Barclays
Annual Report 2017

Plain-text annual report

B a r c l a y s P L C A n n u a l R e p o r t 2 0 1 7 Positioned for growth, sharing and success Barclays PLC Annual Report 2017 About this report Where we can find out more You can learn about Barclays’ strategy, our businesses and performance, approach to governance and risk online, where latest and archived Annual and Strategic Reports are available to view or download. For further information and a fuller understanding of the results and the state of affairs of the Group, please refer to the full Barclays PLC Annual Report 2017 suite of documents at home.barclays/annualreport Barclays PLC Annual Report Our Governance, our Risks and our Financials Strategic Report An overview of the business Environmental Social Governance Report Our shared growth ambition Country Snapshot Our tax contributions Pillar 3 Report Our Risk profile and how we manage it Barclays PLC Annual Report was approved by the Board of Directors on 21 February 2018 and signed on its behalf by the Chairman. Details on how to obtain a copy of the full Barclays PLC Annual Report 2017 can be found in the Shareholder information section. Report of the Auditor The Auditor’s report on the full accounts for the year ended 31 December 2017 was unqualified, and their statement under section 496 (whether the Strategic Report and the Directors’ report are consistent with the accounts) of the Companies Act 2006 was unqualified. Approach to non-financial performance reporting We note the requirements under the provisions of the Companies Act 2006, relating to the preparation of the Strategic Report which have been amended by the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, which implements EU Directive 2014/95/EU (on non-financial and diversity information). As a result of these changes, we have integrated the information required for a Non-Financial Information Statement into the Strategic Report, thereby promoting cohesive reporting of non-financial matters. Notes, Non-IFRS performance measures and forward- looking statements Barclays management believes that the non-IFRS performance measures included in this document provide valuable information to the readers of the financial statements. This document also contains certain forward-looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended, and Section 27A of the US Securities Act of 1933, as amended, with respect to the Group. For further details on Notes, non-IFRS performance measures, and forward-looking statements used within this document, please see the back cover. 2 Barclays PLC Annual Report 2017 Barclays PLC Strategic Report 2017 home.barclays/annualreport home.barclays/annualreport The Strategic Report An overview of our 2017 performance, a focus on our strategic direction, and a review of the businesses underpinning our strategy. The Detailed Report Within the Annual Report, these disclosures inform of Barclays 2017 performance. The content meets, and where insightful, goes beyond minimal regulatory reporting standards. Governance 43 Governance contents 44 Directors’ report 89 People 93 Remuneration report Risk review 117 Risk review contents 119 Risk management 121 Material existing and emerging risks 127 Principal Risk management 138 Risk performance 197 Supervision and regulation Financial review 205 Financial review contents 206 Key performance indicators 208 Consolidated summary income statement 209 Income statement commentary 210 Consolidated summary balance sheet 211 Balance sheet commentary 212 Analysis of results by business 223 Non-IFRS performance measures Financial statements 227 Financial statements contents 234 Consolidated financial statements 241 Notes to the financial statements 323 Shareholder information Strategic framework 02 Chairman’s letter 04 Chief Executive’s review 06 Operating environment 08 Business structure 09 Our business model 10 Our strategy 12 Risk management 15 Key performance indicators A review of our performance 23 Barclays UK 26 Personal Banking 27 Barclaycard Consumer UK 28 Wealth, Entrepreneurs and Business Banking 29 Barclays International 32 Corporate and Investment Bank 33 Consumer, Cards and Payments 35 Head Office and Group Service Company An overview of governance and financial performance 36 Our people and culture 38 Governance compliance 40 Viability statement home.barclays/annualreport Barclays PLC Annual Report 2017 01 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportChairman’s letter Dear Fellow Shareholders While a number of challenges remain, the launch of the ring- fenced bank expected at the beginning of April this year largely draws a line on large-scale restructuring, and we look forward to a more traditional business pattern, including the return to a more normal dividend pattern. As I indicated last year, Barclays is one of the largest restructuring situations in bank history. While this was partly a consequence of the Global Financial Crisis, it was also partly a consequence of the doubling of the balance sheet and the seven-fold increase in derivatives across 2007 and 2008, immediately prior to the full onset of the Global Financial Crisis. This, together with the subsequent designation of the Group as globally systemic, and the consequent more than doubling of minimum regulatory capital ratios, meant the need substantially to re-capitalise the Group, and resulted in a considerable proportion of our portfolio becoming economically non-viable in the post-crisis environment. The consequent recapitalisation involved the urgent raising of capital in 2008 (now the subject of charges by the Serious Fraud Office), a substantial reduction in capital and balance sheet usage, and the disposal of a considerable portion of our international network. Since the crisis, we have refocused the business, halving the balance sheet by £1trn and the staff by some 80,000, through the disposal of Non-Core assets. We are also creating a new UK ring-fenced bank from scratch, resolving and continuing to resolve multiple large legacy conduct matters, as well as preparing the Group for Brexit. The enormous impact all of this has had on the business, the Board and management, is a sobering lesson. Over the past six years, reasonable underlying operating profits have been fully eroded in the process. Over this period, we saw £15.1bn in litigation and conduct charges, £2.4bn in bank levies, £10.1bn in losses from Non-Core, a £2.5bn loss from the sell down of Barclays Africa, and £7.1bn in taxes (at an average rate of 65%). All of this, totalling £35.6bn over the six years, resulted in an aggregate attributable loss of £1.0bn over the same period. Imagine if all the underlying profits had gone to shareholders and to investment in growth. Clearly, shareholders would prefer we declared higher dividends, but it should be remembered over the same period, we paid £5bn in dividends out of negative attributable profits. 02 Barclays PLC Annual Report 2017 home.barclays/annualreport While the bulk of our historical challenges are behind us, we do continue to face some residual challenges. These include the historical residential mortgage backed securities matter in the US, the Serious Fraud Office prosecution in the UK as well as the consequence of Brexit. This said, depending on their scale and pacing, we believe we have the capacity to deal with them over time. So, while a number of challenges remain, the launch of the ring-fenced bank Barclays UK expected at the beginning of April this year largely draws a line on large-scale restructuring. We look forward to a more traditional business pattern, including the return to a more normal dividend pattern, planned to begin with the 2018 financial year. Turning to the 2017 financial year itself, this was another critical year for Barclays. Good progress was made on a significant number of fronts. The closure of the Non-Core business from the start of July marked a significant milestone. This business was formed in 2014 in order to deliver the divestment of our non-strategic assets and businesses, releasing capital to support strategic growth in our Core business and to strengthen the Group’s capital position. At its peak, the business comprised approximately £121bn of risk weighted assets (RWAs), representing 28% of the Group’s total at the time and it has been a significant achievement to reduce this to just c.£23bn by the time of its closure. We also implemented the difficult decision to sell down our shareholding in Barclays Africa in 2017. The changing regulatory requirements for global banks resulted in higher hurdles, making the ownership of the profitable African business uneconomic. Therefore, we successfully sold down 33.7% of our remaining Barclays Africa Group Limited (BAGL) shareholding in the first half of the year. We now own a residual 14.9% of the issued share capital, consistent with regulatory commitments. 2017 also saw us make significant progress in terms of creating the new ring-fenced bank as required by UK legislation. This has been an enormous undertaking as we are in effect creating a new bank comprising some 24 million customers. We remain on track to set up this bank in the second quarter of 2018. As part of our structural reform requirements a Group Service Company has been successfully established which provides a wide range of operations, technology and functional services to the Group as a whole. We continued with our Brexit preparations to ensure that Barclays can preserve our access to the EU markets for our customers and clients. Barclays Bank Ireland, where we have a banking license and have operated for nearly 40 years, will provide us with a natural base from which we can continue to provide products and services which require an EU presence. Share price performance in 2017 was disappointing, with the share price falling from 223p to 203p over the calendar year. We are working to reverse this in 2018. Delivering quality earnings above the cost of equity as well as returning to higher dividend levels, are necessary to generate a meaningful recovery in the share price. This is the priority for 2018 and beyond. The ultimate resolution of legacy conduct and litigation issues will allow underlying profit to fall to the bottom line to the benefit of shareholders. This, together with the resolution of the whistleblowing issue, will also help remove some uncertainty which is overshadowing the Company. The past few years have been a really tough period for the Board and management, and bottom line results can obscure the real underlying progress that is being made. I would therefore like to thank the Board, the management team and all our staff for the enormous efforts they are making to secure our recovery. Finally, I would thank shareholders for their patience, and believe it will be rewarded. The situation is more complex and difficult than we had envisaged, and is taking longer than we hoped, but shareholders can rest assured that we will continue to strive to deliver the performance and value creation that their patience deserves. John McFarlane Chairman As shareholders are aware, during 2017 Barclays disclosed a whistleblowing incident involving allegations made in connection with the hiring of a senior management team member. After an internal investigation, the Board determined that CEO Jes Staley believed, mistakenly but in good faith, that it was permissible to identify the author. A detailed announcement on the issue was made in April and the matter is now the subject of an external investigation. Despite the very significant achievements and milestones passed during the year, our financial performance in 2017 highlights that further progress is required to deliver acceptable returns to our shareholders. Profit before tax was £3.5bn, and although this was a 10% increase on prior year, return on tangible equity was a negative 3.6% on a statutory basis. Excluding litigation and conduct, the loss on sale of our BAGL stake and a remeasurement of DTAs, largely from US tax reform, return on tangible equity was 5.6%. Fortunately, the losses we experienced last year from Non-Core, as well as the costs of structural reform, are unlikely to be repeated going forward, and this, together with the profit improvement programme in the core business, should contribute towards improving returns. Accordingly, the focus of management and the Board’s attention is on performance, particularly that of the Corporate and Investment Bank in Barclays International. There, performance in Markets, and in particular Macro and Equities, was weak, driven by difficult market conditions. There have been significant management changes and action is being taken to improve profitability in this area. Barclays Consumer, Cards and Payments saw profits decline by 22% but still produced a respectable 16.7% return on tangible equity. Barclays UK’s profits were marginally up on the previous year generating 9.8% return on tangible equity. home.barclays/annualreport Barclays PLC Annual Report 2017 03 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportChief Executive’s review We have strong foundations in place for delivering to stakeholders and society… Two years ago, we laid out our plan to build a Barclays that is fit for the future. To recast our business as a transatlantic consumer and wholesale bank, with global reach. I am pleased to report that the significant task of restructuring this great institution was completed in 2017. The spirit, energy and professionalism that my colleagues from across Barclays have brought to this endeavour gives me great confidence in our future, both as Group CEO and as a shareholder. While there is still work to be done, the story of Barclays in 2017 has been one of considerable strategic progress. The Barclays of today is almost unrecognisable, compared with just a few years ago. The momentum we have built in successfully delivering on our plans so far, leaves me with a sense of confidence about our next task: delivering acceptable Group returns for you, our shareholders. On the 1st of June, we completed the sell down of our shareholding in Barclays Africa. At a stroke, this single act permitted accounting deconsolidation and regulatory proportional consolidation, reduced both cost and complexity, and improved our capital strength. Our Group profit before tax is up by 10%, year on year. In July, we closed Barclays’ Non-Core unit, six months ahead of plan. In doing so, we eliminated some £95bn of risk weighted assets, sold more than 20 businesses, exited operations in a dozen countries, and reduced costs by over £2bn – all in just three years. In September, we stood up the Group Service Company, where around 42,000 of our 80,000 employees now work. Operational and technological strength is a key competitive advantage for any global bank today. The cost efficiencies and improvements in effectiveness realised from this strategic decision are already being felt right across the Group – and that is making a real and positive difference to our customers and clients’ lives, every day. By December, we had largely completed the work to build our UK ring-fenced bank, which we expect will be fully up and running by the time we meet at the Annual General Meeting (AGM). Our financial performance in 2017 shows that we are on our way to doing this. Our Group profit before tax is up by 10%, year on year, largely driven by a reduction in Non-Core losses. Group return on tangible equity, excluding litigation and conduct charges, the losses related to the sell down of BAGL and a one-off adverse impact from US tax reform, stood at 5.6% in 2017. Our two businesses, Barclays UK and Barclays International, performed fairly well in the year despite challenging market conditions, and the Group is benefiting from the balance that the diversity of product, currency, geography, and business mix, gives us. In Barclays UK profitability held up, with good progress in mortgages, deposit growth, and mobile banking. Profits were down in Barclays International versus 2016, due to a poor performance in the Markets business of our Corporate and Investment Bank in difficult trading conditions for the industry. We have strong plans in place to address that underperformance in 2018. Our Consumer, Cards and Payments business continues to produce excellent levels of income, while managing risk effectively. Perhaps most importantly of all, we enter 2018 in a strong capital position. By the end of 2017, we were at a Common Equity Tier 1 (CET1) ratio of 13.3%, within our end-state target range. 04 Barclays PLC Annual Report 2017 home.barclays/annualreport In 2017, over half of our colleagues took part in volunteering, fundraising or giving programmes. It is the talent, ingenuity and dedication of our people, and the progress we have made in the past year, which gives me great confidence for our future. I look forward to discussing this future with you when we meet at our AGM in May. James E. Staley Group Chief Executive This shows that Barclays can sustainably generate profits at a healthy rate, and our capacity to do so should increase over time as we grow our businesses. That is why in 2017 we set ourselves ambitious but attainable targets for Group returns of greater than 9% in 2019, and of greater than 10% in 2020, excluding litigation and conduct, and based on a CET1 ratio of around 13%. A small number of significant legacy conduct issues remain, and we will need to resolve them in due course. Nevertheless, it is our intention to prioritise the return of capital to shareholders, beginning this year. We plan to pay a dividend for 2018 of six and a half pence, which is more than double the amount paid in 2016 and 2017, and restores it to the level paid in 2015. This is an important first step, but is still a fairly modest proportion of our anticipated earnings for Barclays. It is our firm intent, over time, to return a greater proportion of our earnings to shareholders, both through the annual dividend and in other ways. For example, it has been some 20 years since Barclays last used share buybacks as a means of returning value to investors, but we expect these to be an important part of the capital return mix going forward. I have worked in banking for some 38 years, and I can say with conviction that the way Barclays does business, constantly seeking to earn the trust of every customer, client and community we serve, is truly extraordinary. In 2017, we celebrated the 20th anniversary of the Barclays Citizenship Awards – a year which saw over half of our colleagues take part in volunteering, fundraising or giving programmes. Among many examples of great contributions to the communities in which we operate, I was particularly proud of the work we have done to increase digital safety and to prevent the growing threat of fraud. Our education and awareness campaign has seen over 4.8 million people take action to protect themselves as a result. Supporting the ambitions of customers, clients, and communities is not just the right way to act, it also makes commercial sense. When the societies where we operate succeed, Barclays succeeds. That is why, for over three centuries, this great institution has risen to the challenges that our communities face, and played our part in meeting them. This is particularly true as our home country, the United Kingdom, faces an uncertain future as negotiations to leave the European Union unfold. Whatever may come, Barclays is here to stay, and here to help the 24 million customers and almost one million UK businesses, who put their trust in us, every day. Being a contributor is a very important part of the culture of Barclays. It says the right things about who we are. Barclays is a business built on our people and we are proud of the contributions that our extraordinary people make to further our Citizenship ambitions. Barclays Citizenship Awards Going the extra mile to benefit society and Barclays is what our Shared Growth Ambition is all about. Our Citizenship Awards celebrate the extraordinary Barclays colleagues who do just that and play a positive role in society. 2017 marked the 20th anniversary of the awards and there were almost 500 nominations, celebrating the outstanding contributions of our employees to driving economic, environmental and social prosperity. The awards were split into five categories that encompass Citizenship and our Shared Growth Ambition: access to financing, access to financial and digital empowerment, access to employment, colleagues in the community and the way we do business. Whether it’s creating commercial products with a positive societal impact, empowering customers with better financial and digital skills, helping people get into the world of work, improving the way we do business, or colleagues giving their time and skills to the causes they’re passionate about, there is a huge variety of ways in which Barclays colleagues contributed to society in 2017. home.barclays/annualreport Barclays PLC Annual Report 2017 05 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportOperating environment …in a constantly evolving environment that creates opportunity and risk As a transatlantic consumer and wholesale bank with operations globally, Barclays is impacted by a wide range of macroeconomic, political, regulatory, accounting, technological and social developments. The evolving operating environment presents opportunities and risks which we continue to evaluate to ensure that we appropriately adapt our strategy and its delivery. Global growth saw a modest recovery in 2017, principally driven by an upswing in Europe and Asia. However, the interest rate environment remained low, albeit with indications of Central Banks positioning for a tightening cycle. Notably, the Federal Reserve and the Bank of England commenced tightening actions, with an increase in their key policy rate as well as initiation of actions to wind-down quantitative easing programmes. The low interest rate environment combined with continued low market volatility, relatively weak consumer confidence and a slowing housing market in the UK continued to impact banking sector performance by making income generation more challenging. The political environment remained uncertain globally throughout 2017 with a notable increase in geopolitical tensions. We remain vigilant to these risks and their potential impact on global trade and investment. In the UK, the General Election resulted in a hung Parliament while negotiations with the EU on post-Brexit arrangements continue, without full clarity on the nature of the UK’s relationship with the EU immediately following its exit. In July, in response to the EU referendum outcome, Barclays announced its intention to use an existing subsidiary in Ireland as its European licensed entity from which to passport financial services across the EU, thereby continuing to serve its customers and clients in the EU post Brexit. The regulatory landscape impacting Barclays evolved through 2017 and will continue to do so in 2018. The banking industry in the UK has continued implementation of measures to meet structural reform requirements, which include the requirement to ring-fence certain activities. As part of these reforms, Barclays launched its Group Service Company in September 2017. The implementation of structural reform and other regulatory changes requires significant focus and we are seeking to minimise disruption to our customers and clients, while executing in accordance with regulatory timelines (as set out on page 204). Barclays’ ring-fenced bank will be operational during the first half of 2018, subject to court and regulatory approvals. The banking industry in the UK has continued implementation of measures to meet structural reform requirements, which include the requirement to ring-fence certain activities. With effect from 1 January 2018, as part of the US Tax Cuts and Jobs Act, the federal corporate income tax rate has been reduced from 35% to 21%. Given the Group’s substantial US operations, this tax rate cut materially impacted the measurement of Barclays’ US deferred tax assets, however, it will also result in a material reduction to the Group’s future effective tax rate. This Act also introduced the Base Erosion and Anti-Abuse Tax (BEAT) which involves complex provisions with currently uncertain practical and technical application and which may reduce the future benefit of the lower statutory tax rate. Detailed analysis of our tax can be found in the Annual Report, or in the Country by Country report, both found at home.barclays/annualreport In addition, from 1 January 2018 the introduction of IFRS 9, Financial Instruments, will see significant changes to the accounting for impairment and measurement of expected credit losses which we discuss further, along with other significant accounting policies on pages 241 to 246. Our operating environment continues to be influenced by rapid technological change, significantly impacting customer expectations and behaviour as well as leading to the ongoing review of established banking operating models. We are investing to position our business at the forefront of this evolving environment. New technology is transforming the way customers interact with their banks and continues to encourage new entrants into the market. We expect to see these trends accelerating in 2018 with the implementation of the Second Payment Services Directive (PSD2) and Open Banking, which will have a profound impact on the banking landscape by allowing customers to choose to enable third parties to access their data. Barclays is very supportive of the opportunities that Open Banking presents for those who design their propositions and experiences with customers at their heart. However, we are also aware of potential customer concerns regarding data security and we continue to work hard to ensure the safety of customer data. 06 Barclays PLC Annual Report 2017 home.barclays/annualreport During 2017 there was further activity to advance the financial sector’s understanding of the potential financial, operational and strategic implications of climate change. Recognition of the commercial, reputational and regulatory implications of climate change are shaping the way businesses engage with the climate change agenda. At Barclays, we want to facilitate our stakeholders’ access to financing that places green principles at its core. Please see the Case Study below for examples of how we are putting our beliefs into practice. Developments in the external environment present both opportunities and risks. Without active risk management to address these external factors, our long-term goals could be adversely impacted. Our approach to risk management and material existing and emerging risks to the Group’s future performance are outlined in the Risk review section on page 121. Our Corporate and Investment Bank clients are anticipating enhanced electronic capabilities as well as enhanced transparency through the new Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation (collectively referred to as MiFID II), as part of their operating environment. For example, recent advances in trading automation continue to change the operating landscape through increased experimentation with, and implementation of, solutions relying on machine learning, natural-language processing and predictive analytics. For further information on the changes in Supervision and Regulation of the Group, please see page 197. We continue to invest in our digital and mobile capabilities to respond to these rapid changes, while maintaining a continued focus on the risks posed by fraud and social engineering and the importance of network defence, cyber risk, IT security and the appropriate management of our most valuable environments and high risk users in the face of growing cyber threats. In 2017, we launched #digisafe, a UK-wide consumer engagement campaign to highlight the importance of digital safety, helping people to be more aware of the risks that exist in the digital world and how to be safer online. Green bonds Barclays’ green bond is one of a number of innovative green products, launched in 2017, which reinforce Barclays’ support for, and participation in, the transition to a sustainable and low carbon global economy, following the publication of Barclays’ Green Bond Framework in September 2017. In November 2017, Barclays successfully priced and issued a €500m green bond. This was a milestone for the UK market, being the first green bond issued by a UK bank using UK assets. Green bonds are fixed income securities, designed to raise finance for assets that have positive environmental and climate benefits. The proceeds from Barclays’ green bond have been allocated to the financing and refinancing of Barclays’ residential mortgages on environmentally friendly homes in England and Wales. Barclays is a signatory to the Green Bond Principles and an active lead manager of green bond issuances across jurisdictions, issuers and currencies within our investment bank. Barclays remains firmly committed to contributing to the growth of the green bond market, and has committed to a green bond investment target of £2bn in its Liquidity Portfolio. home.barclays/annualreport Barclays PLC Annual Report 2017 07 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportBusiness structure Our enhanced structure empowers our business model… In 2017, Barclays made significant progress reorganising the business to enable a sharper focus on our strengths as a transatlantic consumer and wholesale bank with global reach. In March 2016, we announced our intention to operate through two principal business divisions: Barclays UK and Barclays International. As well as accelerating the delivery of our strategy, this change helped enable Barclays to fulfil the requirements of our UK regulators in regard to ring-fencing. Ring-fencing of essential retail banking services is one of the reforms introduced by the UK government to strengthen the UK financial system following the financial crisis that began in 2007. It requires the larger UK high street banks, including Barclays, to separate certain retail and smaller corporate banking activity and products, like savings accounts, current accounts and payments, from more complex, wholesale and investment banking activity and from certain activities outside of the UK and European Economic Area. This separation must be completed by 1 January 2019. Barclays Bank UK PLC and Barclays Bank PLC will operate alongside, but independently from one another. Both Barclays UK and Barclays International currently operate within the legal entity of Barclays Bank PLC. Barclays UK offers everyday products and services to retail and consumer customers and small to medium sized enterprises based in the UK, and Barclays International delivers products and services designed for our larger corporate, wholesale and international banking clients. During the first half of 2018, we will formally separate the Barclays UK division into a new legal entity – Barclays Bank UK PLC – which will become our UK ring-fenced bank, subject to court and regulatory approvals. Products and services designed for our larger corporate, wholesale and international banking clients will continue to be offered by Barclays International from within Barclays Bank PLC. Barclays Bank UK PLC and Barclays Bank PLC will operate alongside, but independently from one another as part of the Barclays Group under the listed entity, Barclays PLC. In September 2017, in preparation for the separation of the Barclays UK business into its separate legal entity, we created our Group Service Company, Barclays Services Limited, as a subsidiary of Barclays PLC. The Group Service Company will deliver critical infrastructure services to businesses within the Barclays Group and will enhance operational continuity for our business units, facilitating the execution of recovery and resolution plans in the event of financial difficulty. It will also become a centre of excellence for services required by the business, such as fraud management and cyber security, reducing duplication and promoting best practice across our businesses. The new organisational structure, illustrated below, brings complementary businesses more closely together; creates an enhanced focus on our client proposition and offering across all target sectors; and, through the creation of the new Group Service Company, establishes a centre of service excellence that will drive efficiency and increase the Group’s resilience. Further information on structural reform can be found on page 204. Illustrative unaudited pro forma financials for Barclays Bank UK PLC and Barclays Bank PLC are available at home.barclays/annualreport Barclays PLC Barclays Bank PLC (Barclays International) Barclays Services Limited (Group Service Company) Barclays Bank UK PLC (Barclays UK – ring-fenced bank) 08 Barclays PLC Annual Report 2017 home.barclays/annualreport Our business model …and creates value for our stakeholders, with economic benefits to society Barclays PLC Group operates via two clearly defined divisions – Barclays UK and Barclays International – with a diversified business model that we believe helps enhance our resilience to changes in the external environment. Our business model is aligned with our strategy of being a leading, diversified transatlantic bank with global reach. Read more on our strategy on pages 10 to 11. For further information on our divisions, see: Barclays UK – pages 23 to 28 Barclays International – pages 29 to 34. We draw on the following to support our activities and deliver value to our stakeholders: We aim to provide superior services to help customers and clients create, grow and protect wealth in a sustainable way: We support our stakeholders via a commercially successful business that generates long-term sustainable returns: We aim to deliver a broad spectrum of value through the way we do business, including: ■■ the strength and reputation of our brand – serving customers and clients for over 325 years ■■ a strong, well-funded and diversified balance sheet ■■ customer and client relationships built on trust ■■ a solid track record of successfully innovating for customers and clients ■■ our geographic focus: firmly anchored in the two financial centres of London and New York, with global reach ■■ the skills and expertise of our people and our shared values which inform the way we work and how we act Barclays’ customers and clients include: individuals, small and medium-sized businesses, large corporates and multinational companies, financial institutions and banks, institutional investors, funds, sovereign institutions and governments. We offer: ■■ a safe place to save, invest and manage cash and payments ■■ innovative digital and technological capabilities ■■ funding for purchases and growth ■■ management of business and financial risks ■■ financial and business support ■■ our services generate revenue via net interest income and non-interest income, including fees and commissions as well as trading and investment income through our wholesale activities ■■ we are a large financial institution and provide diversification by business line, geography and customer ■■ we aim to capture the benefits of diversification through efficient delivery of cross- group synergies The skills and trust in our staff helps us, through a range of initiatives, increase financial literacy. Our business services are tailored to help support SMEs and entrepreneurs, creating wealth. Meeting the demands of our customers around sustainable investment drives sustainable value. ■■ superior service to enable customers and clients to achieve their ambitions ■■ challenging and fulfilling careers for our people in a values-driven organisation ■■ long-term sustainable returns for our investors ■■ we work together with regulators to help reduce risk in the industry and provide a more sustainable banking landscape over the long term ■■ employment and growth in the economies in which we operate ■■ engagement with governments and society in general to address societal issues and needs Innovation through our products and services is helping increase access to finance and generating dividends and returns. home.barclays/annualreport Barclays PLC Annual Report 2017 09 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportOur strategy We have positioned Barclays as a leading, diversified, transatlantic bank with global reach… As a leading, diversified, transatlantic bank with global reach, our goal is to support our stakeholders via a commercially successful business that generates long-term sustainable returns. We reflect our strategy in a number of financial and non-financial measures. Read more on our financial and non-financial measures on pages 15 to 22. Completion of the restructuring announced in March 2016 In 2017, we successfully delivered on two key components of the strategic priorities we announced in March 2016: ■■ during the course of 2017, we completed the partial sale of our stake in BAGL resulting in a non-controlling, accounting deconsolidated position with a residual 14.9% shareholding in BAGL ■■ on 1 July we closed Barclays Non-Core, six months ahead of schedule, representing a watershed moment for the implementation of the Group’s strategy. These actions have significantly contributed to the simplification of the Group, helping to reduce drag on Group profitability and laying the foundations for Barclays to drive sustainable returns in its businesses. Building on our strong foundations The strategy of Barclays PLC Group is to build on our strength as a transatlantic consumer and wholesale bank, anchored in our two home markets of the UK and US, with global reach. Our two clearly defined divisions, Barclays UK and Barclays International, provide diversification to our business model. We believe that combining consumer and wholesale businesses, as well as accessing geographic diversification, provide real advantages to both the Group and our investors and help contribute to the delivery of more consistent and sustainable returns through the business cycle. Effective execution of our strategy of diversification should reduce volatility of income and earnings, generate higher returns through the cycle and improve resilience of the Group as a whole. Consistent with the objective of delivering long-term sustainable value for our stakeholders, we continue to pursue our Shared Growth Ambition – our approach to citizenship and sustainability. The objective is to make decisions and do business that provide our clients and customers, and the communities which we serve, access to a prosperous future. You can read more about our Shared Growth Ambition within our performance metrics on page 21. Delivering the Barclays of the future Our focus is now on building the Barclays of the future, operating principally through Barclays UK, Barclays International and supported by the new Group Service Company. We are fully committed to our model as a diversified bank and will remain a well-diversified financial institution providing best-in-class products and services to our customers and clients, underpinned by world class operations. We believe that the Group and its entities are well positioned to deliver future growth and appropriate returns for shareholders. We will remain a well- diversified financial institution providing best-in-class products and services to our customers and clients. We continue to invest in our technological and digital capabilities to facilitate delivery of our strategy. This is particularly relevant in Barclays UK where we already have a strong digital proposition, Barclays Mobile Banking. We have a clear strategy to use technology to deliver deeper and more meaningful customer relationships by transforming the way we interact with customers, leverage data analytics and take advantage of the opportunities presented by Open Banking. Delivering a truly customer-centric model is at the heart of Barclays UK’s strategy. Barclays International will continue to focus on markets and services where we have a competitive advantage, allocating capital where we see the ability to generate the most attractive risk-adjusted returns and investing where we see an opportunity to expand our market share. We see technology as a significant enabler for our strategy across the investment banking business, particularly in Markets business lines, and will continue to invest appropriately, alongside recruiting the best talent as we build the Barclays of the future. In July 2017, we announced our intention to use Barclays Bank Ireland, an existing licensed EU-based bank subsidiary, to continue passported activity after the UK’s departure from the EU. Despite the uncertainty around the final outcome of the negotiations between the UK and EU, our planning is driven by a strategic intention to preserve EU market access for Barclays and our customers and clients, with a continuous seamless service. 10 Barclays PLC Annual Report 2017 home.barclays/annualreport Contact centres – creating a seamless end to end customer experience in an omni-channel environment We believe the Group Service Company will enable the delivery of world class services to our customers and clients while driving efficiency gains. Our global contact centres teams within Barclays UK and Barclays International support over 60 million customer calls each year, across several geographies and business areas. Our colleagues are central to our customer experience and through the creation of the Group Service Company we have a unique platform to unlock opportunities across our shared colleague and technology propositions and through doing so, continue the transformation of our customer experience for Barclays UK and Barclays International. In the past, our technology supporting contact centres has been highly fragmented and we have operated with different processes with each business unit having their own contact centres, leading to more than 30 different contact centre sites, utilising over 100 bespoke technology applications. Through the creation of the Group Service Company we aim to streamline our technology estate, identifying synergies to support a world class customer and colleague experience. We will also continue to evolve the way we interact with customers through a highly integrated omni-channel framework, enabling customers to interact with Barclays through their channel of choice. We will continue to roll out and scale new capabilities throughout 2018, supporting our customers choice in how they interact with us. Leveraging our geographic and business diversification, we see a significant opportunity to develop our payments capabilities across the Group. We aim to leverage our extensive experience and expertise developed through our leadership position in the UK to grow our market share in the US. In the Business to Business (B2B) space, we will continue to invest in our commercial payments capabilities, in order to meet the evolving needs of our customers, by leveraging innovative solutions and our data assets. On the consumer side, we are growing our mobile payment solutions in the UK. In the US, we see opportunity to build on our position of 9th largest credit card issuer by receivables, as our targeted partnership model drives continued growth. Furthermore, we are investing in our US consumer banking proposition, where we have a growing, own-brand and prime-focused digital banking offering. Our strategic execution as a diversified bank has been enhanced by the launch of the Group Service Company. The Group Service Company changes the way Barclays operates, enabling the delivery of world class services through a more standardised global operating model. We believe our Group Service Company will enable us to extract cross-Group cost synergies through simpler processes, enhanced controls, a better co-ordinated service provision and more effective management of investment in our technology and processes. The Group Service Company is a key component of Barclays’ operating model. We believe our Group Service Company will enable us to extract cross-group cost synergies. We remain focused on resolving legacy conduct, litigation and regulatory matters and delivering enhanced controls We aspire to be one of the world’s most respected and well-regarded banks. We are working hard to resolve outstanding legacy issues in an appropriate time frame and manner, while continuing to strengthen our control environment. We put our customers and clients at the heart of everything we do and seek to strengthen the trust of our customers, clients and wider society. home.barclays/annualreport Barclays PLC Annual Report 2017 11 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportRisk management …with a structure and governance that enable us to manage risk… Barclays is exposed to external risks as part of our ongoing activities. These risks are managed as part of our business model. The recent changes to the structure of the bank in anticipation of ring fencing, together with the closure of the Non-Core, and the partial sell down of our shareholding in BAGL mean that we have even more clarity on our strategic direction. The risks we undertake in delivering this strategy are now also well-defined. Enterprise Risk Management Framework At Barclays, risks are identified and managed in the business through the Enterprise Risk Management Framework (ERMF), which supports the CEO and Chief Risk Officer in embedding effective risk management and a strong risk culture. By applying mandate and scale limits, we can enable and control specific activities. The ERMF specifies the Principal Risks of the Group and the approach to managing them. Risk Appetite Risk Appetite defines the level of risk we are willing to take across the different risk types, taking into consideration varying levels of financial stress. Risk Appetite is key for our decision making process, including business planning, mergers and acquisitions, new product approvals and business change initiatives. By applying mandate and scale limits across legal entities and businesses, we can enable and control specific activities that may have material concentration. The management of risk is embedded into each level of the business, with all colleagues being responsible for the understanding and managing of risks. This is done by specifying responsibilities according to the ‘Three Lines of Defence’. Each Line of Defence is overseen by the next, resulting in a strong design, implementation, remediation, monitoring and testing framework, with independence and robust governance. Three Lines of Defence The First Line of Defence comprises the revenue generating and client facing areas, along with all associated support functions. The First Line identifies the risks, and sets the policies, standards and controls, within the criteria set by the Second Line of Defence. The Second Line of Defence comprises Risk and Compliance employees and oversees the First Line, setting the limits, rules and constraints, consistent with the Risk Appetite of the firm. The Third Line of Defence comprises Internal Audit employees, providing independent assurance to the Board and Executive Management. The Legal function does not sit in any of the three lines, but supports them all and plays a role in overseeing Legal Risk. The Legal function is also subject to oversight from the Risk and Compliance functions with respect to the management of operational and conduct risks. Together with a governance process using Business and Group level Risk Committees and Board level forums, the main Board of Barclays receives regular information in respect of the risk profile of the Group, and has ultimate responsibility for risk appetite and capital plans. Risk management post-ring fencing There are no significant changes to the ERMF proposed following ring-fencing. However, each of the Boards of Barclays Bank UK PLC and Barclays Bank PLC will approve and implement the ERMF at an entity level, with any requirements specific to the relevant legal entity documented within the ERMF. Group-wide risk management principles will govern both Barclays Bank UK PLC and Barclays Bank PLC and their own legal entity governance processes around risk management, capital and liquidity plans. We believe that our structure and governance will enable us to manage risk in changing economic, political and market environments. 12 Barclays PLC Annual Report 2017 home.barclays/annualreport Principal Risks are overseen by a dedicated Second Line function Risks are classified into Principal Risks, as below How risks are managed Credit Risk Market Risk Treasury and Capital Risk Operational Risk Model Risk Reputation Risk Conduct Risk Legal Risk The risk of loss to the firm from the failure of clients, customers or counterparties, including sovereigns, to fully honour their obligations to the firm, including the whole and timely payment of principal, interest, collateral and other receivables. Credit risk management teams set the Risk Appetite, monitoring risk against limits and help manage risk through the credit cycle. The risk of loss arising from potential adverse changes in the value of the firm’s assets and liabilities from fluctuation in market variables including, but not limited to, interest rates, foreign exchange, equity prices, commodity prices, credit spreads, implied volatilities and asset correlations. A range of complementary approaches to evaluate market risk including specific management and regulatory measures, are used to capture exposure to market risk. These are overseen and managed by dedicated market risk management teams who engage with the businesses to challenge the risk profile on a regular basis. Liquidity Risk: The risk that the firm is unable to meet its contractual or contingent obligations or that it does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets. Capital Risk: The risk that the firm has an insufficient level or composition of capital to support its normal business activities and to meet its regulatory capital requirements under normal operating environments or stressed conditions (both actual and as defined for internal planning or regulatory testing purposes). This includes the risk from the firm’s pension plans. Interest Rate Risk in the Banking Book: The risk that the firm is exposed to capital or income volatility because of a mismatch between the interest rate exposures of its (non-traded) assets and liabilities. The risk of loss to the firm from inadequate or failed processes or systems, human factors or due to external events (e.g. fraud) where the root cause is not due to credit or market risks. The risk of the potential adverse consequences from financial assessments or decisions based on incorrect or misused model outputs and reports. Treasury and capital risk is managed and monitored through a wide range of activities including: managing limits on a variety of on and off-balance sheet exposures; monitoring of market indicators for early signs of liquidity risk; recovery planning; capital planning and allocation; internal Group- wide stress testing; management of foreign exchange and pension risk, and uses a range of metrics and sensitivity analysis to measure non-traded market risk. The Group assesses its operational risk and control environment across its businesses and functions with a view to maintaining an acceptable level of residual risk. Models are validated and approved upon implementation and on an ongoing basis. The risk that an action, transaction, investment or event will reduce trust in the firm’s integrity and competence by clients, counterparties, investors, regulators, employees or the public. Reputation risk is managed by maintaining a controlled culture within Barclays, with the objective of acting with integrity, enabling strong and trusted relationships to be built with customers and clients, colleagues and broader society. The risk of detriment to customers, clients, market integrity, competition or Barclays from the inappropriate supply of financial services, including instances of wilful or negligent misconduct. All colleagues are responsible for the management and mitigation of conduct risk. The Compliance function sets the minimum standards required, and provide oversight to monitor that these risks are effectively managed and escalated where appropriate. The risk of loss or imposition of penalties, damages or fines from the failure of the firm to meet its legal obligations including regulatory or contractual requirements. The Group conducts diverse activities in a highly regulated global market and therefore is exposed to legal risks in the conduct of its business. The Group General Counsel and the Legal function support colleagues to manage legal risks. home.barclays/annualreport Barclays PLC Annual Report 2017 13 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportRisk management …and help us focus on climate change Climate change and resource scarcity are acknowledged as two of the greatest global challenges facing society today. As a global institution, we support our clients and communities as they adopt measures to mitigate and adapt to climate change such as clean technologies and infrastructure resilience. We acknowledge the validity of climate science and support the efforts of public and private stakeholders around the world aiming to limit global temperature rise to two degrees Celsius above pre-industrial levels. Barclays participated in the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD), which published its final recommendations in June 2017. Barclays endorsed the final report, and will work to implement the recommendations over the coming years. The principles laid out in the TCFD recommendations are an important step in providing the foundations from which companies, investors, banks and other market participants can move forward together to improve transparency and build better understanding of potential climate- related risks and opportunities. This is the start of a longer-term process to enhance disclosures and improve understanding of potential material financial impacts. This is the start of a longer- term process to enhance disclosures and improve understanding of potential material financial impacts. Governance On behalf of the Board, the Board Reputation Committee reviews and approves Barclays’ overall Environmental, Social and Governance (ESG) strategy, which includes the approach taken on climate change and emission targets. The Committee discussed the outcome of an externally facilitated review on Barclays alignment with the TCFD recommendations in 2017. See pages 69 to 74 for the Board Reputation Committee report. Strategy Significant financing requirements for energy transition and resilient infrastructure will necessitate access to the capital markets, bank debt and wider funding solutions, providing revenue pools that are projected to grow over time. Our approach is to focus on managing potential climate change related risks at a client and transactional level, and assess current and emerging opportunities across our product suite and geographical footprint. In the shorter term, Barclays sees immediate opportunities in Green Bonds and other financing solutions. We actively manage our own direct carbon footprint and are making good progress towards our target of 30% reduction by end 2018, against a 2015 baseline, reducing our emissions by 26.1% in 2017. Managing climate risk and opportunity Through a dedicated Environmental Risk Management team within the Credit Risk function, we are focused on managing both physical risks, for instance flood risk for our UK mortgage book, as well as potential transition risks if carbon intensive industries do not plan strategically for a smooth medium to long term transition to a low carbon economy. During 2017, we have significantly increased our focus on developing new climate opportunities, including the launch of a suite of industry-leading Green Products driven by the Green Banking Council and the issuance of Barclays inaugural Green Bond. Please see the Green Bonds case study on page 7. Please refer to the 2017 ESG Report for further information, found at home.barclays/annualreport 14 Barclays PLC Annual Report 2017 home.barclays/annualreport Key performance indicators A holistic approach to measuring success Our approach reflects the way in which management monitors the performance of the Group, allows for a holistic assessment and sets out our progress towards the strategic goals of the organisation. By incorporating a broad range of financial and non-financial measures, our framework is focused on achieving positive and sustainable outcomes for our diverse group of stakeholders, and influences incentive outcomes for Barclays’ employees. Read more on our remuneration framework in the Remuneration report pages 93 to 116. Approach and governance: Performance measurement In the 2016 Barclays Annual Report, we introduced our revised performance measurement framework to assess progress against our strategy, across our diverse stakeholder groups. The framework reflects a balance of key financial performance metrics and broader strategic non-financial measures. Financial performance metrics The financial metrics are aligned to Barclays PLC Group financial targets, updated in Q317, and are reported quarterly as part of our financial results. Achieving our targets is consistent with our aim of generating long-term sustainable returns for the shareholders of Barclays PLC Group. Strategic non-financial performance measures Non-financial measures are an important element of how we evaluate our progress towards achieving our ambition of delivering a sustainable business for all our stakeholders. We focus on the impact we have on our customers and clients, colleagues, and the benefit we bring to society via our citizenship activity. These measures are underpinned by how we behave towards all our stakeholders, through our conduct and our culture. To assess our performance, progress towards delivering positive outcomes for our stakeholders is informed by a number of sources including internal dashboards, regular management reporting and external measures, to help provide a balanced review of performance. We have a range of policies and guidance that can support our key outcomes for our customers and clients, colleagues and citizenship activity. Performance against our strategic non-financial performance measures is one indicator of the effectiveness and outcome of aspects of certain policies and guidance. Our policies and guidance are refreshed regularly. For further details, please see our Customer and Client, Colleague and Citizenship sections. Barclays PLC Group Performance Measurement Framework Financial performance metrics Group RoTE* >9% in 2019 >10% in 2020 CET1 ratio 150–200 bps above the end point regulatory minimum level Group costs £13.6–£13.9bn in 2019† Targeting cost: income ratio below 60% * excluding litigation and conduct, and based on a CET1 ratio of c.13% † excluding litigation and conduct Strategic non-financial performance measures Delivering positive outcomes for our stakeholders Customer and Client ■■ Building trust with our customers and clients, such that they are happy to recommend us to others ■■ Successfully innovating and developing products and services that meet their needs ■■ Offering suitable products and services in an accessible way, ensuring excellent customer and client experience Colleague Promoting and maintaining: Citizenship ■■ Making decisions and doing ■■ A diverse and inclusive workforce in which colleagues of all backgrounds are treated equally and have the opportunity to be successful and achieve their potential ■■ Engaged and enabled colleagues ■■ A positive conduct and values- based environment business that provides our clients, customers, shareholders, colleagues and the communities which we serve with access to a prosperous future, through our Shared Growth Ambition ■■ Proactively managing the environmental and societal impacts of our business Underpinned by how we behave towards all our stakeholders through our conduct and culture home.barclays/annualreport Barclays PLC Annual Report 2017 15 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportApproach and governance: Remuneration Performance against our financial metrics and strategic non-financial performance measures is directly linked to executive remuneration, and also influences incentive outcomes for Barclays’ employees more broadly. This approach supports us in our work to deliver positive outcomes for all our stakeholders. Please refer to the Remuneration Report on pages 93 to 116 for further information. How we are doing Group Return on Tangible Equity (3.6)% 2016 3.6% Common Equity Tier 1 (CET1) ratio 13.3% Cost: income ratio 73% Operating expenses* £14.2bn 2016 12.4% 2016 76% 2016 £15.0bn * excluding litigation and conduct Financial performance metrics Key outcomes we will look to achieve include: Achieving our financial targets, consistent with our aim of generating long-term sustainable returns for the shareholders of Barclays PLC Group. How we measure success The financial performance metrics are aligned to Barclays PLC Group financial targets, updated in Q317: ■■ Group Return on Tangible Equity (RoTE) of greater than 9% in 2019 and greater than 10% in 2020, excluding litigation and conduct, and based on a CET1 ratio of c.13% ■■ CET1 ratio of 150–200 bps above the end point regulatory minimum level ■■ Group costs, excluding litigation and conduct, of £13.6–13.9bn in 2019, and to have a target cost: income ratio below 60%. RoTE measures our ability to generate acceptable returns for shareholders. It is calculated as profit after tax attributable to ordinary shareholders, including an adjustment for the tax credit recorded in reserves in respect of other equity instruments, as a proportion of average shareholders’ equity excluding non-controlling interests and other equity instruments adjusted for the deduction of intangible assets and goodwill. This measure indicates the return generated by the management of the business based on shareholders’ tangible equity. Achieving a target RoTE demonstrates the organisation’s ability to execute its strategy and align management’s interests with the shareholders’. RoTE lies at the heart of the Group’s capital allocation and performance management process. The CET1 ratio is a measure of the capital strength and resilience of Barclays. The Group’s capital management objective is to maximise shareholder value by prudently managing the level and mix of its capital. This is to ensure the Group and all of its subsidiaries are appropriately capitalised relative to their minimum regulatory and stressed capital requirements, and to support the Group’s risk appetite, growth, and strategic options while seeking to maintain a robust credit proposition for the Group and its subsidiaries. The ratio expresses Barclays’ capital as a percentage of risk weighted assets (RWAs), as defined by the PRA, in the context of Capital Requirements Directive IV (CRD IV – an EU directive prescribing capital adequacy and liquidity requirements), and is part of the regulatory framework governing how banks and depository institutions are supervised. Barclays views operating expenses as a key strategic area for banks; those which actively manage costs and control them effectively will gain a strong competitive advantage. Restructuring the cost base is a key execution priority for management and includes a review of all categories of discretionary spending and an analysis of how we can run the business to ensure that costs increase at a slower rate than income. The cost: income ratio measures operating expenses as a percentage of total income and is used to assess the productivity of the business operations. Updating the Return on Tangible Equity metric Significant strategic progress was made in 2017 with the closure of Non-Core and sell down of our stake in Barclays Africa, marking the completion of our restructuring. With the closure of Non-Core, we no longer have a Core and Non-Core distinction within the Group, and hence our prior target of Group RoTE to converge with Core RoTE no longer exists. The RoTE target has been updated to reflect our commitment to continuing to execute at pace against our plan and we are confident in asserting when Barclays will start to deliver the economic performance that the Group is capable of. How we are doing Group Return on Tangible Equity 2017 reflected a number of one-off items including losses related to the sell down of BAGL of £2.5bn and a net charge of £0.9bn due to the remeasurement of US DTAs in Q417, as well as litigation and conduct of £1.2bn. These items drove a Group RoTE of negative 3.6% (2016: positive 3.6%). Excluding these material items, Group RoTE was 5.6%. 16 Barclays PLC Annual Report 2017 home.barclays/annualreport Key performance indicatorsA holistic approach to measuring success Colleague: We remain focused on increasing the diversity of our workforce and continuing to build an inclusive culture. We are proud of the progress we have made on the multicultural, multigenerational, LGBT and disability pillars, and we continue to receive external recognition for our diversity and inclusion work. We also continue to focus on the positive engagement of our workforce, and are encouraged to see a 3 percentage point improvement in our annual employee engagement survey score. Citizenship: We are conscious of our wider stakeholders and the communities in which we operate and have performed well against our citizenship agenda, meeting our internal objectives on all six of our Shared Growth Ambition metrics. Areas of continued focus: Customer and Client: Further transformation of our customer and client experience remains a key priority for Barclays, particularly as customer and client expectations continue to evolve rapidly. Although we are encouraged by the reductions in the number of complaints we received in 2017, this remains an ongoing area of focus for management and the Board. Colleague: Our commitment to increasing female representation at all levels of Barclays remains firm. Although we have achieved an increase in the percentage of women at our Managing Director and Director levelsa, we recognise that there is still progress to be made regarding senior female representation. In addition, although we have made progress, we recognise there is still more to do to further reduce obstacles to efficiency and enable our colleagues to achieve excellent performance. We remain committed to driving the right culture throughout all levels of the organisation and continuing to enhance the effective management of Conduct Risk. Citizenship: We have made good progress in delivering access to sustainable finance and developing new green products. We see further opportunity in this space and are working to develop broader sustainability and sensitive sector guidelines. In addition, we continue to focus on enhancing disclosures, particularly on climate change, and improving our Environmental, Social and Governance (ESG) ratings and benchmark scores on an absolute and relative basis. CRD IV fully loaded CET1 ratio The Group’s CRD IV fully loaded CET1 ratio increased to 13.3% (2016: 12.4%) driven by a decrease in RWAs of £53bn to £313bn, which was partially offset by a reduction in CET1 capital to £41.6bn (2016: £45.2bn). The 90bps improvement was driven by organic capital generation from continuing operations, the benefit of the proportional consolidation of BAGL and the rundown of Non-Core, partially offset by an adverse movement in reserves and the net impact of the remeasurement of US DTAs. Operating expenses and cost: income ratio Group operating expenses were £15.5bn (2016: £16.3bn). Excluding litigation and conduct charges, Group operating expenses were £14.2bn (2016: £15.0bn), in line with 2017 guidance. The reduction in operating expenses was primarily driven by lower Non-Core related operating expenses. The Group cost: income ratio was 73% (2016: 76%). For further information on the financial performance of the Group, please see page 47. Strategic non-financial performance measures How we are doing: summary We assess progress towards the delivery of positive outcomes our customers and clients (page 18), colleagues (page 19), and citizenship activity (page 21), all underpinned by conduct and culture. Areas of encouragement: Customer and Client: In 2017, we continued to focus on delivering excellent customer and client experience, by offering products and services to meet their needs in an appropriate and accessible way. We are encouraged by the performance of our Relationship Net Promoter Scores (NPS®), while our client ranking and market share indicators remained broadly stable across many of our international business areas, which we believe reflect the relevance of our customer and client proposition. Digital solutions can enable a convenient and secure everyday banking experience for customers and clients, and we believe this is reflected in a 7% year on year increase in the number of Barclays UK customers using our digital services. ®Net Promoter, Net Promoter System, Net Promoter Score, NPS and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc. Note a 2016 restated on an ex-Africa basis. home.barclays/annualreport Barclays PLC Annual Report 2017 17 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportCustomer and Client Key outcomes we will look to achieve include: ■■ building trust with our customers and clients, such that they are happy to recommend us to others ■■ successfully innovating and developing products and services that meet their needs ■■ offering suitable products and services in an accessible way, ensuring excellent customer and client experience. How we measure success Measures used in our evaluation include, but are not limited to: ■■ Net Promoter Scores (NPS) ■■ client rankings and market shares ■■ lending volumes provided to customers and clients ■■ digital engagement ■■ complaints performance ■■ conduct indicators. How we are doing Areas of encouragement: Net Promoter Scores (NPS)a Improvements to our customer experience and customer value proposition, as well as our campaign to educate customers about how they can take steps to protect themselves from fraud, have all contributed to customers advocating our brand. Barclays Relationship NPS ended the year with an improved score of +14 (2016: +10), while Barclaycard UK Relationship NPS remained relatively flat year on year with a score of +9 (2016:+7). Our Barclaycard International business also continued to perform well on Relationship NPS, supported by a continued focus on customers and improvements in our products and digital experiences. Client rankings and market shares With the repositioning of the Corporate and Investment Bank largely completed in 2017, we believe the business is well-positioned to deliver for our clients in our two home markets. Our Corporate and Investment Bank achieved a 6th place ranking by fee share (2016: 5th) in our UK and US home markets across M&A, equity and debt capital markets, and syndicated loan transactions, and we were highly encouraged by the 1st place ranking in the UK (Dealogic). In 2017 Barclays ranked 4th, based on Global Fixed Income market share (Greenwich Associates), unchanged from 2016. 88% of our largest UK corporate clients considered the service they receive from Barclays to be good, very good or excellent, a 2 percentage point decrease on 2016 (Charterhouseb). We also processed more than a third of all card payments made in the UK. Please refer to the Consumer, Cards and Payments section on page 33 for further information on our market presence across our international businesses. Lending volumes provided to customers and clients Barclays continues to be an important provider of financial services to UK businesses. We provided around £66bn of lending, down 6% on 2016, as we continued to exert high levels of discipline in capital allocation decisions to strengthen the long-term sustainability of the business for all our stakeholders. We continue to support UK SMEc customers in achieving their ambitions, with new lending of £2.8bn (2016: £2.5bn). We also extended or renewed mortgage facilities worth nearly £20bn (2016: nearly £19bn) to nearly 88,000 UK households. Our Mortgage business continued to focus on enhancing the customer experience, with Barclays winning eight awards in 2017d. Notes a NPS measures customer experience and facilitates benchmarking. It is widely used in banking and other industries. In this reporting year, the basis of Barclays Relationship NPS has been revised from a three-month rolling average to a 12-month rolling average, to reduce fluctuations in the data. On a three-month rolling average basis we reported Barclays Relationship NPS of +13 in 2016, which remained unchanged at +13 in 2017. Source: GfK FRS, 12 months ending December 2017. Adults interviewed: 8,568 Barclays main Current Account holders (Barclays Relationship NPS), and 4,754 Barclays main Credit Card holders (Barclaycard UK Relationship NPS). b Charterhouse Research Business Banking survey: 820 interviews with businesses in the UK, turning over £25m–£1bn year end 2017. Data is weighted by region and turnover to be representative of the UK business market. Share-based on bank named as main bank. c SME Customers reflects our Business Banking customers. In 2016, we reported on UK SME lending across Barclays according to the UK Finance definition of SME (2016: just over £3.6bn. 2017: not available). Business Banking has now been established as part of Barclays UK and we believe that moving to report on this basis ensures we provide strategic clarity, while continuing to cover the majority of customers who would be classified as ‘SMEs’. d Best Lender for first-time buyers with family support (Moneywise); Best Lender for Larger loans (Moneywise); Best Online Lender (What Mortgage); Best Help to Buy Mortgage Lender – Equity Loan (What Mortgage); Best Intermediary Lender (Mortgage Finance Gazette); Best Overall Lender (Mortgage Finance Gazette); Best National Bank (Mortgage Finance Gazette); Best Large Loans Mortgage Lender (Your Mortgage). e In 2016 we reported complaint volumes for ‘Barclays UK’ which reflected total UK FCA reportable complaints (including complaints which now sit within Barclays International). Following preparation for the formal separation of the Barclays UK division into a new legal entity we are now able to accurately split UK FCA Complaints between our Barclays UK and Barclays International divisions. f For further information on Barclays’ complaint volumes, the FCA publishes firm-level complaints data on their website. Digital engagement Digital solutions can enable a convenient and secure everyday banking experience and over 10 million customers and clients in the UK are using our digital services on a regular basis (2016: nearly 9.5m). Barclays Mobile Banking has now been chosen by 5.5 million customers as a ‘bank in their pocket’, to access key services whenever and wherever they need them. We are also mindful that while we have customers who fully embrace digital channels, we serve a wide customer base. We continue to work alongside communities to help our customers feel comfortable in the digital environment and we also launched our Digital Safety campaign which aims to heighten awareness and educate our customers on the risks posed by cyber crime. In 2017, Barclaycard US customers logged into our website and mobile apps over 230 million times, up 12% on 2016. Of our over eight million digitally active customers in Barclaycard US, 57% are mobile active and they expect instant, relevant and safe access to their most important banking needs including account management, rewards, and payments. In 2017, we continued to leverage consumer insights and feedback to build innovative experiences for our customers as evidenced by our 3rd place in the JD Power 2017 Mobile Banking Credit Card evaluation and the launch of our mobile-first Uber co-branded credit card. See our case study on Uber on page 34. Areas of continued focus: Complaints performance In Barclays UK, we continue to focus on customer journeys and our underlying complaint volumes (Barclays UK, excluding PPI) reduced 13% year on year, however we have seen a small increase in PPI complaints (up 2% year on year) driven largely, we believe, by the FCA deadline announcement. Barclays UK complaint volumes, including PPI, were down 7% year on yeare. Barclays International complaints reduced by 19% year on year, largely driven by a strong performance in the Barclaycard US business, as we continued our focus on improving customer experience. Complaints reduction remains a priority across the Group and, despite improvement in 2017, we have more work to do, as can be seen from our position in the H1 2017 FCA complaints tables in the UKf. 18 Barclays PLC Annual Report 2017 home.barclays/annualreport Key performance indicatorsA holistic approach to measuring successWe therefore remain focused on areas requiring our attention including, for example, the recent issues we have experienced with our Smart Investor proposition, and we are working to improve our service as a result of customer feedback. In 2017, Barclaycard US customers logged into our website and mobile apps over 230 million times. Conduct indicators Barclays has operated at the overall set tolerance for Conduct Risk throughout 2017. The tolerance is assessed by the business through Key Indicators which are aggregated and provide an overall rating which is reported to the Board Reputation Committee as part of the Conduct Dashboard. We remain focused on the continuous improvement being made to manage Conduct Risk effectively, with an emphasis on enhancing governance and management information to facilitate the identification of risks at earlier stages. For further information on the management and performance of Conduct Risk, please refer to the Risk Review section on page 117. ________________________________________ Policies and guidance can support delivery towards the key outcomes for our customer and clients. The Barclays Way contains statements on how we strive to deliver excellent customer service, and respect and protect the personal information we hold. It defines Conduct Risk outcomes as guiding principles and contains statements on privacy and data protection that colleagues must adhere to. The Barclays Way is available to view at: home.barclays/citizenship/ our-approach.html. Performance against our strategic non-financial performance measures for our customers and clients is one indicator of the effectiveness and outcome of certain policies and guidance. Policies which support our customer and client strategic non- financial measures include aspects of our Customer Complaints Global Policy. Our customers and clients are at the heart of our purpose and strategy. For further information on our two divisions, Barclays UK and Barclays International, please refer to pages 23 to 34. Colleague Key outcomes we will look to achieve include: Promoting and maintaining: ■■ a diverse and inclusive workforce in which employees of all backgrounds are treated equally and have the opportunity to be successful and achieve their potential ■■ engaged and enabled colleagues ■■ a positive conduct and values-based culture. How we measure success Measures used in our evaluation include, but are not limited to: ■■ diversity and Inclusion statistics ■■ employee sustainable engagement survey scores ■■ conduct and culture measures. How we are doing Areas of encouragement: A diverse and inclusive workforce We remain focused on increasing the diversity of our workforce and continuing to build an inclusive culture. In 2017, we have placed additional focus on upskilling our leadership through a range of initiatives including our Unconscious Bias Training, which has been delivered to over 10,000 leaders to date. How we are doing Barclays Relationship NPS +14 2016: +10 Sustainable engagement of colleagues 78% 2016: 75% Access to financing £31.7bn 2016: £30.5bn We are proud of our achievements in 2017, across the following pillars of our global Diversity and Inclusion strategy: LGBT: Our Spectrum Allies programme is growing, with an estimated over 8,000 colleagues (2016: over 7,000), who have pledged to challenge homophobia, biphobia and transphobia and provide support to LGBT colleagues. Disability: This year, alongside PwC, we have further scaled the ‘This is Me in the City’ initiative along with the Lord Mayor of the City of London. Multicultural: The number of apprentices who identify as Black, Asian and Minority Ethnic was 19% in 2017 (2016: 30%), 8 percentage points above the national apprenticeship average. Multigenerational: Since the Barclays Armed Forces Transition, Employment and Resettlement (AFTER) programme began in 2010, the programme has assisted over 5,500 veterans in employment transition and since 2013 we have hired over 500 ex-military personnel (2016: nearly 400). Our Dynamic Working campaign is relevant to colleagues at every life stage and encourages the integration of personal and professional responsibilities through smarter work patterns. The campaign is having a positive effect on colleague engagement, with 59% of colleagues actively working dynamically in 2017 with an average overall sustainable engagement score of 83% among this group. Gender: Our commitment to increasing female representation at all levels remains firm. Please see ‘Areas of continued focus’ below for details on our progress. Throughout 2017, our work was recognised externally, including: Stonewall recognising Barclays as one of only 12 Top Global Employers; the Human Rights Campaign awarding Barclays 100% on their corporate equality index; Working Families UK recognising Barclays as one of the top 10 Employers for Working Families in 2017; and the City of London and the Social Mobility Commission acknowledging Barclays as a Top 50 Employer through the Social Mobility Employer Index. home.barclays/annualreport Barclays PLC Annual Report 2017 19 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWe continue to see improvements in conduct performance and are committed to continuing to drive the right culture throughout all levels of the organisation. Barclays will continue to enhance the effective management of Conduct Risk and appropriately consider the relevant tools, governance and management information in decision making processes. ________________________________________ Policies and guidance can support delivery towards the key outcomes for our colleagues. The Barclays Way contains statements on how we aim to create and promote a culture that is diverse and inclusive and create the positive and respectful environment all employees are entitled to enjoy. It also contains requirements for employees to: inform their line managers of changes in circumstances, including, for example, any conflict of interest or outside business interest; take reasonable care of their own and others’ health and safety; and the responsibility to protect Barclays’ assets. It also contains statements on: physical security; Group Resilience Policy and Standards; and communication with the media and public speaking appearances. Performance against our strategic non-financial performance measures for our colleagues is one indicator of the effectiveness and outcome of certain policies and guidance. Policies which support our colleague strategic non-financial measures include aspects of our Employee Opinion Survey Policy. Please refer to the section on Our people and culture on page 36 and the People section on pages 89 to 92 for further information on our progress. Engaged and enabled colleagues An engaged workforce is critical to the success and delivery of our strategy. Our principle measurement of employee engagement is through our employee opinion survey ‘Your View’. This year, sustainable engagement of our employees improved by 3 percentage points to 78%, with the majority of key survey question results recording improvements compared to 2016, and the rest remaining stable. Areas of particular strength from the annualised ‘Your View’ results include ‘I would recommend Barclays as a good place to work’ (82% favourable, up 6 percentage points on 2016), ‘Barclays is truly focused on achieving good customer and client outcomes (88% favourable, up 5 percentage points on 2016) and colleagues ‘believe strongly in the goals and objectives of Barclays’ (90% favourable, up 3 percentage points on 2016). In addition, by supporting internal mobility across Barclays, we hope to successfully attract, retain and develop internal talent. In 2017, our rate of internal hiring was 40% (2016: 48%). A positive conduct and values-based culture In 2017, we focused on embedding the culture measurement framework we developed in 2016, and using the insights to stimulate senior management discussion. We have made good progress in continuing to embed the value of ‘Integrity’, highlighted by results to the questions ‘it is safe to speak up’ (83% favourable, up 2 percentage points on 2016) and ‘I can report instances of dishonest or unethical practices to the appropriate level of authority without fear’ (86% favourable, flat on 2016). ‘Stewardship’ also remains a strongly embedded value with 89% of colleagues stating that they are proud of the contribution Barclays makes to the community and society (up 1 percentage point on 2016). ‘Service’ and ‘Respect’ remain strong with 90% of colleagues believing strongly in the goals and objectives of Barclays (up 3 percentage points on 2016) and 91% of colleagues agreeing that ‘leaders at Barclays support diversity in the workplace’ (up 2 percentage points on 2016). Areas of continued focus: A diverse and inclusive workforcea Our commitment to increasing female representation at all levels remains firm and we are mindful of the need to remain focused on improving our gender diversity with goals to improve the percentage of female Managing Directors and Directorsb to 26% by 2018 (2017: 23%, a 1 percentage point improvement year on yearc); 33% female representation on our Board by 2020 (2017: 21%, 2016: 31%); and 33% female representation among the Group Executive Committee and their direct reports (2017: 25%, flat year on year). Recognising the importance of strengthening our talent pipeline, we also have an ambition for 50% female graduate hires (2017: 40%, 2016: 39%). Engaged and enabled colleagues Although it is pleasing to note that we have made progress across areas identified for opportunity, including ‘eliminating obstacles to efficiency’ and ‘ensuring colleagues have the tools and resources to achieve excellent performance’, there is always more to do. Enabling our employees to achieve excellence remains a key priority and throughout 2018 new initiatives will be identified that will continue to improve the simplicity and efficiency of our tools, processes and systems. A positive conduct and values-based culture Within our culture measurement framework, which is anchored in our values, ‘Excellence’ remains the biggest opportunity for improvement, as the ‘Enable’ component within the colleague survey continues to be the lowest scoring measurement of sustainable engagement (64%, up 4 percentage points on 2016). A set of improvement initiatives were identified in 2017 and will continue in 2018 to drive progress in this area. Barclays has operated at the overall set tolerance for Conduct Risk throughout 2017. The tolerance is assessed by the business through Key Indicators which are aggregated and provide an overall rating which is reported to the Board Reputation Committee as part of the Conduct Dashboard. Notes a Under the Companies Act 2006, Barclays is required to report on the gender breakdown of our employees and ‘senior managers’. Of our global workforce of 79,900 (45,100 male, 34,800 female), 555 were senior managers (401 male, 154 female), which include Officers of the Group, certain direct reports of the Chief Executive, heads of major business units, certain senior Managing Directors, and directors on the boards of undertakings of the Group, but exclude individuals who sit as directors on the Board of the Company. The definition of senior managers within this disclosure has a narrower scope than the Managing Director and Director female representation data provided above. b Previously called female representation across ‘senior leadership’. c Based on 2016 actual (24%) restated on an ex-Africa basis (22%). 20 Barclays PLC Annual Report 2017 home.barclays/annualreport Key performance indicatorsA holistic approach to measuring successCitizenship Key outcomes we will look to achieve include: ■■ making decisions and doing business that provides our clients, customers, shareholders, colleagues and the communities which we serve with access to a prosperous future, through our Shared Growth Ambition ■■ proactively managing the environmental and societal impacts of our business. How we measure success Measures used in our evaluation include, but are not limited to: ■■ delivery against our Shared Growth Ambition ■■ colleague engagement in citizenship activities ■■ external benchmarks and surveys. How we are doing Areas of encouragement: Delivery against our Shared Growth Ambition We met our internal objectives on all six of our Shared Growth Ambition metrics. Performance was on-track against our internal milestones for three initiatives around ‘access to financing’, ‘access to digital and financial empowerment’ and ‘access to employment’. We also met or exceeded our 2017 annual targets for The Barclays Way training, carbon emissions reduction and payment of suppliers on time. Access to financing We continued to deliver financing solutions in areas including renewable energy, water and low carbon technologies; social infrastructure; development institutions; and small business financing. Barclays delivered £31.7bn in financing for specific social and environmental segments across our business lines (2016: £30.5bna). There has been significant momentum across the Barclays franchise in 2017, including the launch of a range of new Green Loans, Asset Finance and Deposit products; the issuance of Barclays inaugural Green Bond (see case study on page 7); an industry-first Multi-Impact Growth Fund for retail investors; a range of innovative transactions such as solar project bonds and green asset backed securities; and continued coverage from our Research teams on ESG and Sustainability themes. Supporting sustainable ventures Barclays and the Unreasonable Group hosted the first Unreasonable Impact World Forum in 2017, bringing together 27 innovative companies from Asia, the US and Europe working to solve some of the world’s most pressing problems. Held in London, the Forum included elevator pitches from entrepreneurs and panel sessions on themes such as scaling businesses and raising capital through impact investors. Over 400 representatives from a range of stakeholder groups, including investors, clients, NGOs and government agencies attended in person, with the event broadcast live on select social media channels globally. Unreasonable Impact is an innovative multi-year partnership between Barclays and Unreasonable Group to launch the world’s first international network of accelerators focused on scaling-up entrepreneurial solutions that will help employ thousands worldwide while solving some of our most pressing societal challenges. See https://unreasonableimpact.com/ for more information. Access to financial and digital empowerment Inclusive financial systems are key to achieving economic and societal progress, but there can be several barriers to access. We believe digital offerings can help break down these barriers. We helped empower around 205,000 people in 2017 (2016: 249,000) through initiatives such as Barclaycard Initial for those with a limited credit history; our Digital Eagles network, comprised of specially trained Barclays employees working to provide free technology support to customers and non-customers; and the continued development of learning platforms. We work closely with partners in the free debt advice sector and collaborate on a number of projects including research and colleague training on financial vulnerability, and how we can best match customers to the advice service that suits them. Access to employment Barclays is committed to helping people gain access to skills, and supporting entrepreneurs to drive job creation. We helped upskill over 2.1 million people in 2017 (2016:1.7 million), driven by a range of regional employability partnerships and our flagship LifeSkills programme in the UK. Barclays delivered £31.7bn in financing for specific social and environmental segments. We held Accelerators for the second cohort of the ‘Unreasonable Impact’ programme in partnership with Unreasonable Group, focused on scaling ventures that solve environmental and societal problems. 57 ventures have participated to date in programmes across the UK, US and Asia. Note a Financing volume based on a use of proceeds framework. 2016 actuals have been restated from £21.1bn due to the inclusion of new qualifying categories such as national development banks. Further detail available in the ESG Report. home.barclays/annualreport Barclays PLC Annual Report 2017 21 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic report Business conduct and environmental impact The Barclays Way outlines the Purpose and Values which govern our way of working. 99.9% of our colleagues completed annual training on The Barclays Way in 2017 (2016: 99.6%) ahead of our target of above 97%. We reduced carbon emissions by 26.1% against the 2015 baseline (2016: 14.3%a), making good progress towards our 30% target by 2018. We also achieved 89% (2016: 88%) on-time payment by value to our suppliers (Target: 85%) and have published an updated Statement on Modern Slavery which includes additional information on the work we are doing with our clients and customers, as well as our suppliers. Please see the statement on our website home.barclays/citizenship/our-approach/ human-rights.html Colleague engagement in citizenship activities Colleague participation is essential to the success of our citizenship strategy. More than 50% of our colleagues participated in volunteering, fundraising or regular giving activity with 43,700 unique participants (2016: almost 44,000)b. We also have active internal Digital and LifeSkills, Environmental, Social Innovation and Intrapreneur networks. Areas of continued focus: Shared Growth Ambition We will continue to focus on improving integration with our product suite and developing innovative sustainable financing solutions. We intend to focus on enhancing the impact of our employability programmes and providing compelling opportunities for our colleagues to participate in citizenship activities. In addition, we are developing wider sustainability and sector guidelines for business activity in 2018, and will increase our contribution to policy initiatives and multi- stakeholder partnerships. Supporting sustainability-focused ventures to scale-up is one way in which Barclays is supporting the Sustainable Development Goals (SDGs), and we will continue to review and improve our core focus on raising access to financing for social and environmental segments, building skills and supporting empowerment. External benchmarks and surveys Barclays’ strategy and performance on a range of ESG factors is evaluated by external agencies on an annual basis. In 2017, we broadly maintained our performance scores in key ratings and indices. Although methodologies vary and continue to evolve, we believe there is an opportunity to continue to enhance our performance on an absolute and relative basis. We maintained membership of both the Dow Jones Sustainability Indexc series, where our score reduced by 1 percentage point to 83 points against an industry average of 58 points (2016: 61 points), and the FTSE4Good Index seriesd, with our absolute score up to 4.3/5 (2016: 3.9/5) and our position relative to the banks sector improved to the 91st percentile (2016: 78th percentile). Barclays was rated ‘BBB’ by MSCI ESG Ratingse (2016: ‘BBB’) and scored 61 points in Sustainalytics ESGf Ratings (2016: 62 points). ________________________________________ Policies and guidance can support delivery towards the key outcomes for citizenship. The Barclays Way contains statements on: respect for society – our Shared Growth Ambition; respect for human rights; respect for the environment and supporting the communities in which we operate. Our activity is supported by policies and position statements on a range of material issues including: environmental sustainability; modern slavery; human rights; and anti- bribery and anti-corruption. These are available at home.barclays/citizenship/ our-approach/policy-positions.html Barclays’ Group Statement on Human Rights aims to achieve a consistent and comprehensive approach to respecting human rights. We are committed to operating in accordance with the Universal Declaration of Human Rights and we take account of other internationally accepted human rights standards. We respect and promote human rights through our employment policies and practices, through our supply chain and through the responsible provision of our products and services. The Barclays Anti-Bribery and Anti-Corruption (ABC) Policy and Standards and the Barclays Introducer Policy and Standard extend to all Barclays’ business dealings globally. Barclays takes a zero-tolerance approach to bribery and corruption and we are committed to conducting our global activities free from any form of bribery and corruption. We also expect the same from any third parties providing services for or on behalf of Barclays. Employees who fail to comply with the requirements of our policies and standards, may face disciplinary action, up to and including dismissal or termination of employment. Performance against our strategic non- financial performance measures for citizenship is one indicator of the effectiveness and outcome of certain policies and guidance. Policies which support our citizenship strategic non-financial measures include aspects of our policy statement on environmental sustainability. The full details of our policies and position statements are available at home.barclays/ citizenship/our-approach/policy-positions. html We provide additional information in the Environmental Social Governance (ESG) Report 2017 available at home.barclays/annualreport Notes a 2016 carbon reduction actuals have been restated due to improved billing data replacing estimates and restatements to travel emissions. Further detail available in the ESG Report. b Unique participants measures colleague involvement in eligible volunteering, matched fundraising, regular giving initiatives. Data sourced from internal reporting systems including several manual sources. c Source: S&P Dow Jones; Sustainable Asset Management (SAM). d Source: FTSE Russell. e Source: MSCI ESG Inc. f Source: Sustainalytics Inc. 22 Barclays PLC Annual Report 2017 home.barclays/annualreport Key performance indicatorsA holistic approach to measuring successBarclays UK home.barclays/annualreport Barclays PLC Annual Report 2017 23 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportBarclays UK Our performance in the UK With 30,000 colleagues and 24 million customers and clients, Barclays UK strives to help people move forward by providing personalised and perfect experiences, delivered by passionate colleagues. In 2017, we have made significant progress in establishing the ring-fenced bank, protecting our customers and clients and transforming our business through digitisation and automation. Overview of products, services and clients Our future ring-fenced bank, Barclays UK, is a personal and business banking franchise, built around our customers’ needs with innovation at its core. Our Personal and Premier Banking financial solutions help customers move forward by putting them at the heart of everything we do, connecting the different aspects of their lives to their financial lives, at a time that suits them. Barclaycard Consumer UK is a leading credit card provider, offering flexible borrowing and payment solutions, while delivering a market-leading customer experience. Wealth, Entrepreneurs and Business Banking serves a spectrum of clients, from those who manage their own investments to small and medium-sized enterprises (SMEs) who need specialist advice, products and services. Market and environment in which the division operates Against the background of a prolonged uncertain political and economic climate in the UK, we continue to deliver solid financial performance and provide innovative solutions for our customers and clients. The operating environment continues to be challenging including rapidly changing customer behaviours; increasing expectations of society and regulators; and significant technological disruption amid the threat of dis-aggregation from competitors and new entrants. However, we have a leading brand, a solid customer base and we remain well positioned in the current environment. Barclays UK operational model Customers and Clients ■■ Individuals ■■ Businesses (SMEs) Products and services ■■ Personal banking services ■■ Credit cards and transactional lending ■■ Investment products and services Value creation ■■ To our customers and clients – Building meaningful relationships to provide relevant financial solutions ■■ Business banking solutions ■■ To society – Helping communities move forward ■■ To Barclays – Ring-fenced UK-focused bank with sustainable returns and prudent balance growth Contribution to Group £7.4bn Income £1.7bn Profit before tax 9.8% RoTE 66% Cost: income ratio £70.9bn Risk Weighted Assets 24 Barclays PLC Annual Report 2017 home.barclays/annualreport Educating our customers in digital safety In May 2017, we launched our UK-wide consumer engagement campaign to highlight the importance of digital safety and our role in helping people move forward in this digital age. The digital age has made our lives much easier in many ways. We now share information, shop online, pay bills, and keep in touch with each other in cyberspace. For many people, this is their way of life and they feel confident in navigating the digital world. However, having the confidence to be able to work and play in the digital age isn’t the same as knowing how to keep safe while doing so. Our campaign resulted in over 4.8 million people taking action off the back of this outreach, resulting in our leadership role being recognised by Government ministers and the media. We are committed to ensuring continued growth of Barclays UK, and are cognisant of the rapid pace of technological change in today’s environment. Risks to the operating model We continue to monitor leading indicators to identify trends in UK economic performance – in particular, trends caused by low interest rates, Brexit uncertainty, as well as from the impact of the increase in zero hour contracts. We aim to remain conservative and well positioned post-Brexit with stable trends in impairments supported by our strong risk management framework and oversight. We are committed to ensuring continued growth of Barclays UK, and are cognisant of the rapid pace of technological change in today’s environment. In order to continue to provide exciting and relevant solutions for our customers and remain competitive against new entrants, we are investing significantly in new technology, while simplifying and automating our existing platforms. Unrelenting growth and sophistication in organised crime remains a concern. In order to reduce the risk of cyber threat and protect our customers and clients, we continue to invest heavily in cyber risk, improving detection and response capability and implementing new resilience standards and testing approaches. Innovation at our core Half a century after launching the world’s first Automated Teller Machine – the ATM, we developed new ‘contactless cash’ withdrawal options in 2017, fit for the digital age. In addition, we extended our cheque imaging pilot programme to other banks, allowing more than 243,000 customers the ability to pay in cheques instantly from wherever they are, 24 hours a day. We also achieved an industry first with Insurance Instant Price – our first mobile insurance proposition, allowing instant price quotes from our providers to approximately one million customers. Key highlights this year in delivering our strategy This year we have built the Barclays UK ring-fenced bank and a diverse, highly- experienced Board has been appointed by the Barclays UK Chairman. We have also migrated over 600,000 customers onto new sort codes with minimal customer impact. Alongside this, we have made good progress building meaningful relationships with our 24 million customers and significantly reducing the number of customer complaints – one of our key objectives for 2017 – by developing our colleagues and tackling the root causes. Interactive tools are now available to enable colleagues to more effectively own, manage and collaborate in the timely resolution of complaints. Reducing customer complaints further will continue to remain one of our top priorities for 2018. Over 10 million customers are now actively engaged with our digital services, including our award-winning Barclays Mobile Banking mobile app. Delivering on shared growth Our signature citizenship programme, LifeSkills, aims to inspire young people to develop the skills they need for a better future. In less than five years, it has reached over 5.5 million young people and more than 16,000 colleagues are now registered as LifeSkills volunteers. We expect 2018 to be a pivotal year for the financial services industry with the introduction of PSD2 and Open Banking but we believe Barclays UK has a significant opportunity to thrive in this environment. I am positive we will continue our lead in innovation in an Open Banking environment, as a new ring-fenced bank. Ashok Vaswani CEO, Barclays UK home.barclays/annualreport Barclays PLC Annual Report 2017 25 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportPersonal Banking Our performance in Personal Banking Our Personal and Premier Banking team develop transparent and innovative solutions for our customers. We help customers move forward by putting them at the heart of everything we do, connecting the different aspects of their lives to their financial lives, at a time that suits them. This ranges from opening their first bank account to completing a mortgage on their dream home. We launched a new online Track Savings Goals tool available through Barclays Finance Manager, which aims to support customers in setting and reaching their targets. Our Mortgages business has continued to focus on enhancing the customer experience this year, and has won eight awardsa in 2017. We’ve also continued to enhance our CloudIt offering, including allowing customers to access their mortgage statements online. This year we created a single Product and Propositions team, bringing together our core product capabilities in Current Accounts, FX and Insurance, Consumer Lending, Mortgages and Savings with our newer Information Business and Mobile Payments products, as well as with the Community and Premier segments they serve. Through doing this, we are now able to more fully anticipate and deliver responses to our customers’ needs and understand what they want in the moment they need it. Moving Barclays UK forward 2017 has seen a continued focus on rewarding customer loyalty and creating advocates for every interaction. Over 930,000 customers now benefit from Blue Rewards, including Cashback. We landed our first 10% Cashback retail offers and have helped our customers earn over £5 million in savings since Cashback was launched. Technology and data are such fundamental parts of how we serve customers and clients that it is vital that we all become more digitally savvy and help our customers to do the same. We started several years ago with the nationwide force of Digital Eagles, offering our customers and clients the help and resources to improve their digital skills; and continued this year with our Digital Safety campaign which aims to heighten awareness and educate our customers to be digitally safe. Leveraging our data to benefit our customers and clients is a fundamental pillar of our strategy. We launched Local Insights, providing consumers, businesses and MPs key insights about their local area. We celebrated one year of our Barclays Identity Service, which allows consumers to access government services such as tax self-assessment online in a simplified, secure manner. Helping our customers and colleagues Barclays has made significant progress to enhance accessibility this year. Our high visibility and tactile debit cards aren’t just useful for the visually impaired – many people struggle to read the numbers on their card – so we’ve offered a high contrast design option. We also launched a new larger audio PINsentry device to facilitate easier access to online banking for customers with dexterity and sight difficulties, enabling them to continue to do their banking independently. We have supported customers in vulnerable circumstances by automating complex processes such as registering a power of attorney. As well as delivering for our customers and clients, we need to ensure we deliver for our colleagues too. Our focus on investment in training, development and coaching as well as creating new ways to engage and support our colleagues continues. Our colleagues’ needs are changing just as those of our customers are, and empowerment, dynamic and flexible working as well as improved technology have been a strong focus as we develop a world-class team who put the customer at the centre of everything they do. “Barclays has always believed in me. The real support has come from my points of contact at the bank. It’s these relationships that not only keep me banking with Barclays, but encourage me, without a shadow of a doubt, to recommend Barclays.” Kieran Miles, Premier Customer Note: a Best Lender for first-time buyers with family support (Moneywise); Best Lender for Larger loans (Moneywise); Best Online Lender (What Mortgage); Best Help to Buy Mortgage Lender – Equity Loan (What Mortgage); Best Intermediary Lender (Mortgage Finance Gazette); Best Overall Lender (Mortgage Finance Gazette); Best National Bank (Mortgage Finance Gazette); Best Large Loans Mortgage Lender (Your Mortgage). 26 Barclays PLC Annual Report 2017 home.barclays/annualreport Barclaycard Consumer UK Our performance in Barclaycard Consumer UK We are continuously looking for ways to improve the customer experience we deliver Throughout 2017 we focused on reducing customer complaints, maintained a stable Relationship NPS and reached new records on several transaction NPS, including Customer Service. We are pleased to have won a number of awards, acknowledging the market-leading service we offer our customers. We were recognised at the Top 50 Companies for Customer Service Awards, with two awards, Best Extra-Large Centre and Best Social Media Team. We support consumers by providing free credit scores, and personalised hints and tips on how to become fraud smart. Fraud-related activity is increasing and our research tells us that customers are increasingly concerned about how to protect themselves, and look to us to help provide support and information. We developed a digital interactive Fraud Fighter Tool to help customers understand where they are vulnerable and what they could do to better protect themselves, by giving them personalised fraud prevention tips. We also launched the Barclaycard Start Today campaign, to encourage people to start something new that they always wanted to do. So whether it is signing up to those pottery lessons or buying a bike, Barclaycard is there for our customers to help them move forward. Barclaycard Consumer UK is a leading credit card provider, providing flexible borrowing and payment solutions to around 10 million customers in the UK. We help people move forward, by enabling them to borrow and pay in a way that suits them. We are a responsible lender, providing credit based on credit history, ability to afford credit and our risk appetite, while delivering a market-leading customer experience. Barclaycard Consumer UK offers a suite of products to our customers. Our Barclaycard Initial credit card is aimed at customers who are looking for a first credit card, or have a limited credit history, and helps them to build a credit profile. Our Barclaycard Platinum card offers promotional savings on balance transfers and purchases for borrowers with good credit history. Alternatively, shoppers can earn reward points everywhere they shop with our Barclaycard Freedom Rewards credit card. The UK credit market continues to experience considerable change, driven by new competitors, new technologies, economic and regulatory pressures, and changing consumer expectations and behaviour. We are responding by developing new products and services for our consumers. For example, this year we have further diversified our offers to new and existing customers with the launch of our Barclaycard Platinum travel card, which has no non-Sterling transaction fees on foreign spend and ATM withdrawals. This year also saw the integration of Barclaycard Consumer UK with our retail bank to build and grow more sustainable income while reducing complaints and creating better customer experience. The integration of Barclaycard Consumer UK into Barclays UK has progressed with focus on enhancing the customer experience, as well as leveraging resources, technology and digital capabilities. 0000 0000 0000 0000 home.barclays/annualreport Barclays PLC Annual Report 2017 27 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWealth, Entrepreneurs and Business Banking Our performance in Wealth, Entrepreneurs and Business Banking This year, we launched the Multi-Impact Growth Fund, the first impact-investing vehicle of its kind from a major UK bank, offering mainstream investors the opportunity to generate long-term capital growth while making a positive contribution to society. Business Banking overview Our Business Banking unit provides coverage for clients across the UK at every stage of their business cycle in every industry, delivering distribution models which match clients’ needs and sophistication. This year, we launched our SmartBusiness Dashboard and App and now have over 12,000 clients benefiting from this unique client experience. With all their key business data in one handy place, our business clients are now spending more time within SmartBusiness and reaping the benefits. The roll-out of Direct, our unique telephony relationship model for small business and start-up customers, has vastly increased the number of conversations and in-depth client reviews we are able to have, which directly benefits over 900,000 customers already on this new, interactive model. In 2017, we supported more clients, reduced account opening times, lent more money and generated more income than in 2016 through targeting sustainable, long-term growth. Our aim in 2018 is to empower our colleagues through continuing to invest in technology and services. Within Wealth, Entrepreneurs and Business Banking, Wealth and Investments serves a spectrum of clients, from those who manage their own investments and require an execution service, to those who require a dedicated and holistic service through our Wealth Management services. Business Banking offers specialist advice, products and services to over one million business clients across the UK, helping them to run and grow their business, from start-ups through to mid-sized businesses. Smart Investor provides clients access to a wide range of investment products, educational resources to help build their confidence in investing, and tools to assist in planning for their future. The focus of the business this year has been launching Smart Investor and migrating over 225,000 existing Stockbrokers’ clients onto the new platform. This allows our clients to leave the day-to-day management of their investments to our experts, thereby taking the complexity out of investing. Wealth and Investments overview Wealth and Investments is formed of two businesses; Wealth Management and Smart Investor, both of which are supported by our in-house investment and asset management capabilities. Clients of our Wealth Management business benefit from holistic advice in banking, credit, wealth planning, and investments through their dedicated Wealth Manager and access to specialists across Wealth and Investments and the wider Barclays UK division. Despite significant investment in regulations required, Wealth Management has achieved a strong performance, and achieved year on year growth in client acquisitions. Despite significant investment in regulations required, Wealth Management has achieved a strong performance, and achieved year on year growth in client acquisitions. Investing in change The Multi-Impact Growth Fund invests primarily in specialist third-party funds which have been identified and blended by our experienced in-house fund and manager selection team. These funds have been chosen as best-in-class based on both their potential for strong financial returns and the consideration of their impact around key social and environmental issues such as climate or demographic changes. The Fund is the first Barclays product in the wider impact investing proposition being developed and is available to clients in Wealth Management and Smart Investor. 28 Barclays PLC Annual Report 2017 home.barclays/annualreport Barclays International home.barclays/annualreport Barclays PLC Annual Report 2017 29 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportBarclays International Our performance in International Barclays International is the diversified transatlantic, wholesale and consumer bank within Barclays Bank PLC. Encompassing the Corporate and Investment Bank, Barclaycard International and Private Bank and Overseas Services businesses, our dual home markets in the UK and US anchor our business in the two most important global financial centres. Our business model in Barclays International is dependent upon our client relationships, the services we provide to our clients and our capital – human, technological and financial. In 2017, Barclays International contributed 68% to Group income with an RoTE of 6.6%, excluding the impact of the US deferred tax assets remeasurement. Overview of products, services and clients On the consumer side, within Barclaycard International, we provide consumers with credit cards, lending and deposit accounts. In Private Bank and Overseas Services, we provide banking, investment and wealth management services. For SMEs and corporates, we enable payment acceptance, commercial card payments and point-of-sale finance. Through our Corporate and Investment Bank, we serve our clients by providing advice, financing, trade and payment solutions, and raising capital. We support our institutional clients through sales and trading of securities. Barclays International operational model Customers and Clients ■■ Corporates ■■ Financial institutions ■■ Institutional investors ■■ Governments ■■ Consumers ■■ High and Ultra-High Net Worth Individuals ■■ Family Offices Products and services ■■ Financial advice ■■ Primary capital raising and capital markets execution ■■ Risk and liquidity management ■■ Lending ■■ Sales and trading ■■ International credit cards ■■ Consumer payments ■■ Banking ■■ Investments ■■ Wealth management Value creation ■■ To our customers and clients – we create value by facilitating the transmission of money from providers to users of capital ■■ To society – we provide financing to a range of social and environmental segments ■■ To shareholders – as a diversified transatlantic, wholesale and consumer bank Contribution to Group £14.4bn Income £3.3bn Profit before tax 3.4% RoTE (6.6% excl. the impact of the US deferred tax assets remeasurement) 69% Cost: income ratio £210.3bn Risk Weighted Assets 30 Barclays PLC Annual Report 2017 home.barclays/annualreport Market and environment in which the division operates The economic markets in 2017 were characterised by a low volatility and low interest rate environment. With this benign backdrop, valuation gains in the equity markets prevailed throughout the year. Prospective and confirmed legislative and regulatory changes continued to influence and shape strategies of all market players. In the UK, consumer confidence hit a four-year low, amid Sterling depreciation and despite historically low unemployment. In the US, the labour market and consumer spending strengthened, with subdued wage growth. Barclays International is focused on investments in talent, capital and technology. Barclays International has achieved significant milestones to meet structural reform regulations. Working closely with regulators and stakeholders, we are set up to serve our clients across the globe in alignment with regulatory policies and legislation. The newly-created divisional Board of Directors has been confirmed and has convened prior to formal Board meetings to ensure that we are set to operate within the Barclays governance framework upon the formalisation of structural reform. Significant entities within Barclays International, such as the US Intermediate Holding Company (IHC), are subject to stringent governance standards to ensure safety and soundness, particularly around capital, liquidity and risk management. Risks to the operating model Geopolitical and macroeconomic uncertainty in some markets remain a risk, while the volume and reach of regulatory change continues to require significant attention. We are making comprehensive plans for the UK’s planned exit from the EU and we believe we will provide an uninterrupted service to our clients, consumers and other stakeholders during and after the transition. We continue to monitor growth in US consumer delinquencies having proactively reduced our exposure to middle market consumers earlier this year. Advising on pan-European expansion Asahi Group Holdings, the largest brewer in Japan, has targeted Europe as its next platform for growth in its drive to become a global beer industry leader. Having already established a presence in Italy, the UK and the Netherlands through the acquisition of brands such as Peroni, Grolsch and Meantime, Asahi engaged Barclays to assist in creating a truly pan-European franchise. In March 2017, with Barclays acting as Financial Adviser, Asahi successfully closed on its €7.3bn acquisition of AB InBev’s business in the Czech Republic, Slovak Republic, Poland, Hungary and Romania. Asahi turned to Barclays for this critical transaction due to our holistic capability, including a long-standing, global coverage relationship, leading brewing industry and M&A experience, deep insight into Central Europe and cross-border deal execution expertise. Cyber crime had a hugely detrimental impact on the global economy in 2017, with unprecedented attacks in terms of their scale, impact and rate of spread. We have continued to invest heavily to ensure that our infrastructure retains industry-leading resilience to cyber crime. The growth strategy within Barclays International will continue to be executed in a controlled, commercial manner within the ERMF framework. Business highlights Barclays International is focused on investments in talent, capital and technology. In 2017, we affirmed the executive management leadership team within BI. In our Markets division, a new leadership structure has enabled streamlining and simplification, with global heads across credit, equities, macro and distribution. We are focused on dynamically managing and allocating financial resources to businesses within Barclays International through optimisation of capital, leverage, risk weighted assets, funding and tax across all jurisdictions and legal entities. Barclays International continues to enhance its customer and client experiences through innovation. For example, in Barclaycard International, we launched a new core payment processing platform that provides, multi-currency and multi-geography settlement capabilities and enables all currencies in all territories to be processed on a single platform. We also launched an Artificial Intelligence/Machine Learning tool to provide the latest advanced platforms and techniques for fraud detection and intelligent customer service automation. Overall, 2017 was a milestone year for Barclays International. Together, with our colleagues across the globe, we have embarked on a number of initiatives and areas of growth as we strive to matter more to our clients, to grow our revenues, and deliver much improved sustainable returns to our shareholders. Tim Throsby President, Barclays International and Chief Executive Officer, Corporate and Investment Bank home.barclays/annualreport Barclays PLC Annual Report 2017 31 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportCorporate and Investment Bank Our performance in the Corporate and Investment Bank The Corporate and Investment Bank offers wholesale banking products and services to corporate and institutional clients. The business is focused on serving our UK and US home markets, while supporting the global ambitions of our strategic clients. The Corporate and Investment Bank includes our markets, investment banking, corporate banking and research businesses. issues. Serving clients across a number of industries and segments, Barclays is proud to be a top three financier of capital for supranationals, sovereign and agency institutionsa, enabling the funding of critical infrastructure and helping to promote global economic growth and stability. With industry expertise and a history of innovation, our corporate banking business provides comprehensive banking, financing, trade and payment solutions to businesses across the UK. For example, Barclays has supported Pod Point, the UK’s leading provider of electric vehicle charging since inception in 2009. Barclays’ venture debt offering – enabled by our innovation finance product which is partly guaranteed by the European Investment Fund – has supported Pod Point to gain early access to capital so they can focus on developing their business. Finally, our research business delivers independent, thought-leading content across Equities, Credit, Macro and Quantitative Portfolio Strategy. The implementation of MiFID II has brought unprecedented change to the research industry and reinforced Barclays’ commitment to providing clients with differentiated market insights, actionable trade ideas and thematic views delivered through publications, one-to-one analyst interactions, conferences and events. Business update Our markets businesses provide execution, prime brokerage and risk management services across the full range of asset classes including equity, fixed income and rates. With a new markets leadership team in place, we are highly focused on investments in technology to drive client successes and increase market share. For example, we migrated to a new digital platform and funded critical upgrades to our electronic trading platforms in 2017. We are focused on the standardisation and simplification of post-trade technologies with the backdrop of a strong regulatory and controls environment. In 2017, Barclays was named Best Bank for FX in London and Best Bank for GBP/USD in FX Week’s annual awards. Our investment banking business provides long-term strategic advice on mergers and acquisitions, corporate finance and strategic risk management solutions, and equity and credit origination capabilities. In 2017, Barclays achieved its highest global fee share in three yearsa, and was the number one ranked bank in the UK for the first time since 2012a. Bolstered by strong mergers and acquisitions activity, we advised on numerous landmark deals to deliver for our clients. Our Leveraged Finance business reached its highest ever global fee share, ranking Barclays top four for the second consecutive yeara. Barclays was named 2017 Sterling Bond House of the Year by IFR magazine – with over 150 Sterling bond Note a Source: Dealogic. 32 Barclays PLC Annual Report 2017 home.barclays/annualreport Consumer, Cards and Payments Our performance in Consumer, Cards and Payments Consumer, Cards and Payments includes Barclaycard International and the Private Bank and Overseas Services. Barclaycard International provides branded and co-branded consumer credit cards, lending and deposit accounts to our customers in the US and Germany, and payment solutions to our clients in the UK. Private Bank and Overseas Services provide banking, investment and wealth management services to over 160,000 clients, globally. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Barclaycard International Our Barclaycard International business operates in three divisions: Barclaycard US, Barclaycard Business Solutions and Barclaycard Germany. Barclaycard US offers co-branded and branded credit cards in the US, along with consumer loans and online retail deposits. We are the ninth-largest credit card issuer in the market and this business has strengthened further in 2017. We launched a new co-branded credit card with Uber, which featured a ground breaking integration into the Uber app, offering a simple, seamless and frictionless customer experience. Our relationship with existing partners strengthened further, with our JetBlue co-branded card being named the ‘best no-fee loyalty airline card’ for 2017 by MONEY magazine. Across all credit card products, Barclaycard US added over two million new accounts in 2017. In addition, our Barclays-branded consumer retail deposits now exceed $12.5bn. Barclaycard Business Solutions provides merchant acquiring, payments integration and acceptance, payment gateway, commercial payments and point-of-sale consumer finance solutions in the UK. We are a leading provider in all our businesses and we are one of the largest payment acceptance providers in Europe. In 2017, we processed close to £250bn in payments through acquiring. In 2017, we processed close to £250bn in payments through acquiring. In 2017, we completed a four-year investment in a new core payment processing platform that provides omni-channel, multi-currency and multi-geography settlement capabilities to help us strengthen our merchant relationships and support their growth. Coinciding with the launch of Apple’s iPhone 8 and X, Barclays Partner Finance rolled out an in-store financing offer in the UK with 131,000 applications received in-store since launch. We are also now a preferred partner for UK point-of-sale finance for Tesla via a digital in-store offering. Barclaycard Business Solutions’ electronic funds transfer platform, known as PrecisionPay Bank Transfer, went live in Q3 with a successful launch, providing clients with the ability to pay their suppliers via bank transfer, which is funded by a commercial card. Barclaycard has been present in Germany for over a quarter of a century and now serves over 1.2 million cards and loans customers. We are the leading issuer of revolving credit cards in the country by outstanding balances. We also have a strongly growing instalment loans business as well as an online deposit product. In recognition of our focus on innovative products and features, all three Barclaycard open market products (New Visa, Gold and Platinum) received several best-in- class recognitions from leading German business and finance magazines. Barclaycard Germany continues to drive exceptional customer satisfaction rankings, with the business placing in the top two for both cards and loans. We also provide cards and lending in Norway, Sweden and Denmark via our EnterCard joint venture with Swedbank and we are a leading player in the region. home.barclays/annualreport Barclays PLC Annual Report 2017 33 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic report Consumer, Cards and Payments Our performance in Consumer, Cards and Payments Disrupting the US co-branded credit card market November 2017 marked the unveiling of the Uber Visa Card, recognised as one of the most rewarding ‘no annual fee’ card programs in the US. As a pioneer in transportation and technology, Uber recognised Barclays’ leadership in payments, innovation and partnerships when launching its first co-branded credit card. With an eye toward the future of mobility, technology and commerce, our companies built one of the most modern payment experiences in the US market. This cutting-edge payments program represents a ground-breaking approach to mobile app technology that meets the demands of today’s on-the-go consumer. Using their smartphone, approved customers can apply, load their card into the Uber wallet, and start earning rewards in a matter of minutes, providing them value and experiences that are instant, integrated and rewarding. Private Bank and Overseas Services Private Bank and Overseas Services provides a diversified range of financial and wealth products and services to a broad base of clients, ranging from retail, high net worth and ultra high net worth, to family offices and corporates. With a significant global footprint, business operates across the UK, EMEA, India and Offshore Islands. With a significant global footprint, the business operates across the UK, EMEA, India and Offshore Islands. Within the Private Bank, affluent clients at Barclays are supported by a dedicated Private Banker and a team of investment and wealth specialists. In addition, the Private Bank facilitates access to Barclays Corporate and Investment Bank products and services for ultra high net worth clients. The Overseas Services business delivers banking, treasury and investment solutions to core client segments through relationship led services and online channels. With a focus on enhanced service delivery and product offerings, our Private Bank and Overseas Services business is poised for growth and scale. 34 Barclays PLC Annual Report 2017 home.barclays/annualreport Head Office and Group Service Company Our service operations The Head Office function contains the central operations of the Group. With the reintegration of remaining legacy assets and businesses in the second half of 2017, the function became a more material contributor to the Group results. Going forward, many of the Head Office functions will be within the Group Service Company. The Head Office of Barclays includes the impact of treasury operations, which manage the capital, funding and liquidity position of the Group. In 2017, the Head Office became more significant for Barclays as it contained some of the costs associated with the legacy assets and businesses, which were reintegrated on 1 July 2017. These factors contributed to a £834m loss before tax in 2017. From 1 April 2018, the treasury operations will be embedded into the respective legal entities of Barclays Bank UK PLC, and Barclays Bank PLC, as well as into Barclays PLC. The Group Service Company has significant commercial and competitive value. Central operations are already operating through the Group Service Company – a separate legal entity, recharging all of its costs to the two legal entities. The Group Service Company was ‘stood up’ in September 2017 and is the hub through which we will deliver a wide range of operations, technology and functional services to the Barclays Group and the two legal entities of Barclays Bank UK PLC and Barclays Bank PLC. The purpose of the Group Service Company is to provide world-class services that are high quality, efficient and cost effective, to support our goal to be at the forefront of industry change and innovation. With significant commercial and competitive value, we believe the Group Service Company will radically reduce duplication of effort and cost, allowing us to give a more consistent and seamless experience to our colleagues, clients and customers. This will allow us to lead the way in next generation products and services in banking, to fully embrace the advantages that lie in automation, capitalise on our data and to innovate like a Fintech. We intend to unlock efficiencies and release capital for strategic investment, helping to drive the optimisation of Barclays as a whole and delivering value to our shareholders. The scale of the Group Service Company is substantial, accounting for around 42,000 colleagues working globally. It delivers services across a wide range of technical and functional capabilities, including Compliance, Corporate Relations, Legal, Risk, Real Estate, Finance, Operations and Technology. The Group Service Company operates as a separate legal entity with its own Board of Directors, thereby promoting transparency and increased accountability. The Group Service Company is also a major step in the delivery of our structural reform programme. It is Barclays’ response to the ring-fencing requirements established by the UK Government following the financial crisis that began in 2007. Grouping our services together in this way will allow us to maintain operational continuity for our business units and facilitate the execution of our recovery and resolution plans in the event of financial difficulty, thereby strengthening the overall resilience of the Barclays Group. It also means we have a centre of excellence for services required by the business, such as fraud management and cyber security, where we can reduce duplication and benefit from implementing best practice across all of our businesses. For further information on the timeline and progress of our structural reform programme, please see page 204. home.barclays/annualreport Barclays PLC Annual Report 2017 35 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportOur people and culture Our ongoing commitment to our people drives our success Fostering the right culture at Barclays is critical to our success. By promoting respect, diversity and performance in the workplace we strive for excellence to deliver the best results for our customers and clients, taking pride in our achievements. We continue to be focused on the importance of embedding a conduct and values-based culture throughout the organisation and this is at the core of our strategy and processes. In recognising the significance of this commitment, conduct, culture and values remained one of our strategic priorities in 2017. In 2016, we developed a culture measurement framework, anchored in our values to track and measure cultural progress across the Group. In 2017, we focused on embedding this framework, ensuring it is a key component of the non-financial metrics reviewed to assess the performance and culture of Barclays. Through this framework, and the results from our employee opinion survey ‘Your View’, quarterly insights, key cultural metrics and performance indicators are produced, stimulating management discussions which result in actions and decisions to further promote and embed a conduct and values- based culture. We continue our ambition to become the most accessible, inclusive and sought after employer, where colleagues feel engaged and empowered to achieve their best in order to deliver the best for our customers and clients. We continue our ambition to become the most accessible, inclusive and sought after employer, where colleagues feel engaged and empowered to achieve their best in order to deliver the best for our customers and clients. We are pleased that in 2017 the sustainable engagement of our employees improved to 78% across the Group. This year colleagues were asked to select the phrases that they would use to describe the current culture at Barclays and we are encouraged that customer satisfaction, continuous improvement and growth are some of the top words selected. Focus continues in areas that we know are key to advancing cultural change, for example our Dynamic Working and employee well-being campaigns, as well as prioritising positive mental health awareness through our ‘This is Me’ campaign. Our ongoing commitment towards increasing female representation at all levels across Barclays remains a core focus of our talent management and leadership succession processes and we recognise that our commitment to greater gender equality is integral to drive societal change in equality, diversity and inclusion. Further details on our gender diversity commitments and additional highlights from across our Diversity and Inclusion strategy can be found in the People section on pages 89 to 92. We continue to run Group CEO sponsored Enterprise Leaders’ Summits, which seek to develop the next generation of enterprise leaders and strengthen a culture of collaboration among our leaders in order to deliver improved solutions and products for our customers and clients. The control functions rotational programme launched in 2016, which was expanded this year, recognises that future leaders in our businesses must have a strong awareness and understanding of the control environment. The programme provides colleagues the opportunity to work within a control function gaining valuable perspective. 36 Barclays PLC Annual Report 2017 home.barclays/annualreport We are committed to helping people succeed, whether entering the workplace for the first time or as an experienced professional. In support of the Barclays Shared Growth Ambition, and youth unemployment and social mobility, our apprenticeship programme has continued to provide opportunities for candidates from a broad range of backgrounds. Since the programme began we have hired over 3,400 apprentices, the majority with no prior qualifications or experience. We have continued to expand the programme, launching in 2017 the first ever Agriculture Higher Apprenticeship programme and Degree Apprenticeship in banking. Through the Barclays Armed Forces Transition, Employment and Resettlement (AFTER) programme we have assisted over 5,500 veterans in employment transition, hired over 500 ex-military colleagues and donated over £4.25m to military charities to assist wounded and injured service personnel in employment transition. During 2017, external recognition has confirmed the sustained and global impact of our work. We are proud of the increased colleague engagement we are seeing across the organisation and both the external and internal differences that our values and culture are having and the change we can make to people’s lives as a result, enabling success and giving them access to a future where they can thrive. Our drive to continue to embed a conduct and values-based culture shows the importance that we place on the positive and creative contributions of each and every one of our colleagues in order to serve customer and clients and to continue to build trust and respect in the profession of banking. Tristram Roberts Group Human Resources Director For further information about the gender pay gap at Barclays, please see page 90. Dynamic Working Dynamic working is empowering our colleagues to work in a way that suits their lives and supports our business, to better serve our customers’ and clients’ needs. Every stage of life brings new priorities, responsibilities and opportunities. Having the flexibility when, where and how colleagues work can help them integrate their professional and personal lives and fulfil all their roles more easily. Dynamic working is not flexi-time rebranded, it is not a policy, instead it is agile, attitudinal approach to meeting colleagues wide-ranging needs while having a positive impact on productivity, engagement and retention in the following ways: ■■ colleagues who work dynamically score higher on engagement and job satisfaction with 87% saying they would recommend Barclays as a good place to work ■■ dynamic working provides agility to address the needs of clients and colleagues across the globe living in different time zones ■■ dynamic working is addressing the needs of a work force that spans five generations. You can find out more on our Diversity and Inclusion activities reporting at: home.barclays/about-barclays/diversity-and-inclusion.html home.barclays/annualreport Barclays PLC Annual Report 2017 37 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportGovernance compliance Compliance with the UK Corporate Governance Code A snapshot of how Barclays complies with the requirements of the UK Corporate Governance Code (the Code) is set out below. For further information, see pages 80 to 84. Leadership There is clear division of responsibilities between the Chairman, who runs the Board, and the Group Chief Executive, who runs the Group’s business. Individual roles on the Board and their responsibilities are set out in Barclays’ Charter of Expectations. Effectiveness The skills, knowledge and experience needed for an effective Board are recorded on a skills matrix, which is used by the Board Nominations Committee to inform Director recruitment, induction and ongoing development. The Senior Independent Director, Sir Gerry Grimstone, provides a sounding board for the Chairman, acts as an intermediary for the other Directors when necessary and is available to shareholders if they have concerns that have not been addressed through the normal channels. The Board has set out Barclays’ culture, values and behaviours in the Barclays Values and Purpose and The Barclays Way, which are embedded throughout the Group. Directors are expected to provide rigorous and constructive challenge on matters that, owing to their strategic, financial or reputational implications or consequences, are considered significant to the Group. The composition of principal Board Committees meets the independence criteria of the Code and there is appropriate cross- membership to further promote effectiveness. 11 of 14 Directors are independent non- executive Directors (79%), while the Chairman was independent on appointment. As at the date of this report, there are three female Directors (21%), compared to our target of 33% by 2020 which the Board remains committed to achieving. The Board Nominations Committee regularly considers Board and senior management succession plans. Appointments to the Board are made following a formal, rigorous and transparent process, based on merit, taking into account the skills, experience and diversity needed on the Board in the context of Barclays’ strategic direction. All Directors are expected to commit sufficient time to fulfil their duties to Barclays. In 2017, Directors’ attendance at scheduled Board meetings was 99% and across the scheduled Board Committee meetings was an average of 94%. The Board assesses its effectiveness and that of its Committees and the individual Directors annually in a process that is externally facilitated by an independent third party. Directors are subject to election or re-election each year by shareholders at the AGM. Barclays’ Charter of Expectations sets out responsibilities for providing the Board with accurate, timely and high-quality information necessary for it to fulfil its duties. The Board, assisted by its Risk and Reputation Committees, conducts robust assessments of the principal risks facing Barclays. Accountability The Board is responsible for setting Barclays’ risk appetite, that is, the level of risk it is prepared to take in the context of achieving Barclays’ strategic objectives. Barclays’ Enterprise Risk Management Framework is designed to identify and set minimum requirements in respect of the main risks to achieving the Barclays’ strategic objectives and to provide reasonable assurance that internal controls are effective. The Board, assisted by its Risk and Reputation Committees, conducts robust assessments of the principal risks facing Barclays, including those that would threaten its business model, future performance, solvency or liquidity. It reports on this in the annual viability statement on pages 40 and 41. 38 Barclays PLC Annual Report 2017 home.barclays/annualreport The Directors also review the effectiveness of the Group’s systems of internal control and risk management. The Board has put in place processes to support the presentation to shareholders of fair, balanced and understandable information. The Board Audit Committee, comprising independent non-executive Directors, oversees the effectiveness of Barclays’ internal and external auditors. Remuneration The Board Remuneration Committee, comprising independent non-executive Directors, sets the overarching Group remuneration policy and approves the remuneration arrangements of the Chairman, the executive Directors and other senior executives. The Board Remuneration Committee seeks the views of Barclays’ major shareholders on remuneration matters. This engagement is meaningful and contributes directly to the decisions it makes. Barclays’ reward framework is simple and transparent and is designed to support and drive business strategy and long-term success. To ensure alignment with shareholder interests, a significant part of performance- related pay is delivered through Barclays shares. Unvested deferred remuneration is subject to malus. Clawback also applies to any variable remuneration awarded to Material Risk Takers after 1 January 2015. Engagement The Chairman and Senior Independent Director, together with other Board representatives and the Company Secretary, hold meetings with investors focusing on corporate governance matters. The Group Chief Executive and Group Finance Director present quarterly results briefings and the Group Finance Director holds briefings for equity and debt sell-side analysts. The Board Remuneration Committee seeks the views of Barclays’ major shareholders on remuneration matters. This engagement is meaningful and contributes directly to the decisions it makes. Regular engagement with Barclays’ brokers ensures that the Group’s strategy and performance is being communicated effectively and provides a better understanding of investor views. The Board receives feedback on investor relations activity, along with regular reports of changes in holdings of substantial shareholders and reports on share price movements. A number of events are held throughout the year to maintain an open dialogue with investors, of which the AGM is the most important. home.barclays/annualreport Barclays PLC Annual Report 2017 39 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportGovernance compliance Compliance with the UK Corporate Governance Code Viability statement While the financial statements and accounts have been prepared on a going concern basis, the UK Corporate Governance Code also requires the Directors to make a statement in the Annual Report regarding the viability of the Group, including explaining how they assessed the prospects of the Group, the period of time for which they have made the assessment and why they consider that period to be appropriate. In light of the analysis summarised below, the Board has assessed the Group’s viability and confirms that the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years. This timeframe is used in management’s Working Capital and Viability Report (WCR), prepared at February 2018. The availability of the WCR gives management and the Board sufficient visibility and confidence on the future operating environment for this time period. The three-year timeframe has also been chosen because: ■■ it is within the period covered by the Group’s future projections of profitability, cash flows, capital requirements and capital resources; ■■ it is also within the period over which regulatory and internal stress testing is carried out; and ■■ it is representative of the continued level of regulatory change in the financial services industry. The Directors are satisfied that this period is sufficient to enable a reasonable assessment of viability to be made. In making their assessment the Board has: ■■ carried out a regular and robust assessment of the Group’s risk profile and material existing and emerging risks. Notable among these are risks which senior management believe could cause the Group’s future results of operations or financial condition to differ materially from current expectations or could adversely impact the Group’s ability to maintain minimum levels of regulatory capital, liquidity, funding and the minimum requirement for own funds and eligible liabilities (‘MREL’) over the period of the assessment; ■■ reviewed how those risks are managed and controlled (further detail provided on pages 127 to 137); ■■ considered the WCR which provides an assessment of forecast CET1, leverage ratio, Tier 1 and total capital ratios, as well as the build-up of MREL up to 2022; ■■ reviewed the Group’s liquidity and funding profile, particularly Barclays’ internal liquidity risk appetite (LRA) and regulatory liquidity coverage ratios; ■■ considered the Group’s viability under specific internal and regulatory stress scenarios; ■■ considered the stability of the major markets in which it operates, the risks posed by the simplification of the business model and regulatory changes; ■■ considered the impacts of structural reform, including the creation of the UK ring-fenced bank; ■■ reviewed the draft statutory accounts and the in-depth disclosure of the financial performance of the Group; ■■ considered the Group’s medium-term plan (MTP); and ■■ reviewed the legal, competition and regulatory matters set out in Note 29 to the financial statements on pages 285 to 293. Risks faced by the Group’s business, including in respect of conduct, capital and operational risk, are controlled and managed within the Group in line with the Enterprise Risk Management Framework and the relevant Principal Risk Frameworks, through the Three Lines of Defence model. Executive management set a Risk Appetite for the Group, which is then approved by the Board. The second line set limits, within which the first line are required to operate. Management and the Board then oversee the associated Risk Profile. Internal Audit comprise the third line of defence and provide independent assurance to the Board and Executive Management over the effectiveness of governance, risk management and control over current, systemic and evolving risks. A full set of material risks to which the organisation is exposed can be found in the Material Existing and Emerging Risks on pages 121 to 126. Certain particular risks to viability identified by the Board are detailed below. These have been chosen on the basis of their ability to impact viability over the timeframe of the assessment but in some instances the risks exist beyond this timeframe. These particular risks include: ■■ legal proceedings, competition, regulatory and conduct matters giving rise to the potential risk of fines, loss of regulatory licences and permissions and other sanctions, as well as potential adverse impacts on our reputation with clients and customers and on investor confidence and/ or potentially resulting in impacts on capital, liquidity and funding; ■■ sudden shocks or geopolitical unrest in any of the major economies in which the Bank operates which could impact credit ratings, alter the behaviour of depositors and other counterparties and affect the ability of the firm to maintain appropriate capital and liquidity ratios; and ■■ evolving operational risks (notably cyber security and technology) and the ability to respond to the new and emergent technologies in a controlled fashion. 40 Barclays PLC Annual Report 2017 home.barclays/annualreport Legal proceedings, competition, regulatory and conduct matters and remediation/ redress are also assessed as part of the stress testing process. Capital risk appetite and LRA are set at a level designed to enable the Group to withstand various stress scenarios. As part of this process management also identified actions, including cost reductions and withdrawal from lines of business, available to restore the Group to its desired capital flightpath under a range of operating environments. The Group-wide stress testing framework also includes reverse stress testing techniques which aim to identify and analyse the circumstances under which the Group’s business model would no longer be viable, leading to a significant change in business strategy and to identify appropriate mitigating actions. Examples include extreme macroeconomic downturn scenarios, or specific idiosyncratic events, covering operational risk (for example, cyber attack), adverse outcomes in legal proceedings, competition, regulatory and conduct matters and capital/liquidity events. We use an inventory of models, non-modelled methods and quantitative procedures to support the stress test calculations and projections. These tools range from experienced management judgement through to sophisticated regression models based on historical data depending on the stress test application. The stress test evaluation process produces both gross impacts and the effect of mitigation including management actions which enables us to understand, monitor control and manage the risks identified effectively. The stress testing process is overseen by a detailed governance structure from the Board through to the three lines of defence within the business. Management is confident that the internal and external stress testing process is rigorous and considers a wide range of severe but plausible events, however, stress tests should not be assumed to be an exhaustive assessment of all possible hypothetical extreme or remote scenarios. These internal and external stress tests informed the conclusions of the WCR. Based on current forecasts, incorporating key known regulatory changes to be enacted and having considered possible stress scenarios, the current liquidity and capital position of the Group continues to support the Board’s assessment of the Group’s viability. For a statement as to our dividend policy please see page 85. The Board’s assessment of the Group’s viability over the next three years is subject to material existing and emerging risks highlighted on pages 121 to 126. As a Transatlantic Consumer and Wholesale Bank with operations globally, Barclays is impacted in the longer term by a wide range of macroeconomic, political, regulatory and accounting, technological and social developments. The evolving operating environment presents opportunities and risks which we continue to evaluate and take steps to appropriately adapt our strategy and its delivery. In relation to regulatory change, the firm is implementing changes required by structural reform, the final stage of which will be the creation of the ring-fenced bank in Q2 2018. The risk identification processes and link to business model will not differ post ring fencing and in assessing the viability of the organisation a standard and common process exists which is both top-down and bottom-up across each entity and the Group as a whole. The Board has also considered the Group’s viability under specific internal and regulatory stress scenarios. The Board reviewed external regulatory stress test results which are designed to assess the resilience of banks to adverse economic developments and confirm that we have robust forward looking planning processes for the risks associated with our business profile. In addition, the latest internal stress test conducted in Q4 2017 considered the potential impacts of: ■■ a severe UK recession including falling property prices which fail to recover over the forecast horizon; ■■ a global downturn driven by decelerating growth in China and emerging markets; and ■■ a significant drop in commodity prices, all of which could result in, among other things, a loss of income or increased impairment. The stress test outcome for macro-economic tests shows our full financial performance over the horizon of the scenario and focuses on the CET1 capital ratio. home.barclays/annualreport Barclays PLC Annual Report 2017 41 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic report42 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance This section sets out our corporate governance processes and the role they play in supporting the delivery of our strategy, including reports from the Chairman and each of the Board Committee Chairmen. ■■ Index to disclosures ■■ Board of Directors ■■ Group Executive Committee ■■ Board report ■■ Board Audit Committee report ■■ Board Risk Committee report ■■ Board Reputation Committee report ■■ Board Nominations Committee report Directors’ report UK Corporate Governance Code Chairman’s introduction Who we are What we did in 2017 How we comply Other statutory information People Remuneration report Page 44 45 47 49 50 53 64 69 75 80 85 89 93 home.barclays/annualreport Barclays PLC Annual Report 2017 43 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportUK Corporate Governance Code – index to disclosures “The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.” The UK Corporate Governance Code The UK Corporate Governance Code (the Code) is not a rigid set of rules. It consists of principles (main and supporting) and provisions. The Listing Rules require companies to apply the main principles and report to shareholders on how they have done so. You can find our disclosures as follows: Page Remuneration Executive directors’ remuneration should be designed to promote the long-term success of the company. Performance- related elements should be transparent, stretching and rigorously applied. ■■ Remuneration report 93 There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration. ■■ Remuneration report 93 Relations with shareholders Page There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. ■■ Stakeholder engagement The board should use general meetings to communicate with investors and to encourage their participation. ■■ Stakeholder engagement 84 84 Leadership Every company should be headed by an effective board which is collectively responsible for the long-term success of the company. Page All directors should receive an induction on joining the board and should regularly update and refresh their skills and knowledge. ■■ Board of Directors ■■ Composition of the Board 47 81 ■■ Induction 81 ■■ Training and development 82 There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision. ■■ Roles on the Board 80 The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role. The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. ■■ Information provided to the Board 82 The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. ■■ Review of Board and Board Committee ■■ Roles on the Board 80 effectiveness As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy. ■■ Roles on the Board 80 Page Effectiveness The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. ■■ Board of Directors ■■ Board diversity 47 46 There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. ■■ Appointment and re-election of Directors 77 All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively. ■■ Attendance ■■ Time commitment 80 81 All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. ■■ Composition of the Board ■■ Appointment and re-election of Directors 78 81 77 Accountability The board should present a fair, balanced and understandable assessment of the company’s position and prospects. Page ■■ Strategic Report ■■ Risk management ■■ Viability statement 2 119 40 The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems. ■■ Risk management and internal control 82 The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles, and for maintaining an appropriate relationship with the company’s auditors. ■■ Board Audit Committee report ■■ Accountability 53 82 44 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportGovernance: Directors’ report Chairman’s introduction Throughout this period of activity and change, your Board has been providing critical oversight of executive management to oversee the successful execution of the Group’s long-term strategy. strong foundation needed for effective management of the Group. Board changes in 2017 Through the Board Nominations Committee, we are always considering whether we have the right mix of individuals on the Board, providing an appropriate balance and diversity of skills, experience and perspectives. It is important that it is inherent within the composition of the Board that a broad range of perspectives and views are able to be provided which are representative of our customers, clients and employees as the foundations of our Bank. In addition, we are also regularly thinking about Board succession planning and ensuring we have a strong pipeline of directors to steer the Group over the long term. With this in mind, we brought on three new non-executive Directors in 2017: Sir Ian Cheshire, Matthew Lester and Mike Turner CBE, all of whom have significant board-level experience and bring specific sector and technical expertise to your Board. During 2017, Diane de Saint Victor and Steve Thieke, both non-executive Directors, left the Board and I thank them on behalf of the Board for their contributions and service. With the changes in 2017, our current female representation on the Board sits at 21%. Last year I reported that we set ourselves a Board diversity target of having 33% female representation on the Board by 2020. We are conscious that our gender diversity balance on the Board has fallen from 2016, but remain committed to achieving the target that we have set. Ensuring diversity of gender, as well as diversity in its other forms such as ethnicity, is built into our governance processes around Board composition and succession planning, and you can read more about this in the Board Nominations Committee report on pages 75 to 79. Dear Fellow Shareholders Welcome to my 2017 corporate governance report. In my Chairman’s letter on page 2, I highlighted the significant milestones and achievements for Barclays in 2017, including the further sell-down of our interest in Barclays Africa Group Limited, the closure of Barclays Non-Core, progress towards the establishment of our ring-fenced bank in 2018 as well as preparations for the UK’s departure from the EU. Throughout this period of activity and change, your Board has been providing critical oversight of executive management to oversee the successful execution of the Group’s long-term strategy. I firmly believe and have often said that the role of the Board is to create long-term, sustainable value for our shareholders. In order to do this, we must have a robust corporate governance framework, providing systems of checks and controls to ensure accountability and drive better decision-making, and also policies and practices which ensure that the Board and its Committees operate effectively. Part of this is creating an environment which encourages a constructive relationship between the Board and executive management to enable an appropriate level of debate, challenge and support in the decision-making process. I am pleased to report that in 2017 your Board and executive management continued to demonstrate this dynamic as we worked together in executing strategy. The impending changes to our Group corporate structure following structural reform has been a significant area of focus for the Board in 2017 and no doubt will continue to be at the forefront of our minds in 2018. After approving for appointment Sir Gerry Grimstone as the Chairman of Barclays International and Sir Ian Cheshire as the Chairman of Barclays UK, we worked closely with both of them to recruit high quality candidates to build the boards of those two entities. Our aim is to ensure that corporate governance within Barclays is in line with best practice for FTSE100 companies and as a Board we will work hard to ensure that our governance framework is always providing the home.barclays/annualreport Barclays PLC Annual Report 2017 45 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportChairman’s introduction Relations, as well as the views of employees through the results of the Barclays Your View employee opinion surveys. Another key stakeholder of Barclays is our regulators, and during 2017 the Board invited representatives of our regulators to attend meetings to hear directly their views and expectations of Barclays. All of these views form the context in which Board decision-making takes place and feeds into the considerations and debate when determining the Group’s strategy. Board effectiveness To deliver our strategy and achieve the delivery of long-term, sustainable value for shareholders requires an effective Board. It is an important part of my role as Chairman to satisfy myself that the Board – both collectively and its individual members – operates effectively. Each year, we conduct a self- assessment of our performance with the aid of an independent facilitator. As part of this process, I receive a report on the performance of our individual Directors, and our non- executive Directors, led by our Senior Independent Director, have the opportunity to review my performance. I am pleased to report that the results of the findings showed that your Board and its Committees are still operating effectively. There are, of course, areas to work on and challenges ahead once the new Group structure is crystallised following the stand-up of our new ring-fenced bank in 2018. Ensuring that there is clear accountability and delineated responsibilities in the new structure, not just between boards but also between committees and between the boards and the executive team, will be a key focus for us in 2018. You can read more about the findings and the review process undertaken for 2017 on page 78. Looking ahead 2018 will be another pivotal year for Barclays with the execution of our new Group corporate structure, and I look forward to working closely with the boards of Barclays UK and Barclays International to embed a strong framework to ensure clear, effective and consistent corporate governance. We will continue to work closely with executive management on improving performance within the Group’s businesses, without losing sight of the need to constantly be acting in line with the Barclays Values and Purpose to build on and retain the trust and confidence of our customers, clients, employees. Together with your Board, we remain focused on working hard to execute the Group’s strategy in order to create sustainable long-term value for our shareholders. John McFarlane Chairman 21 February 2018 Board diversity The Board has a balanced and diverse range of skills and experience. All Board appointments are made on merit, in the context of the diversity of gender, skills, experience and background required to be effective. Balance of non-executive Directors: executive Directors Chairman 1 Executive Directors 2 Non-executive Directors 11 Gender balance Female 3 Male 11 Length of tenure (Chairman and non-executive Directors) 1 3 2 1 0-3 years 2 3-6 years 3 6-9 years 6 4 2 Industry experience (Chairman and non-executive Directors)* 1 Financial Services 2 Political/regulatory experience 3 Current/recent Chair/CEO 4 Accountancy/auditing 5 Operations and Technology 6 Retail/marketing 12 (100%) 12 (100%) 5 (42%) 2 (17%) 1 (8%) 1 (8%) International experience† (Chairman and non-executive Directors)* 1 International (UK) 2 International (US) 3 International (Rest of the World) 10 (83%) 2 (17%) 2 (17%) Notes * Individual Directors may fall into one or more categories. † In relation to board experience based on the location of the headquarters/registered office of a company. Conduct, culture and values The Board also actively supports diversity throughout the Group. To attract and retain the best talent, we need to create an environment in which colleagues can thrive, develop and achieve their ambitions. I am very proud of the initiatives that we have at Barclays to encourage diversity and support inclusion among colleagues. Most recently, we launched a campaign aimed at increasing mental health awareness as Barclays aims to become a ‘mental health confident’ organisation, and we are delighted that our Chief Internal Auditor, Sally Clark, is the Executive sponsor for ‘Be Well’, our well-being initiative. Everything we do at Barclays is underpinned by the Barclays Values and Purpose, and we must act with respect, transparency and integrity in our interactions with stakeholders and with each other to create the right culture, and encourage the right behaviours by colleagues, across the Group. With that framework, we can build and maintain the trust and confidence of our stakeholders and the market. An important part of our strategy in relation to cultural progress and embedding our Barclays Values is our citizenship strategy, the Shared Growth Ambition, where our long-term aim is to create and grow a collection of products, services and partnerships that improve the lives of people in the communities that we serve. In 2017 we launched Barclays’ ‘green bonds’ as part of our support for the transition to a sustainable and low carbon economy. This was the first green bond issued by a UK bank using UK assets, and you can read more about this on page 7. Initiatives like this not only enable us to contribute meaningfully to society, but also enable us to better understand the environment in which we operate and our wider societal obligations, supporting the Board’s objective of delivering sustainable returns to shareholders. You can read more about the Shared Growth Ambition at home.barclays/citizenship Stakeholder views As a Board we are conscious of the impact that our business and decisions have on our customers, clients and employees as well as our wider societal impact. It is through an appreciation of our stakeholders that we can create a strategy aimed at delivering sustainable returns to our shareholders over the long term. The Board is supported in this role by the Board Reputation Committee, which monitors key indicators across the areas of conduct, culture, citizenship and customer satisfaction, as well as Barclays’ reputation and events that occur which may impact the trust in our brand. The Board receives information about, and engages with, our various stakeholders throughout the year and one of the most important dates in our calendar is our Annual General Meeting, which gives the Board an opportunity to meet our shareholders and hear their views. During the year the Board is kept informed of shareholder views through regular updates from the Head of Investor 46 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportGovernance: Directors’ report Who we are – Board of Directors Board of Directors Barclays understands the importance of having a Board with the right balance of skills, experience and diversity, and the composition of the Board is regularly reviewed by the Board Nominations Committee. The skills and experience of the current Directors and the value they bring to the Barclays Board are highlighted below. Full biographies can be accessed online via home.barclays/investorrelations John McFarlane Chairman Appointed: 1 January 2015 Sir Gerry Grimstone Deputy Chairman and Senior Independent Director Appointed: 1 January 2016 Relevant skills and experience Sir Gerry brings to the Board a wealth of investment banking, financial services and commercial experience gained through his senior roles at Schroders and his various board positions. Sir Gerry has global business experience across the UK, Asia, the Middle East and the US. Sir Gerry has significant experience as a non-executive director and chairman. He is currently the chairman of Standard Life Aberdeen plc, independent non-executive board member of Deloitte NWE LLP, board adviser to the Abu Dhabi Commercial Bank and the lead non-executive at the Ministry of Defence. Other current appointments Financial Services Trade and Investment Board Committees Nominations, Reputation (Chairman) Mike Ashley Non-executive Appointed: 18 September 2013 Relevant skills and experience Mike has deep knowledge of auditing and associated regulatory issues, having worked at KPMG for over 20 years, where he was a partner. Mike was the lead engagement partner on the audits of large financial services groups including HSBC, Standard Chartered and the Bank of England. While at KPMG, Mike was Head of Quality and Risk Management for KPMG Europe LLP, responsible for the management of professional risks and quality control. He also held the role of KPMG UK’s Ethics Partner. Other current appointments ICAEW Ethics Standards Committee; International Ethics Standards Board for Accountants; Chairman, Government Internal Audit Agency; Charity Commission Committees Audit (Chairman), Nominations, Risk, Reputation Relevant skills and experience John is Chairman of Barclays PLC and Barclays Bank PLC. He is a senior figure in global banking and financial services circles having spent over 40 years in the sector. John is currently chairman of TheCityUK and a member of the Financial Services Trade and Investment Board and the European Financial Round Table. Other current non-executive directorships include Westfield Corporation, Old Oak Holdings Limited and The International Monetary Conference. John was previously chairman of Aviva plc where he oversaw a transformation of the company FirstGroup plc, and the Australian Bankers Association. He was also a non-executive director of The Royal Bank of Scotland, joining at the time of the UK Government rescue. Prior to that he was CEO of Australia and New Zealand Banking Group Limited for 10 years, group executive director of Standard Chartered and head of Citibank in the UK. Other current appointments Member of Cranfield School of Management Advisory Board; Member of Institut International d’Etudes Bancaires; Member of the President’s Committee Confederation of British Industry Committees Nominations (Chairman) Jes Staley Group Chief Executive Appointed: 1 December 2015 Relevant skills and experience Jes joined Barclays as Group Chief Executive on 1 December 2015. He has nearly four decades of extensive experience in banking and financial services. He worked for more than 30 years at JP Morgan, initially training as a commercial banker, later advancing to the leadership of major businesses involving equities, private banking and asset management and ultimately heading the company’s Global Investment Bank. Jes is currently a member of the Institute of International Finance and formerly served as managing partner at BlueMountain Capital. These roles have provided him with a vast experience in leadership and he brings a wealth of investment banking knowledge to Barclays’ Board. Other current appointments None Committees None Tim Breedon CBE Non-executive Appointed: 1 November 2012 Relevant skills and experience Tim joined Barclays after a distinguished career with Legal & General, where, among other roles, he was the group chief executive until June 2012. Tim’s experience as a CEO enables him to provide challenge, advice and support to the executive on performance and decision-making. Tim brings to the Board extensive financial services experience, knowledge of risk management and UK and EU regulation, as well as an understanding of the key issues for investors. Other current appointments Marie Curie; Chairman, Apax Global Alpha Limited; Chairman, The Northview Group Committees Audit, Nominations, Remuneration, Risk (Chairman) Sir Ian Cheshire Non-executive Appointed: 3 April 2017 Relevant skills and experience Sir Ian joined Barclays in April 2017 as a non-executive Director and the Chairman of Barclays UK. From his lengthy executive career including his time as Group Chief Executive of Kingfisher plc, Sir Ian brings to the Board substantial business experience particularly in the international retail sector, as well as experience in sustainability and environmental matters. He holds strong credentials in leadership as well as being highly regarded by the Government for his work with various Government departments. Other current appointments Business Disability Forum President’s Group; Debenhams plc; Maisons du monde; Menhaden plc; lead non-executive director for the Government Committees Nominations Mary Francis CBE Non-executive Appointed: 1 October 2016 Relevant skills and experience Mary has extensive board-level experience across a range of industries. She is a non-executive director of Swiss Re Group and Ensco plc and was formerly senior independent director of Centrica and a non-executive director of the Bank of England, Aviva and Alliance & Leicester. She held senior executive positions in the UK Treasury and Prime Minister’s Office and in the City as Director General of the Association of British Insurers. She brings to Barclays strong understanding of the interaction between public and private sectors and skills in strategic decision-making and all aspects of board governance. Other current appointments Advisory Panel of The Institute of Business Ethics Committees Remuneration, Reputation home.barclays/annualreport Barclays PLC Annual Report 2017 47 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWho we are – Board of Directors Crawford Gillies Non-executive Appointed: 1 May 2014 Tushar Morzaria Group Finance Director Appointed: 15 October 2013 Mike Turner CBE Non-executive Appointed: 1 January 2018 Relevant skills and experience Crawford has extensive business and management experience, gained with Bain & Company and Standard Life plc. These roles have provided him with experience in strategic decision-making and knowledge of company strategy across various sectors and geographical locations. Crawford is currently senior independent director of SSE plc. He has also held board and committee chairman positions during his career, notably as chairman of the remuneration committees of Standard Life plc and MITIE Group PLC. Other current appointments Chairman, The Edrington Group Limited Committees Audit, Nominations, Remuneration (Chairman) Reuben Jeffery III Non-executive Appointed: 16 July 2009 Relevant skills and experience Tushar joined Barclays in 2013 having spent the previous four years in senior management roles with JP Morgan Chase, most recently as the CFO of its Corporate & Investment Bank. Throughout his time with JP Morgan he gained strategic financial management and regulatory relations experience. Since joining the Barclays Board he has been a driving influence on the Group’s cost reduction programme and managing the Group’s capital plan, particularly in response to structural reform. Other current appointments Member of the 100 Group main committee Committees None Dambisa Moyo Non-executive Appointed: 1 May 2010 Relevant skills and experience Mike has considerable business and board-level experience gained from his lengthy career with BAE Systems PLC where he was CEO as well as his non-executive positions. He has a strong commercial background and experience in strategy and operational performance culture. Mike brings significant leadership and strategic oversight experience to the Board, particularly from his roles as chairman of Babcock International Group PLC and GKN Plc. Other current appointments Member of the UK Government’s Apprenticeship Ambassadors Network Committees Reputation Company Secretary Stephen Shapiro Appointed: 1 November 2017 Relevant skills and experience Stephen was appointed Company Secretary in November 2017 having previously served as the Group Company Secretary and Deputy General Counsel of SABMiller plc. Prior to this, he practised law as a partner in a law firm in South Africa, and subsequently in the UK. Stephen has extensive experience in corporate governance, legal, regulatory and compliance matters. Stephen has also previously served as Chairman of the ICC UK’s Committee on Anti-Corruption as well as on working groups of the GC100, providing business input into key areas of legislative and policy reform. Relevant skills and experience Reuben has extensive financial services experience, particularly within investment banking and wealth management, through his role as CEO and president of Rockefeller & Co. Inc. and Rockefeller Financial Services Inc. and his former senior roles with Goldman Sachs, head of the European Financial Institutions Group. His previous government roles in the US, including as chairman of the Commodity Futures Trading Commission and as an under Secretary of State, provide Barclays’ Board with insight into the US political and regulatory environment. Other current appointments Financial Services Volunteer Corps; The Asia Foundation Committees Nominations, Risk Matthew Lester Non-executive Appointed: 1 September 2017 Relevant skills and experience Matthew joined Barclays as a non-executive Director in September 2017 and contributes strong financial management and regulatory experience to the Board, having held a number of senior finance roles across a range of business sectors, including financial services. Most recently was chief financial officer of Royal Mail Group. Matthew’s financial expertise enables him to analyse effectively complex reporting and risk management processes. He is currently a non- executive director of Man Group plc and Capita plc, where he also chairs the audit and risk committees of both companies. Other current appointments None Committees Audit, Risk Relevant skills and experience Dambisa is an international economist and commentator on the global economy, having completed a PhD in economics. Dambisa has a background in financial services and a wide knowledge and understanding of African economic, political and social issues, in addition to her experience as a director of companies with complex, global operations. She served as a non-executive director of SABMiller plc (2009-2016) and Seagate Technology plc (2015-2017). Other current appointments Chevron Corporation; Barrick Gold Corporation Committees Remuneration, Reputation Diane Schueneman Non-executive Appointed: 25 June 2015 Relevant skills and experience Diane joined Barclays after an extensive career at Merrill Lynch, holding a variety of senior roles, including responsibility for banking, brokerage services and technology provided to the company’s retail and middle market clients, and latterly for IT, operations and client services worldwide. She brings a wealth of experience in managing global, cross-discipline business operations, client services and technology in the financial services industry. Diane is a member of the board of Barclays US LLC, Barclays’ US intermediate holding company and chair of Barclays Services Limited. Other current appointments None Committees Audit, Risk 48 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ report Governance: Directors’ report Who we are – Group Executive Committee Group Executive Committee Biographies for Jes Staley, Group Chief Executive, and Tushar Morzaria, Group Finance Director, who are members of the Group Executive Committee, which is chaired by Jes Staley, can be found on pages 47 and 48. Paul Compton Group Chief Operating Officer Bob Hoyt Group General Counsel Tim Throsby President, Barclays International and Chief Executive Officer, Corporate and Investment Bank Ashok Vaswani CEO, Barclays UK Laura Padovani Interim Group Chief Compliance Officer C S Venkatakrishnan Chief Risk Officer Tristram Roberts Group Human Resources Director Group Executive Committee meetings are also attended on a regular basis by the Chief Internal Auditor, Sally Clark, and by an ex-officio member, drawn from senior management. The current ex-officio member is Barry Rodrigues, Head of Barclaycard International. home.barclays/annualreport Barclays PLC Annual Report 2017 49 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board report The role of the Board The Board of Directors is responsible for promoting the highest standards of corporate governance in Barclays. Further details about our corporate governance framework, policies and Board responsibilities can be found online at home.barclays/corporategovernance We act in a way that we consider promotes the success of Barclays for the benefit of shareholders as a whole, and are accountable to the shareholders for creating and delivering sustainable value. It is our responsibility as the Board to ensure that management not only delivers on short-term objectives, but promotes the long-term growth of Barclays. Our corporate governance framework embeds what we believe are the right culture, values and behaviours throughout the Group and supports our role in determining strategic objectives and policies. In addition to setting strategy and overseeing its implementation, we are also responsible for ensuring that management maintains an effective system of internal control. An effective system of internal control should provide assurance of effective and efficient operations, internal financial controls and compliance with law and regulation. In meeting this responsibility, we consider what is appropriate for the Group’s business and reputation, the materiality of financial and other risks and the relevant costs and benefits of implementing controls. See page 82 for further details on those systems of controls. The Board is the decision-making body for matters that, owing to their strategic, financial or reputational implications or consequences, are considered significant to the Group. A formal schedule of powers reserved to the Board ensures that our control of these key decisions is maintained. A summary of the matters reserved to the Board can be found at home.barclays/corporategovernance. It includes the approval of appointments to the Board, Barclays’ strategy, financial statements, capital expenditure and any major acquisitions, mergers or disposals. Board Committees The main Board Committees are the Board Audit Committee, the Board Nominations Committee, the Board Remuneration Committee, the Board Reputation Committee and the Board Risk Committee. Pursuant to authority granted under our Articles of Association, each Board Committee has had specific responsibilities delegated to it by the Board. Further information on the role and activities of each of the Board Committees can be found in this report on pages 53 to 79 and pages 114 to 115, and in their individual terms of reference, which have been approved by the Board and are available at home.barclays/corporategovernance. In addition, the Regulatory Investigations Committee was formed in 2012 and focused on providing Board-level oversight of regulatory investigations. In 2017, this Committee was disbanded with residual matters being brought under the oversight of the Board Audit Committee or falling directly under the Board’s oversight, as appropriate. You can read more about what the Board and each of the Board Committees did during 2017 on the following pages. Board Governance Framework Barclays Board The Board is responsible for creating and sustaining shareholder value, through setting and overseeing the implementation of Barclays’ strategy Board Audit Committee Board Nominations Committee Board Remuneration Committee Board Reputation Committee Board Risk Committee ■ Reviews accounting policies ■ Reviews the composition ■ Sets principles and and financial reports of the Board ■ Monitors the internal control environment ■ Considers the adequacy and scope of the internal and external audit ■ Reviews and monitors the Group’s whistleblowing policies ■ Recommends the appointment of new Directors ■ Considers succession plans for the Chairman and Group Chief Executive ■ Oversees the annual Board effectiveness review parameters of remuneration for Barclays ■ Considers Barclays’ conduct and reputational risk issues and exposures ■ Monitors and recommends financial and operational risk appetite ■ Considers and approves ■ Reviews and approves remuneration for executive Directors and senior executives ■ Oversees employee share schemes Barclays’ overall citizenship strategy ■ Oversees Barclays’ approach to customer and regulatory matters ■ Monitors the financial and operational risk profile ■ Reviews limits for types of financial and operational risk See page 53 for further information. See page 75 for further information. See page 93 for further information. See page 69 for further information. See page 64 for further information. 50 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportDuring 2017, the Board focused on a number of specific areas, outlined in the table below, in line with Barclays’ three strategic goals and eight Principal Risks: Board allocation of time* (%) 4 1 Strategic goals St Have strong foundations in place Ac Accelerate the completion of restructuring Bu Build the Barclays of the future Principal risks Cr Credit Ma Market Tr Treasury and capital Op Operational Mo Model Re Reputation Co Conduct Le Legal Strategy formulation and monitoring Debated and provided input to management on the formulation of overall Group strategy, and reflected on the Group strategy with longer-term views on what could be done to accelerate returns and build capital. The topics covered include: ■■ potential growth opportunities, and key trends and risks, for Barclays UK and Barclays International ■■ constraints and risks to strategy execution, including economic assumptions, expected regulatory requirements on capital and solvency ratios, anticipated changes to accounting rules including IFRS 9, investor expectations, and potential impacts for clients and customers ■■ a strategic approach to costs optimisation, including analysing the impact on costs of different structural initiatives such as product redesign and automation ■■ impact of continuing legacy conduct issues on capital requirements and profit targets ■■ options for the location of Barclays’ operations in Europe, driven by the EU Referendum result. Discussed regular updates from the Group Chief Executive on the progress being made against the Group’s 2017 execution priorities and capital targets, received insights on stakeholder, employee and cultural matters (including results from employee opinion surveys), and updates on items of focus for the Group Executive Committee. Considered the strategy, and assessed the progress of execution of strategy, in the businesses within each of Barclays UK and Barclays International. Monitored the progress of the sell down of the Group’s remaining interest in Barclays Africa Group Limited. Monitored the progress of the rundown and subsequent closure of Barclays Non-Core. Monitored the progress of the Group’s execution of its structural reform programme – see the case study on page 52 for further details. Monitored the potential implications of the UK’s preparations to leave the EU following the EU Referendum result; approved and monitored progress of the expansion of Barclays Bank Ireland’s operations in preparation for Brexit – see the case study on page 52 for further details. Finance (including capital and liquidity) Debated and approved the Group’s Medium Term Plan for 2017-2019. Regularly assessed financial performance of the Group and its main businesses through reports from the Group Finance Director. Reviewed and approved Barclays’ financial results prior to publication, including approving final and interim dividends. Discussed market and investor reaction to Barclays’ strategic and financial results announcements, with insights provided by the Head of Investor Relations. Provided input, guidance and advice to senior management on the high-level shape of Barclays’ 2018-2020 Medium Term Plan and subsequently approved the final plan. 3 2 2017 2016 1 Strategy formulation and implementation monitoring 2 Finance (including capital and liquidity) 3 Governance and risk (including regulatory issues) 4 Other (including compensation) 47 15 35 3 * Based on scheduled Board meetings 55 17 26 2 Strategic goals Principal risks St Ac Bu Cr Ma Tr Op Mo Re Co Le St Ac Bu Cr Ma Tr Op Mo Re Co Le St Ac Bu Cr Ma Tr Op Mo Re Co Le Ac Bu Ac Bu St Ac Bu St Ac Bu St Ac Bu St Ac Bu St Bu St Bu Tr Op Re Le Tr Op Re Le Tr Op Re Le Ma Tr Op Re Le Cr Ma Tr Mo Co Le Cr Ma Tr Mo Co Le Cr Ma Tr Re Re St Ac Bu Cr Ma Tr Mo Co Le home.barclays/annualreport Barclays PLC Annual Report 2017 51 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board report Governance and risk (including regulatory issues) Debated and approved the 2017 risk appetite for the Barclays Group Regularly assessed Barclays’ overall risk profile and emerging risk themes, hearing directly from the Chief Risk Officer and the Chairman of the Board Risk Committee Received reports on Barclays’ operational and technology capability, including specific updates on cyber risk capability and the strategy for technology and infrastructure services Approved the Group’s 2017 Recovery Plan and US Resolution Plan Invited representatives of Barclays’ UK and US regulators to meetings to enable the Board to hear first-hand about regulatory expectations and their specific views on Barclays Considered and debated proposals for the establishment of a programme to further enhance Barclays’ management information framework across all businesses and entities within the Group Discussed and received regular updates directly from the Chief Controls Officer on the Group’s internal controls and framework, and monitored progress of the Barclays Internal Control Enhancement Plan (the programme for remediation of identified risk and control issues) Considered regular updates from the Group General Counsel on the legal and regulatory risks and issues facing Barclays – refer to note 29 in the financial statements Considered matters relating to Board succession and approved appointments to the Board and Board Committees Received and considered regular updates from the Chairmen of the Board’s principal Board Committees on the matters discussed at Board Committee meetings. See the reports of each Board Committee set out on the following pages for further details Received regular updates (following the establishment of each respective board) from the Chairs of the Barclays UK and Barclays International divisional boards and the Group Service Company Considered updates on views of major shareholders, particularly in the period leading up to the 2017 Annual General Meeting Discussed the Board and Committee governance framework in the context of structural reform, and considered significant developments in UK corporate governance and other corporate governance matters Considered the results of the 2016 Board effectiveness review and proposed action plan, and considered the process for and findings of the 2017 Board effectiveness review. See page 78 for further details of this process and the findings for 2017 Other (including compensation) Considered progress on Barclays’ talent and succession planning (and hosted receptions for key talent within the Group), and received updates on the Bank’s diversity and inclusion initiatives, including from the Chairman of the Board Nominations Committee Considered and approved the 2017 incentive funding pools for the Group and allocation among each business and function – see the Remuneration report on pages 93 to 116 for further details Strategic goals Principal risks St Bu St Bu St Bu St Bu Cr Ma Tr Mo Co Cr Ma Tr Op Mo Re Co Le Op Mo Re Le Ma Tr St Ac Bu Tr Op Re Co Le St Bu St Bu Op Mo Op Mo Re Co Le St Ac Bu Tr Re Co Le St Ac Bu Cr Ma Tr Op Mo Re Co Le St Ac Bu St Bu Re Re St Ac Bu Op Co St Bu St Bu Op Re Co Op Re Co Governance in action – Structural reform and Brexit Execution of structural reform The execution of our structural reform programme was a significant focus for the Group in 2017 as we move towards the legal entity stand up of our ring-fenced bank in 2018. Building on from the work carried out in 2016, the Board continued to closely monitor and evaluate progress on the execution of the programme in 2017. Specific matters addressed by the Board included the following: ■■ overseeing the establishment of the Group Service Company, which was launched on 1 September 2017 ■■ monitoring the stakeholder communications plan (including, in particular, the communications plan for customers and employees) ■■ considering regular updates on migrating sort codes with a focus on any potential impact on customers and clients ■■ overseeing and approving various transfers of assets and liabilities among Barclays Group entities including establishing a committee to provide appropriate Board-level oversight of the processes involved ■■ with the support of the Board Nominations Committee, debating the composition of, and appointments to each of, the boards of Barclays UK, Barclays International and the Group Service Company and discussing the appropriate governance arrangements for the new Group structure. Preparations for Brexit Another area of focus for the Board was preparations for the impact of the UK’s exit from the EU. Barclays has created an internal programme specifically in relation to the planning and preparation for Brexit. The Board debated potential EU hubs for Barclays’ European operations and decided to pursue expansion in Ireland where we have been operating for over 40 years and have an existing banking licence held by Barclays Bank Ireland. Specific matters considered by the Board included debating the feasibility of a significant expansion of Barclays Bank Ireland’s operations, the transfer of capital and resources to Barclays Bank Ireland and assessing the progress being made with applications for the necessary regulatory licensing requirements with the relevant authorities. The successful completion of the Group’s structural reform programme and further progress on our Brexit plans will continue to be areas of focus for the Board in 2018. 52 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportGovernance: Directors’ report What we did in 2017 Board Audit Committee report Solid progress has been made in turning the controls enhancement programme into a ‘business as usual’ activity, with an emphasis on achieving sustainable progress. Dear Fellow Shareholders In writing this report I have reflected on how Barclays has been working to embed the significant strategic changes put in place during 2016 while responding to new challenges driven by the external landscape, in particular the delivery of structural reform and preparation for Brexit. As I reported in 2017, the Committee continues to consider a critical part of its role to be ensuring that the commitment to strengthening Barclays’ control environment is maintained throughout this transformational period. My Committee colleagues and I have been encouraged by the increased rigour applied to oversight of the Group control environment following the creation of the Chief Controls Office at the end of 2016. This has given the Committee greater clarity and transparency regarding thematic control environment issues impacting the Group, and has helped to highlight areas of the business where there may be a concentration of issues and where focus on remediation is required. Regular updates on the overall control environment framework have also continued to be provided to the Board over the course of the year, underlining the importance that the Board of Barclays places on this programme of activity. Solid progress has been made in turning the controls enhancement programme into a ‘business as usual’ activity, with an emphasis on achieving sustainable progress. The Committee has observed heightened focus and attention across the organisation on the importance of having robust processes in place across the business to self-identify controls issues and ensure that there are effective remediation plans in place for which senior management are accountable. The embedding of the Chief Controls Office as part of the first line of management within the organisation has also been helpful in delineating more clearly for the organisation the respective roles of the second and third lines of defence. The Chief Controls Office has taken over the co-ordination of the Risk and Control Self-Assessment process and this will continue to be an area of focus in 2018 as management develops a more detailed, granular self-assessment process which should assist in proactively identifying controls which require remediation. Further details may be found in the Risk management and internal control section on page 82. The Committee has continued to engage with senior management regarding areas of controls weaknesses in their businesses and has received presentations from a number of different areas of the organisation on the actions taken to address unsatisfactory audit reports. In assessing control issues for disclosure in the Annual Report, the Committee has continued to apply similar definitions to those used for assessing internal financial controls for the purposes of Sarbanes-Oxley. The conclusion we have reached is that there are no control issues that are considered to be a material weakness, which merit specific disclosure. The Committee has continued to oversee the performance and effectiveness of internal and external audit, the main independent assurance mechanisms that serve to protect shareholders’ interests. I continue to hold regular meetings with the Chief Internal Auditor and members of her senior management team to ensure I am aware of current work programmes and any emerging issues. I also agreed the Chief Internal Auditor’s objectives and the outcomes of her performance assessment and remuneration. The Committee also held a networking event with Barclays Internal Audit (BIA) during 2017, enabling Committee members to meet on a less formal basis with senior members of the BIA management team. During 2017, the Committee continued to monitor closely the implementation of the action plan to address the recommendations arising from the review undertaken by the PRA of BIA to increase its effectiveness. The Chartered Institute of Internal Auditors requires an independent external review of internal audit functions to be carried out at least every five years and during 2017, the Committee commissioned an independent external quality assessment of BIA, further details of which may be found on page 61. The Committee was satisfied with the conclusions drawn in the report, while noting that there were a number of areas for potential development. The Committee considered that the need for a period of stability and consolidation within BIA would be particularly important to embedding existing initiatives and the Committee will continue to monitor this and other recommendations during 2018. In preparation for structural reform, BIA has aligned its audit planning and reporting to the new legal entity structure. The Committee continued to exercise its responsibility for ensuring the integrity of Barclays’ published financial information by debating and challenging the critical judgements and estimates made by management. The exercise of appropriate judgement in preparing the financial statements is critical in ensuring that Barclays reports to its shareholders in a fair, balanced and transparent way. During the course of 2017, the Committee oversaw Barclays’ transition to KPMG as Barclays’ statutory auditor which was approved by shareholders at the 2017 Annual General Meeting. The lead audit partner is Guy Bainbridge who has held this role since KPMG’s appointment as the Group’s auditor. KPMG has brought fresh challenge and insight not only on accounting judgements and policies but also on financial controls which the Committee has found valuable. The report that follows sets out details of the material matters considered by the Committee since my last report. One of the key developments in accounting policy in 2017 has been Barclays’ preparation for the implementation of the IFRS 9 impairment standard on 1 January 2018. The Committee reviewed the guidance note to non-executive Directors from the PRA in relation to IFRS 9 implementation and was comfortable that the areas highlighted by the PRA were being addressed. Further details of the Committee’s home.barclays/annualreport Barclays PLC Annual Report 2017 53 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportLast year’s review commented on the need to strengthen the depth of financial and accounting expertise on the Committee via new appointments, which I am pleased was addressed through the appointment of Matthew Lester to the Committee when he joined the Board of Barclays in September 2017. The review also highlighted the need to ensure that the way in which the Committee works with the Board Reputation and Board Risk Committees continues to capture all significant issues effectively while minimising any overlap. I continued to work closely with my fellow Board Committee chairmen during 2017, particularly with the Board Risk Committee Chairman in order to clarify the responsibility of the respective committees for operational risk issues, which each Committee has a role in overseeing. You can read more about the outcomes of the Board effectiveness review on page 78. Looking ahead In 2018, in addition to overseeing management’s progress in continuing to embed the role of the Chief Controls Office and the Group’s management of controls remediation, the Committee will be focusing on some significant accounting issues, including in particular, monitoring the impact of IFRS 9 and the resultant disclosures. The Committee is looking forward to working with the audit committees of Barclays UK and Barclays International as we discharge our responsibilities and focus on ensuring efficient and effective coverage of the business under the new group structure. We have already agreed an allocation of responsibilities, and embedding the necessary reporting and information flows across the three audit committees to ensure all of them can discharge their responsibilities efficiently will be a key area of focus. Mike Ashley Chairman, Board Audit Committee 21 February 2018 What we did in 2017 Board Audit Committee report consideration of the judgements and financial impacts relating to the implementation of the new standard may be found in the ‘Governance in action’ section of the Committee report on page 63. I have continued to hold the role of Whistleblower’s Champion, a position required by the FCA to be held at Board level. As champion, I continue to have specific responsibility for the integrity, independence and effectiveness of the Barclays’ policies and procedures on whistleblowing, including the procedures for protecting employees who raise concerns from detrimental treatment. As Whistleblower’s Champion and as Chairman of the Committee, I have been involved in overseeing the implementation of the suggested enhancements following the benchmarking review undertaken in 2017 at the request of the Board of Barclays. Responsibility for the oversight of litigation, investigation and competition matters has transitioned to the Committee, in line with the Committee’s existing responsibility for the oversight of matters related to disclosure and provisioning. The Committee has received regular updates on these matters from the Group General Counsel, with matters of particular significance to the Group continuing to be subject to oversight by the Board of Barclays. I attended meetings of the IHC audit committee to gain a first-hand insight into the issues being addressed by that committee and have held regular meetings with the chairmen-elect of the Barclays UK and Barclays International audit committees. The chairmen or chairmen-elect of all those entities have attended at least one Committee meeting during 2017. I also met frequently with other members of senior management, including the Group Finance Director, and continued my engagement with Barclays’ regulators both in the UK and US. I have reported regularly on the activities of the Committee to the Board of Barclays. Committee performance The Committee’s performance during 2017 was assessed as part of an internal committee effectiveness review. The conclusion of my Board colleagues and standing attendees at Committee meetings was that the Committee is regarded as operating effectively and the Board takes assurance from the quality of the Committee’s work. It is considered well constituted with the right balance of skills and experience. The main area identified for improvement was the need to manage a demanding agenda efficiently so that time is allocated to the most significant items for discussion. Committee allocation of time (%) 6 1 5 2 3 4 1 Control issues 2 Business control environment 3 Financial results 4 Internal audit matters 5 External audit matters 6 Other (including governance and compliance) 2017 11* 15 33 25† 8 2016 23 19 36 11 6 8 4 * The time allocation in 2017 has reduced following the streamlining of the reporting of control issues through the Chief Controls Office. † The increased time allocation to internal audit matters in 2017 reflects the role of the Committee in (i) overseeing the recommendations arising from the review undertaken by the PRA of Barclays Internal Audit to increase its effectiveness, and (ii) the independent external quality assessment of Barclays Internal Audit which was commissioned by the Committee in 2017. Committee composition and meetings The Committee is composed solely of independent non-executive Directors, with membership designed to provide the breadth of financial expertise and commercial acumen it needs to fulfil its responsibilities. Its members as a whole have experience of the banking and financial services sector in addition to general management and commercial experience. Mike Ashley, who is the designated financial expert on the Committee for the purposes of the US Sarbanes-Oxley Act, is a former audit partner who during his executive career acted as lead engagement partner on the audits of a number of large financial services groups. Following the Board’s finding that the Committee could be strengthened by the appointment of an additional member with direct accounting and auditing experience, Matthew Lester was appointed to the Board and Committee with effect from 1 September 2017. During his executive career, Matthew held a number of senior finance roles across a range of business sectors, including financial services, and most recently was the Chief Financial Officer of Royal Mail Group. You can find more details of the experience of Committee members in their biographies on pages 47 and 48. The Committee met 10 times in 2017 and the chart above shows how it allocated its time. Meetings are generally arranged well in advance and are scheduled in line with Barclays’ financial reporting timetable. One additional meeting was arranged to select an appropriate service provider for the independent review of Barclays Internal Audit and to undertake an early review of particular issues relevant to the financial statements. Committee meetings were attended by management, including as required the Group 54 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportChief Executive, Group Finance Director, Chief Internal Auditor, Chief Controls Officer, Chief Risk Officer, Chief Operating Officer, Group General Counsel and Head of Compliance, as well as representatives from the businesses and other functions. The lead audit partner of KPMG (the Group’s external auditor), Guy Bainbridge, attended all Committee meetings since January 2017. The Committee held a number of private sessions with each of the Chief Internal Auditor or the lead audit partner, which were not attended by management. The lead audit partner of PwC, the Group’s previous external auditor, attended meetings until the end of February 2017 to deliver its final audit report to the Committee on the 2016 financial statements before PwC resigned as the Group’s statutory auditor. Member Mike Ashley Tim Breedon Crawford Gillies Diane Schueneman* Matthew Lester (from 1 September 2017)† Meetings attended/eligible to attend 10/10 10/10 10/10 8/10 1/3 * Did not attend due to personal circumstances. † Did not attend owing to existing commitments with other boards (the Committee meeting dates were set before Matthew joined the Board). Committee role and responsibilities The Committee is responsible for: ■■ assessing the integrity of the Group’s financial reporting and satisfying itself that any significant financial judgements made by management are sound ■■ evaluating the effectiveness of the Group’s internal controls, including internal financial controls ■■ scrutinising the activities and performance of the internal and external auditors, including monitoring their independence and objectivity ■■ overseeing the relationship with the Group’s external auditor ■■ reviewing and monitoring the effectiveness of the Group’s whistleblowing procedures ■■ overseeing significant legal and regulatory investigations, including the proposed litigation statement for inclusion in the statutory accounts. The Committee’s terms of reference are available at home.barclays/corporategovernance The Committee’s work The significant matters addressed by the Committee during 2017 and in evaluating Barclays’ 2017 Annual Report and financial statements, are described on the following pages. Financial statement reporting issues The Committee’s main responsibility in relation to Barclays’ financial reporting is to review with both management and the external auditor the appropriateness of Barclays’ financial statements, including quarterly results announcements and half-year and annual financial statements and supporting analyst presentations, with its primary focus being on: ■■ the quality and acceptability of accounting policies and practices ■■ any correspondence from financial reporting regulators in relation to Barclays’ financial reporting ■■ material areas where significant judgements have been made, along with any significant assumptions or estimates, or where significant issues have been discussed with or challenged by the external auditor ■■ an assessment of whether the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess Barclays’ position and performance, business model and strategy. Accounting policies and practices The Committee discussed reports from management in relation to the identification of critical accounting judgements and key sources of estimation uncertainty, significant accounting policies and the proposed disclosure of these in the 2017 Annual Report. Following discussions with both management and the external auditor, the Committee approved the critical accounting judgements, significant accounting policies and disclosures, which are set out in Note 1, ‘Significant accounting policies’, to the consolidated financial statements. There was one significant change in accounting policy during the period which was the early adoption of IFRS 9 (Financial Instruments) in relation to own credit, resulting in the recognition of fair value movements through the Statement of Comprehensive Income. Further information regarding this change can be found in note 1, to the consolidated financial statements. Two new significant accounting standards became effective from 1 January 2018, IFRS 9 (Financial Instruments) and IFRS 15 (Revenue Recognition). Further information regarding these changes can be found in note 1, to the consolidated financial statements. During 2017, the Committee was regularly updated on Barclays’ preparations for the implementation of IFRS 9, in particular in relation to the new expected loss model which represents a fundamental change in approach to impairment. The Committee discussed with management the key technical decisions and interpretations required and Barclays’ approach to these. Further details of the Committee’s role in overseeing the Group’s IFRS 9 preparations can be found on page 63, ‘Governance in action’. Financial reporting regulators and Barclays The Committee from time to time considers comment letters and papers from external bodies including the SEC and the Financial Reporting Council (FRC). In that regard, the Committee considered the following: ■■ the FRC’s Year-End Advice Letter to Audit Committee Chairs and Finance Directors which highlighted key developments for 2017/18 annual report ■■ the FRC’s Annual Review of Corporate Reporting which summarised key characteristics of good corporate reporting for the 2017/18 reporting year ■■ the PRA note of advice to non-executive Directors regarding IFRS 9 implementation which set out a series of questions for consideration to ensure audit committees were well prepared for the transition and its implications. The Committee sought to ensure that Barclays took due account of the matters raised in the letters and papers described above in its external reporting and has sought to enhance and clarify relevant disclosures. The Committee from time to time considers comment letters from the SEC in relation to its reviews of Barclays’ Annual Report and other publicly filed financial statements. Such comment letters and Barclays’ responses are made publicly available by the SEC on its website, sec.gov, once it has closed each such review. Barclays received one comment letter from the SEC during 2017 requesting clarification from the SEC in relation to its 2017 half year filing. Barclays responded to clarify the queries raised by the SEC. The letter did not raise any material concerns or disclosure items. Significant judgements and estimates The significant judgements and estimates and actions taken by the Committee in relation to the 2017 Annual Report and financial statements are outlined below. The significant judgements and estimates are broadly comparable in nature to prior years. Each of these matters was discussed with the external auditor during the year and, where appropriate, have been addressed in the Auditor’s Report on pages 228 to 233. home.barclays/annualreport Barclays PLC Annual Report 2017 55 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Audit Committee report Area of focus Reporting issue Role of the Committee Conclusion/action taken Conduct provisions (refer to Note 27 to the financial statements) Barclays makes certain assumptions and estimates, analysis of which underpins provisions made for the costs of customer redress, such as for Payment Protection Insurance (PPI). Legal, competition and regulatory provisions (refer to Notes 27 to 29 to the financial statements) Valuations (refer to Notes 14 to 18 to the financial statements) Barclays is engaged in various legal, competition and regulatory matters. The extent of the impact on Barclays of these matters cannot always be predicted, but matters can give rise to provisioning for contingent and other liabilities depending on the relevant facts and circumstances. The level of provisioning is subject to management judgement on the basis of legal advice and is therefore an area of focus for the Committee. Barclays exercises judgement in the valuation and disclosure of financial instruments, derivative assets and certain portfolios, particularly where quoted market prices are not available, including the Group’s Education, Social Housing and Local Authority (ESHLA) portfolio. ■■ Regularly analysed the judgements and estimates made with regard to Barclays’ provisioning for PPI claims, taking into account forecasts and assumptions made for PPI complaints and actual claims experience for Barclays and the industry as a whole, including the volume of invalid PPI claims. ■■ Debated the impact on the future range of provisions arising from (i) the FCA’s introduction of August 2019 as the time-bar on claims, (ii) the PPI marketing campaign, and (iii) the progress of the proposed fee cap on the submission of PPI complaints by claims management companies which is being considered by the UK Parliament. ■■ Evaluated proposed additional provisions for PPI, considering whether the total provision is within the modelled range of future outcomes, and whether the external auditor agreed with management’s analysis and approach. ■■ Monitored the position on provisions for alternative PPI (card protection and payment break plan insurance) and considered whether further provisions were required. ■■ Evaluated advice on the status of current legal, competition and regulatory matters. ■■ Assessed management’s judgements and estimates of the levels of provisions to be taken and the adequacy of those provisions, based on available information and evidence. ■■ Considered the adequacy of disclosure, recognising that any decision to set provisions involves significant judgement. ■■ Evaluated reports from Barclays Valuations Committee, with particular focus on the matters below. ■■ Monitored the valuation methods applied by management to significant valuation items, including the ESHLA portfolio, a valuation disparity with a third party in respect of a specific long dated derivative portfolio, and the approach to the marking of Own Credit. ■■ Monitored and discussed the impact of negative interest rates on derivative valuation. ■■ Considered the treatment of the re-integration of Non-Core residual operations into the core business. The Committee and management continue to monitor closely any changes in customer or claims management companies’ behaviour in light of the FCA time-bar and marketing campaign and the ongoing impact of the Plevin case. Having regard to the actual claims experience over 2017 the Committee agreed with management’s assessment that the current provision of £1,600m was appropriate. The Committee noted that this estimate remains subject to significant uncertainty in particular regarding the level of valid customer claims that may be received in the period to August 2019. In this context the Committee was satisfied that sensitivities to the key variables were appropriately disclosed. The Committee discussed provisions and utilisation. Having reviewed the information available to determine what was both probable and could be reliably estimated, the Committee agreed that the level of provision at the year end was appropriate. The Committee also considered that the disclosures made provided the appropriate information for investors regarding the legal, competition and regulatory matters being addressed by the Group. The Committee discussed these matters and agreed that a minor modification be made to the valuation of the specific long dated derivative portfolio where there existed significant valuation disparity. This did not result in a material change to the fair value recorded by the Group. The Committee noted that, following efforts by management to restructure derivative agreements impacted by negative interest rates, any residual uncertainty was now insignificant. 56 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportArea of focus Reporting issue Role of the Committee Conclusion/action taken Impairment (refer to Note 7 to the financial statements) Where appropriate, Barclays models potential impairment performance, allowing for certain assumptions and sensitivities, to agree allowances for credit impairment, including agreeing the timing of the recognition of any impairment and estimating the size, particularly where forbearance has been granted. Tax (refer to Note 10 to the financial statements) Barclays is subject to taxation in a number of jurisdictions globally and makes judgements with regard to provisioning for tax at risk and on the recognition and measurement of deferred tax assets. Long-term viability (refer to Note 41 to the financial statements) The Directors are required to make a statement in the Annual Report as to the long-term viability of Barclays. The Committee provides advice to the Board on the form and content of the statement, including the underlying assumptions. The Committee reviewed model adjustments made by management to ensure that impairment allowances were set at appropriate and adequate levels. The Committee reviewed the impairment charge in Barclaycard US arising in the third quarter from the asset sale in the first quarter. The Committee also reviewed three material single name charges in the Corporate Bank. The Committee agreed that the provision levels for impairment were appropriate. The Committee reviewed Barclays’ global tax risk and associated provisions for the full year and noted that the level of tax provisions remained at about the same level, although the amount of gross tax risk was assessed as slightly reduced. In relation to the treatment of deferred tax assets the Committee noted that those due to US tax losses (£1,520m) are forecast to be utilised by 2019 which is significantly earlier than the first expiry date of 2028. The Committee agreed with management’s view that it was appropriate not to take account of any potential future BEAT liabilities in the measurement of the deferred tax assets. It noted that this would be in line with recent US GAAP pronouncements and as disclosed, management is also continuing to assess the full impact to the Group of the complex provisions in the new US legislation. The Committee agreed that the appropriate timeframe for the viability statement continued to be three years. Taking into account the assessment by the Board Risk Committee of stress testing results and risk appetite, the Committee agreed to recommend the viability statement to the Board for approval. ■■ Assessed impairment experience against forecast and whether impairment provisions were appropriate. ■■ Evaluated credit impairment reports (reviewed by the Group Impairment Committee) presented by the Chief Risk Officer. ■■ Considered a report from the Chief Risk Officer on the position in the US Cards portfolio and monitored the position to determine whether increase in impairment would be required. ■■ Considered a report from the Group Impairment Committee on the adequacy of loan impairment allowances as at 31 December 2017, including assessing internal and external trends, methodologies and key management estimates. ■■ Evaluated the appropriateness of tax risk provisions to cover existing tax risk. ■■ Confirmed the forecasts and assumptions supporting the recognition and valuation of deferred tax assets was in line with Barclays’ Medium Term Plan (MTP). ■■ Monitored the impact to Barclays of the new US framework for tax legislation covering a broad range of tax proposals which was enacted on 22 December 2017 and which had a substantial impact on the measurement of the Group’s US deferred tax assets. The Committee also considered the potential impact of the Base Erosion Anti-abuse Tax (BEAT) which was introduced as part of the new legislation. ■■ Evaluated at year end a report from management setting out the view of Barclays’ long-term viability. This report was based on Barclays’ MTP and covered forecasts for capital, liquidity and leverage, including forecast performance against regulatory targets, outcomes of the stress test of the MTP and forecast capital and liquidity performance against stress hurdle rates, funding and liquidity forecasts and an assessment of global risk themes and the Group’s risk profile. ■■ Considered the viability statement in conjunction with Barclays’ risk statements and strategy/business model disclosures. ■■ Addressed feedback from investors, the FRC and other stakeholders on viability statements in general. home.barclays/annualreport Barclays PLC Annual Report 2017 57 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Audit Committee report Area of focus Reporting issue Role of the Committee Conclusion/action taken Fair, balanced and understandable reporting (including country-by- country reporting and Pillar 3 reporting) Barclays is required to ensure that its external reporting is fair, balanced and understandable. The Committee undertakes an assessment on behalf of the Board in order to provide the Board with assurance that it can make the statement required by the UK Code on Corporate Governance. ■■ Assessed through discussion with and challenge of management, including the Group Chief Executive and Group Finance Director, whether disclosures in Barclays’ Annual Report and other financial reports were fair, balanced and understandable. ■■ Evaluated reports from Barclays’ Disclosure Committee on its assessment of the content, accuracy and tone of the disclosures. ■■ Established through reports from management that there were no indications of fraud relating to financial reporting matters. ■■ Evaluated the outputs of Barclays’ internal control assessments and Sarbanes-Oxley s404 internal control process. ■■ Assessed disclosure controls and procedures. ■■ Confirmed that management had reported on and evidenced the basis on which representations to the external auditors were made. Having evaluated all of the available information and the assurances provided by management, the Committee concluded that the processes underlying the preparation of Barclays’ published financial statements, including the 2017 Annual Report and financial statements, were appropriate in ensuring that those statements were fair, balanced and understandable. In assessing Barclays’ financial results statements over the course of 2017, the Committee specifically addressed and provided input to management on the disclosure and presentation of: ■■ the classification of Barclays’ holding in Barclays Africa Group Limited as an available for sale asset with effect from 1 June 2017 ■■ the closure of the Barclays Non-Core business and the reintegration of the remaining businesses and portfolio ■■ the Group Finance Director’s presentations to analysts ■■ the level of segmental reporting. The Committee recommended to the Board that the 2017 Annual Report and financial statements are fair, balanced and understandable. 58 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportOther significant matters Apart from financial reporting matters the Committee has responsibility for oversight of the effectiveness of Barclays’ internal controls, the performance and effectiveness of BIA and the performance, objectivity and independence of the external auditor. The most significant matters considered during 2017 are described in the table below. Area of focus Matter addressed Role of the Committee Conclusion/action taken Internal control Read more about the Barclays’ internal control and risk management processes on page 82. The effectiveness of the overall control environment, including the status of any material control issues and the progress of specific remediation plans. ■■ Evaluated and tracked the status of the most material control issues identified by management through regular reports from the Chief Controls Officer, assessed against the new Controls Maturity Model created as part of the Barclays Internal Controls Enhancement Programme (BICEP). ■■ Evaluated the status of specific material control issues and associated remediation plans, including in particular those relating to Model risk, resilience, cyber, compliance, technology, credit risk, transaction operations and data management which remained open as at December 2017 and which were reported as ‘on track’ to return to satisfactory status within agreed timeframes. ■■ Considered the second line of defence role in the oversight of operational risk controls, including financial controls over operational risk. ■■ Evaluated reports on the internal control environment from the external auditor. ■■ Discussed lessons learned from specific control incidents and how these could be applied to Barclays’ business globally. ■■ Assessed the progress of the enhancements being made to Barclays’ Risk and Control Self-Assessment (RCSA) process. ■■ Clarified the role and responsibilities of the Committee in relation to the split of responsibility for operational risk between the Committee and the Board Risk Committee. The effectiveness of the control environment in each individual business, including the status of any material control issues and the progress of specific remediation plans. ■■ Assessed reports on individual businesses and functions on their control environment, questioned the heads of the relevant businesses or functions on control concerns and scrutinised any identified control failures and closely monitored the status of remediation plans or workstreams to enhance the respective control environments. ■■ Received updates directly from senior management, and scrutinised action plans, in relation to remediation plans following unsatisfactory audit findings. ■■ Reviewed updates from management on the Designated Market Activity (DMA) remediation plan which addresses Barclays’ regulatory commitments to the Fed and other US and UK regulators in relation to sales and trading practices across the FX, Rates and other markets related business areas. The Committee welcomed the positive change in approach that the BICEP programme had driven across the business, notably that the first line of defence was now more focused on proactively self-identifying control issues rather than waiting for them to be highlighted by the second or third lines of defence. The Committee continued to emphasise the importance of a disciplined self-assessment by management. The Committee provided feedback on the reporting of material control issues, requesting further detail regarding completion dates, key milestones and current status for significant remediation projects to enable closer monitoring and help drive accountability at the appropriate management level. The Committee challenged the application of the lessons learned process in view of the low level of coverage of significant control incidents. Management has taken steps to enhance the process and ensure compliance. Going forward this will be tracked by the Chief Controls Office. The Committee has continued to use the output from the RCSA process in its review of the control environment. While providing a reasonable overview of the control environment, the Committee welcomes management’s plans to put in place a more granular process which should provide greater visibility on controls requiring remediation and associated risks. This approach was piloted in 2017 and will be rolled out across the Group in 2018. The Committee received deep dive control environment presentations from Barclays International and Barclays UK. These provided further detail of management’s assessment of the business unit control environment and key areas of focus, including key controls hot spots for the businesses. The Committee also received a number of presentations from business heads following unsatisfactory audit reports. The Committee challenged the business regarding their role in identifying the control issues and requested confirmation from management regarding the remediation programme, timeframe and accountability for delivery and which are subsequently monitored. The Committee was encouraged that the level of resources being devoted to the DMA programme now shows that it is on track to meet its milestones. home.barclays/annualreport Barclays PLC Annual Report 2017 59 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Audit Committee report Area of focus Matter addressed Role of the Committee Conclusion/action taken The effectiveness of the control environment in the Chief Operating Office (COO) and the status and remediation of any material control issues. The adequacy of the Group’s arrangements to allow employees to raise concerns in confidence without fear of retaliation and the outcomes of any substantiated cases. Internal audit The performance of BIA and delivery of the internal audit plan, including scope of work performed, the level of resources and the methodology and coverage of the internal audit plan. ■■ Scrutinised on a regular basis the COO control environment, taking the opportunity to directly challenge and question functional leaders, including the Chief Operating Officer on the progress of remediation plans. ■■ Clarified the Committee’s ongoing responsibility for the oversight of controls matters relating to the Group Service Company. ■■ The Committee received a deep dive control environment presentation from the Chief Information Officer regarding Technology control issues. ■■ Considered the results of the ‘Your View’ Survey in relation to employee views on their ability to safely speak up in their business/ function and whether they could report instances of dishonest or unethical behaviour without fear. ■■ Received an update on enhancements to Barclays’ whistleblowing programme following the announcement of the PRA/FCA investigations and the outcome of the independent review that was commissioned by the Board. ■■ Monitored instances of retaliation reports and whether any instances had been substantiated. ■■ Monitored whistleblowing metrics, including case load and case ageing. ■■ Scrutinised and agreed internal audit plans and methodology and deliverables for 2017 and the first half of 2018, including reviewing the number of audits for delivery following the alignment of the Audit Universe to Barclays’ new structure following structural reform. ■■ Monitored BIA’s response to feedback received from the PRA as part of its review of internal audit, including independence and impact, quality and weight of resources, productivity and methodology. ■■ Monitored delivery of the agreed audit plans, including assessing internal audit resources and hiring levels and any impacts on the audit plan and reviewing the reasons for the postponement of audits in greater depth. ■■ Debated audit risk appetite and issue validation. ■■ Tracked the levels of unsatisfactory audits, including discussing the time taken to issue audit reports and the reasons for any delays. ■■ Discussed BIA’s assessment of the management control approach and control environment in Barclays UK, Barclays International and the functions. ■■ Evaluated the outcomes from BIA’s annual self-assessment. ■■ Commissioned an independent external review of BIA. The reviewer was selected as a result of a tender process also run by the Committee. The Committee was pleased to note continuing progress over 2017 to address control issues in accordance with the agreed timescales. The Committee discussed the importance of ongoing dialogue and regular training to ensure that the route for escalations was clear and cases were directed to the relevant team for investigation and resolution. The Committee supported the focus on training both to colleagues on the channels available for, and also managers on how to handle, whistleblowing issues. The Committee also emphasised the importance of sharing positive outcomes of whistleblowing incidents where possible. The Committee was pleased to note that volumes of cases remain proportionate to Barclays’ size and footprint. As Whistleblowing Champion, the Chairman of the Committee made an annual report to the Board on whistleblowing matters. The Committee received semi-annual thematic controls reports from BIA and a quarterly operational report during 2017. The Committee reiterated its support for BIA’s recruitment plans which reflected significant activity during 2017 to ensure appropriate audit coverage to support the focus on BIA quality across the audit cycle. The Committee Chairman provided input into the recruitment of the two key roles of Head of Internal Audit in Barclays UK and Barclays International. The Committee observed that the issues arising from unsatisfactory audits indicated that there was still work to do in embedding the required level of control consciousness across the Group and ensuring that control exceptions were highlighted clearly in management reporting. The Committee also requested that senior management support BIA in holding individuals accountable for failure to remediate risks effectively where they had failed BIA validation. The Committee confirmed that it was satisfied with the outcome of the self-assessment of BIA performance and the independent external review, both of which evidenced that the function generally conforms to the standards set by the Institute of Internal Auditors. It further confirmed that it felt able to rely on the work of BIA in discharging its own responsibilities. The Committee is providing oversight over the actions arising from the external review. See page 61 opposite for further details of the review. 60 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportArea of focus Matter addressed Role of the Committee Conclusion/action taken ■■ Met with key members of the KPMG audit team to discuss the 2017 audit plan and agree areas of focus. ■■ Assessed regular reports from KPMG on the progress of the 2017 audit and any material accounting and control issues identified. ■■ Discussed KPMG’s feedback on Barclays’ critical accounting estimates and judgements. ■■ Discussed KPMG’s draft report on certain control areas and the control environment ahead of the 2017 year end. ■■ Discussed the approach to KPMG’s annual report to the PRA which will be issued following completion of the 2017 audit. ■■ Considered the draft SOX controls report and the draft audit opinion. ■■ BIA’s purpose and remit is clearly defined and the function is positioned appropriately within the governance framework of the organisation/its role as an objective third line of defence. This role has been supported by the clearer delineation of the first line role of the newly created Chief Controls Office ■■ the focus on increased headcount in BIA will help drive audit capacity and capability through enhanced specialist skills/ knowledge. Deloitte reported that BIA cares about its people and has created a supportive environment in which to work ■■ while there are opportunities to improve BIA’s impact, they are able to deliver effective feedback on the operation of controls that address key risks. The report paid close attention to the matters raised in the 2016 PRA letter regarding BIA, and Deloitte met with the PRA as part of its review. The Committee was satisfied with the conclusions drawn in the report, while noting the potential development areas identified, in particular, extending the use of data analytics. BIA has drawn up an action plan in response to the review and the Committee will continue to monitor the delivery of this plan. External auditor Following an external audit tender in 2015, PwC was replaced in 2017 as Barclays’ statutory auditor by KPMG. Guy Bainbridge of KPMG is Barclays’ senior statutory auditor with effect from the audit for the 2017 financial year. The Committee approved the audit plan and the main areas of focus. The Committee also approved the principal services agreement and terms of engagement in connection with KPMG’s appointment as the Group’s auditors. Read more about the Committee’s role in assessing the performance, effectiveness and independence of the external auditor and the quality of the external audit below. Assessing external auditor effectiveness, auditor objectivity and independence and non-audit services The Committee is responsible for assessing the effectiveness, objectivity and independence of the Group’s auditor, KPMG and in 2017 the Committee was particularly concerned to ensure that the external auditor transition period was managed effectively. This responsibility was discharged throughout the year at formal Committee meetings, during private meetings with KPMG and through discussions with key executive stakeholders. In addition to the matters noted above, during 2017 the Committee: ■■ approved the terms of the audit engagement letter and associated fees, on behalf of the Board ■■ discussed and agreed revisions to the Group policy on the Provision of Services by the Group Statutory Auditor and regularly analysed reports from management on the non-audit services provided to Barclays ■■ evaluated and approved revisions to the Group policy on Employment of Employees or Workers from the Statutory Auditor and ensured compliance with the policy by regularly assessing reports from management detailing any appointments made ■■ was briefed by KPMG on critical accounting judgements and estimates ■■ assessed any potential threats to independence that were self-identified and reported by KPMG ■■ reviewed the report on KPMG issued by the FRC’s Audit Quality Review team. External audit The work and performance of KPMG The Committee also covered the following matters: ■■ tracked the progress of specific work being done to enhance Barclays’ financial crime controls, including the function’s investigation capabilities, in particular in relation to prevention and detection activities. The Committee also assessed the Group Money Laundering Officer’s annual report ■■ assessed the status of the programme in place to ensure Barclays’ compliance with client assets (CASS) regulatory requirements, including approving the annual client assets audit report and discussing the potential impact of structural reform on client assets ■■ evaluated the outcomes of the assessment of the Committee’s performance and any areas of Committee performance that needed to be enhanced ■■ reviewed and updated its terms of reference, recommending them to the Board for approval. In addition to these matters, as highlighted above in the section of the table headed ‘Internal audit’ the Committee commissioned an independent review of BIA which was undertaken by Deloitte during the second half of 2017. The Chartered Institute of Internal Auditors requires an independent external review of internal audit functions to be carried out at least every five years. Following a selection process, the Committee commissioned Deloitte to conduct this review reporting directly to the Committee. The report concluded that: ■■ BIA demonstrates general conformance with the relevant standards and guidelines ■■ BIA has an effective core audit methodology which reflects investment in agile ways of working and data analytics which has helped to drive continuous improvement. In this respect it is aligned with or ahead of peers home.barclays/annualreport Barclays PLC Annual Report 2017 61 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportbegin. Services where the fees are expected to be £250,000 or higher must be approved by the Committee as a whole. All expenses and disbursements must be included in the fees calculation. The thresholds remained the same following the annual review of the Policy in 2017. During 2017, all engagements where expected fees met or exceeded the above thresholds were evaluated by either the Committee Chairman or the Committee as a whole who, before confirming any approval, assured themselves that there was justifiable reason for engaging the auditor and that its independence and objectivity would not be threatened. No requests to use KPMG were declined in 2017 (2016: one). On a quarterly basis, the Committee scrutinised details of individually approved and pre-approved services undertaken by KPMG in order to satisfy itself that they posed no risk to independence, either in isolation or on an aggregated basis. For the purposes of the Policy, the Committee has determined that any pre-approved service of a value of under £50,000 is to be regarded as clearly trivial in terms of its impact on Barclays’ financial statements and has required the Group Financial Controller to specifically review and confirm to the Committee that any pre- approved service with a value of £50,000- £100,000 (or up to £25,000 for tax advisory and tax planning services) may be regarded as clearly trivial. The Committee undertook a review of pre-approved services at its meeting in December 2017 and satisfied itself that such pre-approved services were clearly trivial in the context of their impact on the financial statements. The fees payable to KPMG for the year ended 31 December 2017 amounted to £48m, of which £10m (2016: £17m) was payable in respect of non-audit services (KPMG was appointed as the Group’s statutory auditor from the financial year beginning 1 January 2017). A breakdown of the fees payable to the Auditor for statutory audit and non-audit work can be found in Note 42. Of the £10m of non-audit services provided by KPMG during 2017, the significant categories of engagement, i.e. services where the fees amounted to more than £500,000, included: ■■ audit-related services: services in connection with CASS audits (while the CASS audit fell within the Auditor’s scope of services, the fees for such services did not form part of the global fee arrangements and therefore required separate Board Audit Committee approval pursuant to the Policy) ■■ quality assurance: support in connection with reports on the internal controls applicable to IBOR submission processes ■■ transaction support: ongoing attestation and assurance services for treasury and capital markets transactions to meet regulatory requirements, including regular reporting obligations and verification reports. The fees paid to PwC for non-audit work during 2017, in the period before they resigned as the Group’s statutory auditor, and after they had resigned but before they were non-independent of certain Group entities (and therefore still fell within the Policy), were £3m (2016: £8m). Significant categories of engagement approved in 2017 included: ■■ transaction support: ongoing support for treasury and capital markets transactions, including providing comfort and accounting letters to meet trust deed and regulatory obligations (this ongoing support transitioned to KPMG during 2017). The Committee also reviewed the level of consultancy spend with PwC during 2017, which it had asked to be monitored in the immediate period after they stepped down as the Group’s auditors. Work with an estimated value of £1m was awarded to PwC during the year (this was in addition to the £3m in fees paid to PwC for non-audit services referred to above). The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 An external audit tender was conducted in 2015 and the decision was made to appoint KPMG as Barclays’ external auditor with effect from the 2017 financial year, with PwC resigning as the Group’s statutory auditor at the conclusion of the 2016 audit. Barclays is in compliance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, which relates to the frequency and governance of tenders for the appointment of the external auditor and the setting of a policy on the provision of non-audit services. What we did in 2017 Board Audit Committee report KPMG’s performance, independence and objectivity during 2017 were formally assessed at the beginning of 2018 by way of a questionnaire completed by key stakeholders across the Group. The questionnaire was designed to evaluate KPMG’s audit process and addressed matters including the auditor transition, quality of planning and communication, technical knowledge, the level of scrutiny and challenge applied and KPMG’s understanding of the business. In addition, KPMG have nominated a senior partner on the audit team reporting to the Senior Statutory Auditor to have specific responsibility for ensuring audit quality. The Committee therefore met with the partner concerned without the Senior Statutory Auditor in order to receive a report on his assessment of audit quality. Taking into account the results of all of the above, the Committee considered that KPMG maintained their independence and objectivity and the audit process was effective. Non-audit services In order to safeguard the Auditor’s independence and objectivity, Barclays has in place a policy setting out the circumstances in which the Auditor may be engaged to provide services other than those covered by the Group audit. The Group Policy on the Provision of Services by the Group Statutory Auditor (the Policy) applies to all Barclays’ subsidiaries and other material entities over which Barclays has significant influence. The Policy therefore included Barclays Africa Group Limited up until the point of accounting deconsolidation. The core principle of the Policy is that non-audit services (other than those legally required to be carried out by the Group’s Auditor) should only be performed by the Auditor in certain, controlled circumstances. The Policy sets out those types of services that are strictly prohibited and those that are allowable in principle. Any service types that do not fall within either list are considered by the Committee Chairman on a case by case basis, supported by a risk assessment provided by management. Under the Policy, the Committee has pre-approved all allowable services for which fees are less than £100,000, or less than £25,000 for tax advisory and tax planning services. However, all proposed work, regardless of the fees, must be sponsored by a senior executive and recorded on a centralised online system, with a detailed explanation of the clear commercial benefit arising from engaging the auditor over other potential service providers. The audit firm engagement partner must also confirm that the engagement has been approved in accordance with the Auditor’s own internal ethical standards and does not pose any threat to the Auditor’s independence or objectivity. All requests to engage the Auditor are assessed by independent management before work can commence. Requests for allowable service types in respect of which the fees are expected to meet or exceed the above thresholds must be approved by the Chairman of the Committee before work is permitted to 62 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportGovernance in action – Preparation for IFRS 9 A significant activity for the Committee during 2017 has been overseeing the Group’s preparation for the implementation of IFRS 9. IFRS 9 Financial Instruments is effective from 1 January 2018 and replaces the IAS 39 accounting standard. The new standard sets out the recognition and measurement requirements for financial instruments and has three parts: classification and measurement of financial assets, the requirements for impairment of financial assets and a hedge accounting model that is designed to more closely reflect risk management. As permitted, Barclays intends to continue with the existing IAS 39 hedge accounting model. The new impairment accounting model however has a significant impact on Barclays and the changes are complex and wide ranging; classification and measurement also results in a number of much less significant changes. IFRS 9 has therefore been the subject of significant regulatory and market focus. Barclays has worked with the industry and regulators to agree a transitional framework for regulatory capital and disclosures and has taken note of the best practice recommendations they have issued for the management of the transition to the new standard. The Committee received regular updates on the status, judgements and financial impacts relating to the implementation of IFRS 9 during 2017 and the first quarter of 2018. It has overseen the steps required for Barclays’ transition to the new standard, in particular the delivery into production of the models and controls which are required for its implementation. Throughout the process, the Committee emphasised to management the importance of developing the models to support business decision making to manage risk and ensure appropriate customer outcomes. The Committee reviewed the internal governance and validation processes in Risk and Finance and received regular updates from KPMG on their assurance work. The Committee also received reports from BIA following the audits undertaken in respect of the IFRS 9 programme, with a number of further audits planned for 2018. The Committee also reviewed the key estimates made by management in considering future economic scenarios and the criteria for determining when significant credit deterioration is observed. In line with its terms of reference, the Committee has been closely involved in the review of all material external financial reporting relating to IFRS 9 and is focused on ensuring clarity, completeness and appropriateness of the Group’s disclosures, particularly given the complexity and technical challenges of this standard. The Committee reviewed the best estimate impact on the Group which was disclosed in Barclays’ third quarter results and the updated IAS 8 disclosures included in the 2017 financial statements. home.barclays/annualreport Barclays PLC Annual Report 2017 63 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Risk Committee report The Committee continued to monitor UK economic trends, consumer behaviour and portfolio performance, and a prudent approach to lending was maintained. Dear Fellow Shareholders The focus of the Committee during 2017 has continued to be on assessing the impact of important macroeconomic and market developments on the risk profile of the Group. Credit risk management during 2017 was primarily concerned with the level of exposure to consumer debt both in the UK and US. In the UK, the Committee in 2016 had accepted the recommendation of management to pursue a conservative approach to managing growth and balances in credit card debt. This had been prompted by the rising level of personal debt in the UK and concerns of weaker growth and higher inflation resulting from the country’s vote to leave the European Union. This theme persisted in 2017, as the Committee continued to monitor UK economic trends, consumer behaviour and portfolio performance, and a prudent approach to lending was maintained. In the US, in late 2016, there had been nascent signs of weakness in the consumer credit portfolio. The Committee had requested management to perform detailed analyses of the balances and, based on this work, approved in early 2017 the sale of a proportion of the weaker segments of the portfolio. This action, along with increased conservatism during the year in lending and portfolio quality, has moderated the impact on Barclays of increasing delinquencies among US credit card borrowers being seen among US credit card lenders. While the impairment performance of the Bank was largely within plan, wholesale credit performance in the UK was slightly weaker than in the US. The Bank experienced higher impairment in its corporate lending book in the UK from the default of certain borrowers in the service sector. In the US, improved economic conditions, and higher energy prices resulted in favourable corporate impairment trends compared to 2016. In recent years, the Committee has been closely supervising the strengthening of the capital position of the Bank. Progress continued in 2017 as the Bank’s capital ratios continued to improve. In assessing the adequacy of the Bank’s capital position, the Committee took into account current financial performance, the impact of expected regulatory developments (including structural reform), and estimates of the costs of resolving past conduct and litigation issues. Likewise, the Committee is pleased that the liquidity risk in the Bank has been closely monitored and strengthened over the past year. An important role of the Committee each year is to recommend the risk appetite of the Bank to the Board: its ability to earn an appropriate return while being able to withstand shocks in the market and economic environment. In addition, the Committee monitors closely the assessment of the Bank’s performance under a variety of regulatory stress tests. We evaluate not just the outcome of these analyses but the means by which they are performed, particularly the assessment of model risk. These efforts increased in 2017, as the Bank prepared for the first stress test of the US Intermediate Holding Company, in addition to completing the newly introduced Biennial Exploratory Scenario for the Bank of England stress test. The Committee assesses external conditions as part of establishing risk appetite. These remain challenging and our objective was to position the Bank conservatively to deal with economic uncertainty. Key themes that developed during 2017 with potential to have a significant first order impact on Barclays’ businesses included heightened political and economic risk in the UK in the backdrop of Brexit negotiations, increased geopolitical risk impacting the delicately poised global economy, and a shortage of new transaction flow in leveraged finance underwriting driving tighter terms. Other emerging risks with potential to impact Barclays include UK property price stress and volatility in financial markets after a long period of quiescent asset appreciation. The Committee maintains regular oversight of exposure to the key risk themes it has identified and actions taken by management in response. During the year, the Committee also evaluated the financial and capital impacts of operational risk. The Committee has noted, and encouraged, the efforts by management to improve the Risk and Control Self- Assessment programme in Operational risk. This work is important in an environment of heightened cyber risk and increased operational complexity as the Bank implements structural reform. As in past years, the Committee reviewed the execution by management of material regulatory programmes and initiatives. These included the BCBS239 effort to improve the quality and reliability of data and information, and IFRS 9, a new standard for the estimation of credit impairment. Committee performance The performance of the Committee during 2017 was assessed as part of an internal annual Committee effectiveness review. The conclusion of my Board colleagues was that the Committee is considered to operate effectively and that the Board continues to have a high degree of confidence in the diligence and coverage of the Committee. Feedback from the review indicated that the Committee was both effective and influential in identifying areas of risk where Barclays needs to change its performance or adjust its risk profile. One of the areas identified for improvement was to consider whether the Committee would benefit from deeper expertise by including a member with a risk function management background and we will give further consideration to this in 2018. The review also highlighted the need to ensure that the way in which the Committee works with the Board Reputation and Board Audit Committees continues to capture all significant issues effectively while minimising any overlap. I continued to work closely with my fellow Board Committee Chairmen during 2017, particularly with the Board Audit Committee Chairman in order to clarify the responsibility of each committee in relation to 64 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ report Member Tim Breedon Mike Ashley Reuben Jeffery Diane Schueneman Matthew Lester (from 1 September 2017) Steve Thieke (to 10 May 2017) Meetings attended/eligible to attend 9/9 9/9 9/9 9/9 3/3 3/3 Committee role and responsibilities The Committee’s main responsibilities include: ■■ reviewing and recommending to the Board the Group’s financial and operational risk appetite ■■ monitoring the Group’s financial and operational risk profile ■■ commissioning, receiving and considering reports on key financial and operational risk issues. The Committee’s terms of reference are available at home.barclays/corporategovernance operational risk matters during the year which each Committee has a role in overseeing. We will work to embed this further in 2018. The Committee will also focus on ensuring there is a framework in place to ensure clear allocation of responsibilities regarding the Committee’s interaction with the risk committees of Barclays UK and Barclays International under the new Group structure. You can read more about the outcomes of the Board effectiveness review on page 78. Looking ahead 2018 is important for Barclays as it completes the restructuring required under the structural reform programme. As a result, the firm will have two important subsidiary legal entities in Barclays UK, the core domestic franchise in the UK, and Barclays International, the Corporate and Investment Banking and international consumer businesses of the firm. These will be in addition to the US Intermediate Holding Company, which is part of Barclays International. The Committee will pay close attention to the executive’s management of risk within and across these entities. We expect that credit and employment conditions in the UK will continue to be uncertain, as future trade and economic arrangements with the EU take shape. In the US, the impact of the corporate tax reform on the health of companies and consumers will need assessment. Lastly, the Committee will continue to monitor the risk to Barclays from volatility in financial markets, which have experienced many years of steady asset appreciation. Tim Breedon Chairman, Board Risk Committee 21 February 2018 Committee allocation of time (%) 4 1 3 2 1 Risk profile/risk appetite (including capital and liquidity management) 2 Key risk issues 3 Internal control/risk policies 4 Other (including remuneration and governance issues) 2017 2016 53 26 12 9 52 26 8 14 Committee composition and meetings The Committee is composed solely of independent non-executive Directors. Details of the skills and experience of the Committee members can be found in their biographies on pages 47 and 48. The Committee met nine times in 2017, with two of the meetings held at Barclays’ New York offices. The chart above shows how the Committee allocated its time during 2017. Committee meetings were attended by management, including the Group Chief Executive, Group Finance Director, Chief Internal Auditor, Chief Risk Officer, Barclays’ Treasurer and Group General Counsel, as well as representatives from the businesses and other representatives from the Risk function. Representatives from Barclays’ external auditor, KPMG, and until March 2017, representatives from the outgoing external auditor, PwC, also attended meetings. home.barclays/annualreport Barclays PLC Annual Report 2017 65 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic report What we did in 2017 Board Risk Committee report The Committee’s work The significant matters addressed by the Committee during 2017 are described below: Area of focus Matter addressed Role of the Committee Conclusion/action taken Risk appetite and stress testing, i.e. the level of risk the Group chooses to take in pursuit of its business objectives, including testing whether the Group’s financial position and risk profile provide sufficient resilience to withstand the impact of severe economic stress. The risk context to Medium Term Plan (MTP), the financial parameters and constraints and mandate and scale limits for specific business risk exposures; the Group’s internal stress testing exercises, including scenario selection and financial constraints, stress testing themes and the results and implications of stress tests, including those run by the Bank of England (BoE). The trajectory to achieving required regulatory and internal targets and capital and leverage ratios. Capital and funding, i.e. having sufficient capital and financial resources to meet the Group’s regulatory requirements and its obligations as they fall due, to maintain its credit rating, to support growth and strategic options. Political and economic risk, i.e. the impact on the Group’s risk profile of political and economic developments and macroeconomic conditions. The potential impact on the Group’s risk profile of political developments, such as elections in other European countries, as well as continuing to monitor the impact of the aftermath of the UK’s EU Referendum. ■■ Assessed the risk context for the 2017 MTP, including general economic and financial conditions and how these had been reflected in planning assumptions. ■■ Debated the assumptions, parameters and results of the internal stress test of the risk appetite of the 2017 MTP. ■■ Discussed and agreed mandate and scale limits for Credit, Market and Treasury and capital risk. ■■ Evaluated the BoE annual cyclical stress test results, and the results of a stress test under the BoE biennial exploratory scenario. ■■ Observed and debated regulatory and market reaction to the publication of BoE stress test results. ■■ Considered and approved internal stress test themes and the financial constraints and scenarios for stress testing risk appetite for the 2018 MTP. ■■ Considered the Federal Reserve Board’s feedback on the US Intermediate Holding Company’s Comprehensive Capital Analysis and Review (CCAR) capital plan following the submission of the CCAR stress test results. ■■ Debated, on a regular basis, capital performance against plan, tracking the capital trajectory, any challenges and opportunities and regulatory policy developments. ■■ Assessed, on a regular basis, liquidity performance against both internal and regulatory requirements. ■■ Regularly monitored capital and funding requirements on a legal entity basis. ■■ Assessed the possible implications of litigation and investigations on the Group’s liquidity position, including a review of the Bank’s liquidity risk control framework. ■■ Monitored the funding risk and capital volatility associated with the Barclays pension scheme. ■■ Monitored progress on actions to mitigate the risk of the potential impact of negative interest rates in the UK on Barclays. ■■ Monitored the potential impacts of Brexit, including a ‘hard’ Brexit. ■■ Considered trends in the UK economy, including risk of inflation amid negative real wage growth. ■■ Continued to monitor the risks relating to South Africa while Barclays still had control of Barclays Africa Group Limited (BAGL). ■■ Monitored Barclays’ exposures to certain products, and with particular focus on redenomination risk, and the risk of a single country leaving the Euro. The Committee recommended the proposed risk appetite for 2017 to the Board for approval, although noted that this may need to be revisited to take account of the impact of IFRS 9 in due course. It encouraged management to make further progress on enhancing infrastructure used to conduct the internal stress test. The Committee approved the 2017 annual stress test results for submission to the BoE, including the range of management actions and overlays designed to mitigate risk impacts. Similarly, the Committee approved the results of the stress test under the BoE biennial exploratory scenario and recommended that the results should be taken into consideration for strategy projections. In recommending the internal stress test and risk appetite for the 2018 MTP, the Committee noted and considered that the severity of the internal stress test had been higher than normal, which provided added resilience to the various challenges for the MTP, such as macroeconomic issues. The Committee supported the forecast capital and funding trajectory and the actions identified by management to manage the Group’s capital position. It approved the proposed capital and liquidity processes for Barclays UK for submission to the regulator as part of its banking licence application. The Committee considered and approved the Group capital adequacy assessment together with the methodologies and results of the reverse stress testing for the submission of the 2017 Internal Capital Adequacy Assessment Process (ICAAP) as well as the Group’s 2017 Individual Liquidity Adequacy Assessment Process (ILAAP). Following the further sell-down of the equity stake in BAGL and the subsequent proportionate regulatory consolidation, the Committee agreed that South Africa should be removed as an ongoing risk theme, although it continued to maintain oversight of any emerging risk. It also agreed to remove negative interest rates as a key risk theme on the basis that the actions previously identified and agreed to mitigate the risk were nearing completion. The Committee suggested that monitoring geopolitical risks in Europe should be broadened to include other regions, but requested that China continue to be reported as a separate geopolitical risk theme. 66 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportArea of focus Matter addressed Role of the Committee Conclusion/action taken Credit risk, i.e. the potential for financial loss if customers fail to fulfil their contractual obligations. Conditions in the UK housing market, particularly in London and the South East; levels of UK consumer indebtedness, particularly in the context of the risk of inflation and negative real wage growth; and the performance of the UK and US Cards businesses, including levels of impairment. ■■ Continued to assess and monitor conditions in the UK property market in case of signs of stress. The Committee focused on effective collections capability as an important tool of risk management. The Committee encouraged management to carry on with its conservative approach to UK lending. The Committee approved changes to the risk appetite levels for US Cards. The Committee requested more granular detail of the impact of strategy changes on risk limits and oversight. ■■ Evaluated how management was tracking and responding to rising levels of consumer indebtedness, particularly unsecured credit in both the UK and US. ■■ Discussed the PRA’s statement on consumer credit and unsecured lending in the UK, and considered Barclays’ response to the PRA statement. ■■ Scrutinised the performance of the UK and US Cards businesses, including the level of impairment. ■■ Reviewed and approved proposals for frameworks relating to Securities Financial Limits and Maximum Exposure Governance. ■■ Scrutinised a strategic review of business activity in the Corporate and Investment Bank. The Committee focused its attention on the financial and capital impacts of operational risk. In relation to fraud, it encouraged management to further integrate strategy, models and operations. The Committee requested a gap analysis together with an action plan to remediate specific weaknesses identified in the internal audit in relation to modelling. The Committee assessed during the year the Group’s risk management capability in the form of a Risk Capability Scorecard and reviewed and approved proposals for the external third party evaluation which was scheduled to be performed in early 2018. Operational risk, i.e. costs arising from human factors, inadequate processes and systems or external events. Risk framework and governance The Group’s operational risk capital requirements and any material changes to the Group’s operational risk profile and performance of specific operational risks against agreed risk appetite. ■■ Tracked operational risk key indicators via regular reports from the Head of Operational Risk. ■■ Debated specific areas of emerging risks, including conduct risk, cyber, execution risk, technology and data, including the controls that had been put in place for managing and avoiding such risks. The frameworks, policies and talent and tools in place to support effective risk management and oversight. ■■ Monitored progress on the implementation of an enhanced modelling framework, including receiving updates from Barclays Internal Audit on findings in relation to specific modelling processes. ■■ Tracked the progress of significant risk management projects, including the progress on achieving compliance with the Basel Committee for Banking Supervision 239 (BCBS239) regulation for risk data aggregation principles as well as the roll out of the Risk and Control Self-Assessment (RCSA) process across the Group. Please see the ‘Governance in action’ box on page 68 for further details about the Committee’s role in overseeing the RCSA process. ■■ Assessed risk management matters raised by Barclays’ regulators and the actions being taken by management to respond. ■■ Endorsed Legal risk and Model risk, as new Principal Risks under the Enterprise Risk Management Framework (ERMF), forming part of the Committee’s roles and responsibilities in future. ■■ Reviewed the implementation of the ERMF during 2017 which had been designed to address feedback from the PRA following a review of the ERMF. Remuneration The scope of any risk adjustments to be taken into account by the Board Remuneration Committee when making remuneration decisions for 2017. ■■ Debated, in a joint meeting with the Board Reputation Committee, the Risk function’s view of 2017 performance, making a recommendation to the Board Remuneration Committee on the financial and operational risk factors to be taken into account in remuneration decisions for 2017. The Committee discussed the report of the Chief Risk Officer and considered the proposal put forward in relation to the impact of relevant risk factors in determining 2017 remuneration decisions, noting that it should also include positive events such as the 2017 Banking Standards Board report which had reported improvements on 2016. home.barclays/annualreport Barclays PLC Annual Report 2017 67 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Risk Committee report In addition, the Committee also covered the following matters in 2017: ■■ assessed Barclays’ exposures to the leveraged finance market, general conditions in that market and approved an updated leveraged finance framework which would be submitted annually to the Committee for approval ■■ was briefed by PwC on main risk issues identified during the 2016 year-end audit, specifically impairment, post-model adjustments, forbearance control issues, key valuation judgements (including in relation to the ESHLA portfolio), and key assumptions used in the pension scheme liabilities ■■ requested and evaluated a report on partnership programmes in the US Cards business with a focus on risk profile and credit quality ■■ considered a report on the effectiveness of the Committee and any areas of the Committee’s performance that could be improved ■■ reviewed and updated its terms of reference, recommending them to the Board for approval. Governance in action – Risk and Control Self- Assessment programme A key focus of the Committee in 2017 was oversight of the implementation of a revised Risk and Control Self-Assessment (RCSA) programme. The RCSA enhancement programme was established as part of Barclays’ commitment to the effective management the Group’s Operational risk and extend both the scope of coverage across a wider range of risks, and also improve the granularity of management’s risk and control assessments of business processes. The programme is the firm-wide process led approach for management to identify and regularly assess material inherent risks and their associated controls, in order to mitigate these risks and reduce the likelihood and/or severity of losses to the firm from a Risk event. In 2017, a number of pilot RCSAs were rolled out across the Group in addition to the regular RCSA process, which was also enhanced. Improvements were also made in the assessment of inherent risk values and the aggregation process for risk and control assessments across risk types. During the year, the Committee reviewed progress in terms of the RCSAs completed across the Group, and also considered the next steps in the review process and the results of the residual risk assessments. Based on the results of the pilot RCSAs undertaken, the Committee was satisfied that the process will improve management’s understanding of the risk and control environment, so they can prioritise and remediate ineffective controls where required. Following completion of the pilot RCSA programme, the Committee considered the ways in which the RCSA programme could be enhanced for the wider implementation of the programme in 2018. The Committee considered specific revisions of the 2017 RCSA programme with the aim of: ■■ improving the identification of inherent risk, control effectiveness and residual risk by going into detail at a more granular process level ■■ increasing the degree of independent challenge provided by all Three Lines of Defence ■■ increasing the granularity of assessments for a further set of pilot RCSAs to estimate inherent risk at activity level by risk type, together with the identification and assessment of detailed operating controls by activity and residual risk. The Committee will continue to work with management in 2018 on further refining and enhancing the RCSA programme. 68 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportGovernance: Directors’ report What we did in 2017 Board Reputation Committee report The Committee has been well positioned during 2017, a time of significant organisational change for the Group, to ensure that our people, whether within Barclays UK, Barclays International or the Group Service Company, continue to demonstrate behaviours and conduct that are consistent with the Barclays Values. One of the key challenges faced by the Committee is how to maintain oversight of Group Conduct and Culture matters as a whole, without overlooking the cultural differences that, naturally and quite rightly, exist between our different operating businesses and support functions. During the year the Committee actively discussed this challenge and, in an attempt to address this, I rebalanced the Committee’s agenda by introducing business and functional ‘Deep Dive’ sessions into each meeting. The Deep Dives allow the Committee to understand the conduct, culture and customer satisfaction issues being faced in specific areas of the business and the actions undertaken to address them. While consideration of our well-refined dashboards and Reputation risk reports ensure that Group-level metrics, challenges and initiatives remain clearly visible and subject to Committee consideration and challenge. You can read about some of the Deep Dives undertaken by the Committee during 2017 on the following pages. A significant output from the Committee during 2017 resulted from discussions around Barclays’ historic commitments to the financing of certain fossil fuels projects, which resulted in a decision to develop a more proactive approach to the management of sustainability issues across the Barclays business. I would encourage you to refer to the ‘Governance in action’ box on page 74 for further details on this initiative. Committee performance Through the process of the annual Board effectiveness review, which confirmed the continued effectiveness of the Committee, the ongoing evolution of the Committee’s role and the increased impact that it had during the last year was clearly acknowledged. An area that the review identified for further consideration was the continued oversight of Conduct and Reputation risk matters in the post-structural reform corporate structure, which I will ensure is addressed by the Committee ahead of April 2018. Looking ahead Finally, I would like to record my thanks to Mike Roemer, who stepped down as Group Chief Compliance Officer in October 2017, for his outstanding contribution to the work of the Committee during his tenure in that role. I would also like to thank Diane de Saint Victor, who stepped down from the Committee on her retirement from the Board in May 2017. I look forward to working with our new Committee member, Mike Turner and, subject to regulatory approval, our new Group Chief Compliance Officer, Laura Padovani, as we continue to support the delivery of the Board’s collective vision of the Barclays Values. Sir Gerry Grimstone Chairman, Board Reputation Committee 21 February 2018 Dear Fellow Shareholders This is my second report to you as Chairman of the Board Reputation Committee. At the conclusion of my last report I commented that the Committee, by way of its membership, executive engagement and reporting processes, had built a strong foundation on which to base its future operations and drive Barclays to be a governance leader in conduct, culture and reputation matters. This strong foundation has ensured that the Committee has been well positioned during 2017, a time of significant organisational change for the Group, to ensure that our people, whether within Barclays UK, Barclays International or the Group Service Company, continue to demonstrate behaviours and conduct that are consistent with the Barclays Values. On two occasions during 2017 the Committee extended an invite to representatives of the Banking Standards Board (BSB) to present and discuss the outcomes of their 2016 and 2017 assessments of Barclays. As an independent third party with insights across the banking industry as a whole, the Committee attaches significant value to the insights offered by the BSB and I would like to extend my personal thanks to Dame Colette Bowe and her team at the BSB for their continuing work to promote the highest standards of behaviour in UK banking and restore public trust in the sector. We were encouraged to hear that the results had generally improved between 2016 and 2017 and were particularly pleased to see how strongly the Barclays Values still resonate with our colleagues. The Committee also carefully considered the BSB’s feedback on results relating to colleague resilience and you will find an outline of our discussion on colleague well-being on page 71. home.barclays/annualreport Barclays PLC Annual Report 2017 69 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Reputation Committee report Committee allocation of time (%) 1 5 4 3 2 1 Conduct and compliance 2 Culture 3 Customer satisfaction 4 Citizenship 5 Brand and other Reputation risk * 2016 figures have been rebased according to the 2017 36 20 14 16 14 2016* 33 21 6 13 27 significant matters considered by the Committee in 2017. Committee role and responsibilities The principal purpose of the Committee is to: ■■ support the Board in promoting its collective vision of Barclays’ purpose, values, culture and behaviours ■■ ensure, on behalf of the Board, the efficiency of the processes for identification and management of Conduct and Reputation risk ■■ oversee Barclays’ conduct in relation to its corporate and societal obligations, including setting the guidance, direction and policies for Barclays’ approach to customer and regulatory matters and Barclays’ Citizenship Strategy, including advising the Board and management on these matters. The Committee’s terms of reference are available at home.barclays/corporategovernance Committee composition and meetings The Committee is composed solely of independent non-executive Directors. During 2017, Diane de Saint Victor stepped down from the Committee and the Barclays Board with effect from 10 May 2017. The Committee met four times during 2017 and the chart on the left shows how it allocated its time. Committee meetings were attended by representatives from management, including the Group Chief Executive, Chief Compliance Officer, Chief Internal Auditor, Chief Risk Officer, Group General Counsel, Group Chief of Staff, Group HR Director and the Heads of Corporate Communications, Citizenship and Reputation, as well as senior representatives from the businesses and other functions. A representative from KPMG, Barclays’ external auditor, attended each Committee meeting during the year and representatives from the BSB attended two meetings during 2017. Member Sir Gerry Grimstone Mike Ashley Mary Francis Dambisa Moyo Diane de Saint Victor (to 10 May 2017) Meetings attended/eligible to attend 4/4 4/4 4/4 4/4 1/1 The Committee’s work The significant matters addressed by the Committee during 2017 are described below: Area of focus Conduct risk Matter addressed Role of the Committee Conclusion/action taken Monitoring the risks that can arise from the inappropriate supply of financial services, including instances of wilful or negligent misconduct. ■■ Discussed updates from management on Conduct risk and considered performance against Conduct risk indicators at each meeting. ■■ Discussed the specific Conduct risks associated with certain business areas and the status of initiatives in place to address those risks and further strengthen the culture of the business. ■■ Received reports from Barclays Internal Audit (BIA) in respect of internal audit activities on conduct risk management matters, including details of any unsatisfactory audit reports and remediation steps identified. ■■ Discussed and approved the Conduct Risk Framework, with Conduct risk having been identified as a Principal Risk under the Barclays Enterprise Risk Management Framework (ERMF). ■■ Received forward looking information on regulatory developments, including the issuance of new consultations by regulators, that might have a Conduct risk impact on Barclays in the future. ■■ Approved the annual Compliance Plan. ■■ Considered and approved the proposed methodology for calculating Conduct risk adjustments to incentive pools. In line with its recategorisation under the ERMF, the Committee adopted Board- level oversight of financial crime risk and conducted a Deep Dive into this area. The Conduct dashboard report was updated to include financial crime information and metrics, and the Committee was encouraged by management’s open and transparent approach to engaging with regulators on financial crime matters. The Committee considered the differing regulatory requirements placed on the UK and US Cards businesses and have suggested that a ‘Barclays view’ should overlay the requirements of local regulations to ensure that all retail facing businesses within the Group operate within a framework that prioritises the concept of ‘Treating Customers Fairly’. During discussion of the realignment of businesses between Barclays UK and Barclays International, the Committee encouraged management to take advantage of opportunities presented by structural reform to address some areas of Conduct risk by harmonising policies and operations, in areas such as collections and affordability assessments. The Committee considered an update from BIA on the use of Conduct risk information by legal entities within the Group and their assessment of reporting mechanisms and the escalation of issues up the organisational hierarchy. 70 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportArea of focus Matter addressed Role of the Committee Conclusion/action taken Cultural progress Reviewing management’s progress on embedding a values-based culture across the organisation. ■■ Debated Culture dashboards presented at each meeting and the progress being made to embed cultural change across Barclays globally. ■■ Received regular updates on colleague engagement metrics and the results of employee YourView surveys and considered proposed changes to the YourView methodology. ■■ Approved the adaption of the Culture dashboard to include the monitoring of cultural attributes across the firm. ■■ Considered and discussed with representatives of the BSB the results of their 2016 and 2017 Annual Reviews of Barclays. ■■ Considered a Deep Dive analysis on culture within Barclaycard UK, including the process and challenges of integrating the UK Cards business into Barclays UK. ■■ Considered feedback from the FCA on the Conduct and Culture dashboards. ■■ Received information on management’s initiatives to improve colleague well-being and resilience, including actively encouraging employees to work dynamically and providing a supportive environment in which colleagues feel able to talk about the impacts of stress and mental health concerns. ■■ Considered draft disclosures on the Gender Pay Gap within the Group and industry comparators. Through consideration of the Culture dashboards and YourView results, the Committee was encouraged by the consistently strong sustainable engagement scores achieved throughout 2017. Improvements have been made in the area of colleague enablement, however the Committee appreciated management’s acknowledgement that further improvement is still required in this area, notably in terms of reducing perceived bureaucracy throughout the organisation. The Committee discussed the importance of a culture in which colleagues feel able to speak up and raise concerns. Particular attention has been paid to whistleblowing metrics throughout the year and, on recommendation of the Committee, the YourView survey system now contains a direct link to Barclays’ whistleblowing resources with the intention of further encouraging and supporting employees to report instances of unethical or inappropriate behaviour. Additional and more detailed information is becoming available to the Committee, by way of reporting on cultural attributes, on what employees perceive to be the most prevalent facets of Barclays’ organisational culture. It is intended that this information be used to monitor attainment of a set of desired attributes and facilitate further discussion and action in order to achieve this. By way of discussion of the FCA’s feedback on Barclays’ dashboards, the Committee acknowledged that the dashboards are just one of a number of key management information tools used to set its agenda and facilitate an ongoing discussion with management on culture which leads, in some cases, to deliberate actions being taken by the Group and business executive committees. home.barclays/annualreport Barclays PLC Annual Report 2017 71 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Reputation Committee report Area of focus Matter addressed Role of the Committee Conclusion/action taken Customer satisfaction Ensuring fair outcomes for customers by monitoring complaints volumes, the standard and quality of complaints handling processes and other relevant metrics. ■■ Debated Complaints dashboards and performance against key indicators at each meeting. ■■ Gave consideration to the impact that matters, such as an effective communication channel, have on customer complaints volumes. ■■ Considered the quality of the processes in place to address and resolve customer complaints. ■■ Monitored trends in the underlying causes of complaints and considered forward looking analysis to identify events (both industry-wide and Barclays-specific) which could influence the volume and timings of complaints. ■■ Considered the differing complaints profiles of the Barclays UK and Barclays International businesses and the actions being undertaken to positively improve the customer journey by utilising complaints management information (MI). ■■ Requested further insight into the first line management of customer complaints and conducted a Deep Dive into Barclays UK’s complaints handling processes (Barclays UK receives the majority of Barclays’ customer complaints given its retail focus). ■■ Requested additional Deep Dives on areas of the Barclays International business that have a retail customer base and considered the complaints profiles of those businesses. ■■ Considered the progress being made by relevant businesses to improve their respective net promoter score (NPS). The Committee was pleased to see a general downward trend in the number of complaints received by Barclays during 2017. While the Committee still receives a Group-wide report on complaints, underlying reporting has been refined in line with organisational changes to ensure the Committee receives a clear view on the complaints metrics of Barclays UK and Barclays International respectively. The Committee made recommendations to management, in the context of the structural reform programme, in respect of ensuring a consistent ‘Barclays’ customer experience is received by retail clients whether they are being serviced by Barclays UK or Barclays International. The Committee developed its understanding of how complaints MI is mapped by Barclays UK in order to identify root causes and received information on the strategic initiatives being undertaken to address them. The Committee’s Deep Dive also led to further refinement of the Barclays UK Complaints dashboards to include complaints volumes by channel. The analysis of the data revealed a high level of customer satisfaction with Barclays’ online bank offering. The Committee was pleased to see an increase in Barclays UK’s NPS during the course of 2017 and support management’s objective of further increasing NPS to ensure Barclays UK remains competitive against challenger and start-up banks. In relation to Barclays International’s business areas, the Committee was encouraged to hear that complaints volumes were at an all-time low within Barclaycard US but noted management’s desire to improve the business’s net promoter score against key US competitors. The Committee also considered the approach being taken by Barclays Partner Finance to identify potential areas of future complaints and proactively reaching out to customers to resolve issues before complaints arise. 72 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportArea of focus Citizenship Matter addressed Role of the Committee Conclusion/action taken Monitoring progress against the Shared Growth Ambition (Barclays’ Citizenship plan for 2016-2018) and the effectiveness of policy statements on Citizenship matters. The Committee was very pleased to see that Citizenship metrics demonstrate a high level of colleague pride in the contribution Barclays makes to the community and society. The Committee is very encouraged by management’s decision to dedicate resource to financial crime, skills and employability and digital empowerment initiatives that provide benefits not only to Barclays and its customers, but to the banking industry and UK population more generally. Read more about Barclays’ approach to Citizenship on pages 21 and 22. ■■ Considered the Citizenship dashboards presented at each meeting and assessed status updates on the Shared Growth Ambition. ■■ Reviewed Barclays’ ratings and relative peer ranking in external Environmental Social Governance (ESG) benchmarks and tracked external perceptions on Citizenship through stakeholder and media analysis. ■■ Received information on new Citizenship initiatives such as the #Digisafe campaign which aims to educate individuals to better protect themselves against digital fraud. ■■ Received an update from Barclays’ Global Head of Financial Crime in respect of the function’s development of intelligence- led initiatives to combat fraud. ■■ Reviewed and recommended the approval of Barclays’ Statement on Modern Slavery. Reputation and brand Ensuring that the Barclays brand ■■ Reviewed Reputation risk updates is proactively managed and Reputation risks and issues are identified and managed appropriately. from management, receiving specific information on those issues deemed to constitute the most significant Reputation risks and issues in each quarter. ■■ Regularly evaluated the measures being taken to enhance the Barclays brand and to understand, and propose action to improve, where appropriate, external perceptions of the Bank. ■■ Considered whether the process for identifying, managing and overseeing Reputation risk was functioning effectively. The Committee approved the Reputation Risk Framework, confirming that Reputation risk is now a Principal Risk under the ERMF. Significant discussion also took place in respect of the correlation between cultural indicators, conduct outcomes and Reputation risk. The Committee requested further refinement of the Reputation risk reporting received to include sentiment analysis of media coverage and metrics on Barclays’ social media presence. The Corporate Relations priorities for 2017 were pre-approved by the Committee and fulfilment of those priorities kept under review throughout the year. This process improved management’s ability to more effectively understand and monitor external perceptions of Barclays among key stakeholders. The Committee requested that management undertake work to further refine the components of Reputation risk, clarify the process for identifying risks, enhance management oversight and give consideration to how the overall process can be better communicated. home.barclays/annualreport Barclays PLC Annual Report 2017 73 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Reputation Committee report The Committee also covered the following matters: ■■ received a report on management’s annual review of the effectiveness of compliance with the Volcker Rule (restrictions on proprietary trading and certain fund investments by banks operating in the US) ■■ received a report from management on Barclays’ Swap Dealer Annual Compliance Report ■■ discussed the outcome of an externally facilitated review on Barclays’ compliance with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and its comparative performance against its peers. ■■ approved, from a Reputation risk perspective, a proposal to restructure certain intra-group shareholdings and enhance capital utilisations ■■ assessed and discussed a report on the Committee’s performance ■■ reviewed and updated its terms of reference. Read more about Barclays’ risk management on pages 119 and 120 and in our Pillar 3 Report, which is available online at barclays.com/annualreport Governance in action – Responding to stakeholder concerns During the year, the Committee gave consideration to Barclays’ exposure to environmental, social and sustainability matters through its business relationships and challenged management to establish a more formal and proactive approach to documenting policy positions and guidelines in relevant sectors. In response to recommendations from the Committee, management commenced work to review Barclays’ involvement and practices in certain ‘sensitive sectors’ and is in the process of drawing up proposals for sector-specific policies that will articulate the forward-looking intentions of Barclays in these areas. The Committee will be reviewing and approving these policies during 2018 and look forward to reporting on their content and implementation in next year’s Annual Report. The Committee considers that the establishment of sector-specific policies and guidelines will be a significant step in further enhancing the role that Barclays plays in the wider business community and believe they will improve the quality of the Company’s future reporting on climate change and other matters of social and environmental interest. 74 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportGovernance: Directors’ report What we did in 2017 Board Nominations Committee report In 2017 we made significant progress towards our new Group governance structure in preparation for structural reform and the stand up of our ring-fenced bank in 2018, with appointments having been made to both the Barclays UK and Barclays International divisional boards. Looking ahead In 2018 we look forward to the execution of our new Group structure and to the implementation of robust processes providing clear, consistent and effective corporate governance for the Group post-structural reform. Throughout this period of change, the Committee will continue to ensure that we have the right people leading the strategic direction of Barclays, motivating colleagues and sustaining our business over the long term. John McFarlane Chairman, Board Nominations Committee 21 February 2018 Dear Fellow Shareholders In 2017 we made significant progress towards our new Group governance structure in preparation for structural reform and the stand up of our ring-fenced bank in 2018, with appointments having been made to both the Barclays UK and Barclays International divisional boards. We are delighted to welcome the new directors to those boards, led by Sir Gerry Grimstone as Chairman of Barclays International (subject to regulatory approval) and Sir Ian Cheshire as Chairman of Barclays UK (which will become our ring- fenced bank). We continued to refine the details of how the Group Board will interact with those boards and the boards of our other strategically significant subsidiaries, building on the Governance Guiding Principles we created in 2016. We look forward to working collaboratively with them to ensure that the roles and responsibilities of each board are clear, while providing effective governance of the Group and protection of shareholder interests. In view of the significant changes to our Group corporate structure, and always bearing in mind the long-term strategy of the Group, the Committee continues to regularly consider our Board composition and succession plans, ensuring it comprises the right balance of diversity, skills and experience to provide the strategic oversight needed to steer the business of the Group. We conducted searches for non-executive Directors in 2017 and were pleased to appoint Matthew Lester and Mike Turner CBE to the Board, in addition to the appointment of Sir Ian Cheshire. Matthew, Mike and Sir Ian each bring with them significant board-level experience and you can find out more about their background and relevant skills and experience that they bring to the Board in their profiles on pages 47 and 48. I have previously emphasised that it is a key part of our role to be satisfied that there are proper processes in place for executive succession, and this continues to remain another key consideration of the Committee. We closely monitored the status and progress of the Barclays Talent and Succession strategy, providing input and guidance to management to ensure we attract and retain the best talent for the Group. As a Committee, we also discuss ways in which we can develop and nurture high performing individuals within senior management to strengthen our succession pipeline, including the use of ex-officio posts to relevant executive committees to give those individuals exposure to Group matters and leadership. Our people are the driving force in sustaining our business and we firmly believe in the benefits of having a diverse workforce. I am proud to see the number and variety of diversity and inclusion initiatives we have at Barclays to develop and support colleagues, and ultimately to encourage them to grow their careers with us. While we recognise that diversity is not only about gender, it is nevertheless an important element of diversity and we have set ourselves a target of 33% female representation on the Board by 2020, which as a Board we remain committed to achieving. Please see page 79 for further information about our approach to diversity at both Board and Group Executive Committee levels. Committee performance The performance of the Committee was assessed as part of the annual Board effectiveness review and I am pleased to report that the results show that it is performing effectively, with the role and responsibilities of the Committee clear and well understood. One area identified for consideration is that the Committee should be mindful of ensuring that all non-executive Directors receive the same flow of information in relation to decisions and discussions by the Committee, which I will address in my updates to the Board as Chairman of the Board Nominations Committee, and outside of scheduled Board meetings to the extent appropriate. The report on the Board effectiveness review can be found on page 78. home.barclays/annualreport Barclays PLC Annual Report 2017 75 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Nominations Committee report Committee allocation of time (%) 5 1 2 4 3 1 Corporate governance matters 2 Board and Committee composition 3 Succession planning and talent 4 Board effectiveness 5 Other 2017 8 2016 20 42 33 11 6 36 31 8 5 Committee composition and meetings The Committee is composed solely of independent non-executive Directors. John McFarlane, as Chairman of the Board, is also Chairman of the Committee. Mike Ashley, Tim Breedon, Crawford Gillies, and Sir Gerry Grimstone, being the Chairmen of each of the other Board Committees, and Sir Ian Cheshire (as Chairman of Barclays UK) and Reuben Jeffery III, are also members of the Committee. Details of the skills and experience of the Committee members can be found in their biographies on pages 47 and 48. During 2017 there were three meetings of the Committee, including one held at Barclays’ New York offices. Attendance by members at Committee meetings is shown below and the chart to the left shows how the Committee allocated its time. Committee meetings were attended by the Group Chief Executive, with the Group HR Director, the Head of Talent, and the Global Head of Diversity and Inclusion attending as appropriate. Meetings attended/eligible to attend Member John McFarlane Mike Ashley Tim Breedon Crawford Gillies Sir Gerry Grimstone Reuben Jeffery III Sir Ian Cheshire (from 9 May 2017) 3/3 3/3 3/3 3/3 3/3 3/3 0/1* * Sir Ian Cheshire did not attend owing to prior commitments, but his views and comments were made available to, and considered by, the Committee. Committee role and responsibilities The principal purpose of the Committee is to: ■■ support and advise the Board in ensuring that the composition of the Board and its Committees is appropriate and enables them to function effectively ■■ examine the skills, experience and diversity on the Board and plan succession for key Board appointments, planning ahead to deal with upcoming retirements and to fill any expected skills gaps ■■ provide Board-level oversight of the Group’s talent management programme and diversity and inclusion initiatives ■■ agree the annual Board effectiveness review process and monitor the progress of any actions arising ■■ ensure the Board has appropriate corporate governance standards and practices in place and keep these under review to ensure they are consistent with best practice. The Committee’s terms of reference are available at home.barclays/corporategovernance The Committee’s work The significant matters addressed by the Committee during 2017 are described below: Area of focus Matter addressed Role of the Committee Conclusion/action taken Board and Board Committee composition The membership of the Barclays PLC Board and the current and future composition of the Board and its Committees. ■■ Reviewed the Board skills matrix and discussed the key skills and experience needed on the Board in the context of future strategic direction, including any areas requiring strengthening for skills and succession and conducted a search for non-executive Directors. ■■ Considered the skills and composition of the Board in a post-structural reform environment. ■■ Reviewed the membership, size and composition of Board Committees. The Committee identified the need to appoint an additional non-executive Director with chairman or CEO experience to add further depth to the Board. During the year it recommended for appointment to the Board Mike Turner CBE, Sir Ian Cheshire (brought on as Chairman of Barclays UK) and Matthew Lester (following the Committee’s previous recommendation of an additional non-executive Director with accounting and auditing experience). The Committee agreed that a search would be conducted for an additional female non-executive Director to promote diversity of gender on the Board and in recognition of the Board’s commitment to achieving 33% female representation on the Board by 2020. The Committee agreed to review the role, purpose and composition of the Group Board once the Barclays UK and Barclays International Boards were fully constituted and operational boards. It noted that changes to Board Committee membership may take place once those boards, as well as the Group Service Company board, were operational so that a holistic view can be taken on appropriate memberships and cross- memberships of boards and committees. Please refer to page 77 for more details of the Board’s approach to the recruitment of new Directors. 76 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportArea of focus Matter addressed Role of the Committee Conclusion/action taken Board composition of Barclays UK and Barclays International in preparation for the legal entity stand up in 2018 under the structural reform programme The composition of the Barclays UK and Barclays International divisional boards. ■■ Considered the board skills matrix for Barclays UK and Barclays International. ■■ Considered updates on the establishment of boards of Barclays UK and Barclays International and discussed the suitability of potential candidates identified to join those boards. The Committee, in reviewing the skills matrices for Barclays UK and Barclays International following appointments to those boards, is of the view that there do not appear to be any skills gaps across the two boards, subject to the recruitment of a non-executive Director with retail banking experience to the Barclays UK board. It discussed opportunities for interaction between the Barclays PLC, Barclays UK and Barclays International boards and agreed to consider opportunities for engagement at board and committee level going forward. Executive succession planning and talent management Succession planning and talent management at Group Executive Committee level. ■■ Considered updates on, and progress being made against, Barclays’ Talent and Succession strategy, including monitoring diversity within the talent pipeline. ■■ Discussed updates from the Group HR Director on Group Executive Committee succession plans, including assessing emergency cover, the existing talent pipeline and any potential gaps. ■■ Considered individuals identified as potential Group Executive Committee successors and discussed next steps for their development. ■■ Considered the succession plans for the most critical business unit and functional roles and discussed how to develop the high performing individuals identified. The Committee welcomed the progress made in the Group Executive Committee succession planning, but noted that there was further work to be done in ensuring we are able to recruit and retain the best talent for the Group. It noted that the boards of Barclays UK and Barclays International, once established, would be able to take a more granular view of succession to some of the roles. The Committee also discussed the use of ex officio posts to both the Group Executive Committee and business executive committees to give senior individuals exposure to Group matters as a further way of developing those individuals to ensure a healthy pool of potential candidates in the succession pipeline. In addition, the Committee covered the following matters: ■■ considered the results of, and the action plan in respect of, the 2016 Board effectiveness review and the process for the 2017 Board and Committee effectiveness review ■■ reviewed and confirmed the effectiveness of the processes for authorising Directors’ conflicts of interests and Directors’ induction and training ■■ considered a report on the effectiveness of the Committee ■■ reviewed the Committee’s terms of reference. Appointment and re-election of Directors Board and Board Committee composition is a standing item for consideration at each Committee meeting. This includes the consideration of potential new non-executive Director appointments, both in respect of planned succession for known retirements and as a result of the ongoing review of the skills and experience needed on the Board in order for it to continue to operate effectively. The Committee frequently considers a skills matrix for the Board, which identifies the core competencies, skills, diversity and experience required for the Board to deliver its strategic aims and govern the Group effectively. Certain attributes identified in the skills matrix have a target weighting attached to them and these are regularly updated over time to reflect the needs of the Group. The Committee reviews the skills matrix when considering a new appointment to the Board, as well as reviewing the current and expected Board and Board Committee composition. This helps to determine a timeline for proposed appointments to the Board. When recruiting a new non-executive Director, the specific skills that are needed are identified, for example, an individual with international experience, or recent history serving on a particular board committee. The Charter of Expectations contains the key competencies and skills expected of non- executive Directors, and these, in addition to other details such as expected time commitment, will be included in an individual specification. The Committee as a whole then considers curriculum vitae and references for potential candidates. Any candidates who are shortlisted will be interviewed by members of the Committee and, if applicable, key shareholders and Barclays’ regulators may be asked to provide feedback on the proposed appointment. The Board is updated on the progress of the recruitment and interview process, and any feedback from the interviews is provided to the Board alongside a recommendation for appointment. Executive search firms Egon Zehnder and Buchanan Harvey were instructed to assist with the search for non-executive Directors during 2017. Neither firm has any other connection to Barclays, other than to provide recruitment services. Open advertising for Group Board positions was not used in 2017, as the Committee believes that targeted recruitment is the optimal way of recruiting for Board positions. Both of the firms used for non-executive Director recruitment have signed up to the Voluntary Code of Conduct for Executive Search Firms, which include measures designed to improve gender diversity on boards. In 2017, Barclays announced the appointments of Sir Ian Cheshire, Matthew Lester and Mike Turner CBE as non-executive Directors, with each Director bringing specific skills and experience to fill the role previously identified by the Committee as well as all having extensive board-level experience (see pages 47 and 48 for details of each Director’s experience and background). Diane de Saint Victor and Steve Thieke both stood down from the Board with effect from the end of the 2017 AGM. The Directors in office at the end of 2017 were subject to an effectiveness review, as described on page 78. Based on the results of the review the Board accepted the view of the Committee that each Director proposed for election or re-election continues to be effective and that they each demonstrated the level of commitment required in connection with their role on the Board and the needs of the business. home.barclays/annualreport Barclays PLC Annual Report 2017 77 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportWhat we did in 2017 Board Nominations Committee report Review of Board and Board Committee effectiveness Process Each year, an evaluation is conducted on the effectiveness of the Board, the Board Committees and individual Directors. Full external evaluations of Board effectiveness have been undertaken in the past two years. In view of the impending new Group corporate structure, following which another external evaluation will be carried out once the structure has had time to settle, the Board decided to focus this year’s review on individual Director performance to monitor the Board’s progress and to inform the agenda of the next full external review process. Independent Board Evaluation facilitated the effectiveness review for 2016 and was engaged again to conduct the 2017 Board review, also again led by Ffion Hague. Independent Board Evaluation is an independent external consultancy with no other connection to Barclays. Consistent with previous years, Ffion Hague carried out interviews with the Directors to obtain feedback on the effectiveness of the Board throughout 2017. Independent Board Evaluation issued a report to the Board on the findings of the effectiveness review. In addition, the Chairman was provided with a report and feedback on the performance of each of the Directors, and the Senior Independent Director received a report on the Chairman. Following consideration of the findings of the 2017 Board and Committee effectiveness reviews, the Directors remain satisfied that the Board and each of the Board Committees are operating effectively. Outcomes of 2017 review Board performance is considered to be improving, with more effective and insightful questions being asked in Board debates and a better balance being struck between support and challenge. In particular, the Directors were positive about: ■■ the preparations for structural reform ■■ project execution, such as the remediation of control issues and preparations for Brexit ■■ the recruitment of high quality new Board members and members for the boards of Barclays UK and Barclays International. The Directors were also pleased with progress on strengthening the senior executive team and deepening relationships between Directors and key executives. The executive team feels well supported by the Board and is grateful for that support. Business performance is a concern for Board members, and the Board is focused on improving this within the Group. This will be a particular area of focus in 2018. The restructuring of the Group in April 2018 is also a significant focus for the Group and regarded as a major challenge. The Board is cognisant of the challenges of ensuring the new Group corporate structure is effective and efficient, and is conscious of the need to maintain good governance overall and minimise duplication. The interaction between the Group Board and the boards of our strategically significant subsidiaries will be closely monitored and thought will be given to identifying opportunities for engagement with subsidiary board members to develop and maintain a good working relationship. The impact of the new structure on Board work and governance will be a key area of review for the 2018 external evaluation of the Board. Committee effectiveness The 2017 Board Committee effectiveness review was carried out internally, led by the Company Secretary. A questionnaire was circulated to all Committee members with a report of the findings of the effectiveness review provided to the Chair of each Committee as well as an update to the Board. The conclusion from the Committee reviews is that the Committees are working well, and you can read more about the findings for each Board Committee within each Committee Chairman’s letter. Progress against 2016 findings Following the 2016 Board effectiveness review facilitated by Independent Board Evaluation, a number of findings were identified and the summary below sets out the Board’s progress against those actions in 2017. 2016 findings Actions taken/findings in 2017 Board priorities Create regular broad-based risk oversight Board sessions to allow Directors to look across the risk spectrum. Schedule a debate on the role of the Board and non- executive Directors and link the conclusions to revised Board objectives to help focus the Board’s agenda. Board/executive relationship Positive and constructive relations between the Board and the new management team were reported. Time was scheduled for free-ranging discussion around risk, strategy and the Bank’s long term plan during the Board’s annual strategy session. The review reported that Board discussion was more focused and struck a balance between support and challenge. The review found that the relationship between the Board and executive management deepened during 2017, with executive management feeling well supported. Optimise communication and collaboration* Continue to optimise the information flow between Directors in the run-up to structural reform in 2018. The Chairman continued to hold meetings with non-executive Directors ahead of Board meetings to brief them on current issues. Consider agreeing common values for the Group and the banking subsidiary boards in the new structure. Board appointment process Continue to refine the Board skills matrix to ensure it aligns with the Group’s strategy and informs the succession plan for key Board roles. Implement more regular reporting to the Board on potential non-executive Directors under consideration. Director induction Continue to enhance the Director induction process with a focus on providing broader governance training to anyone who has not previously served on a UK PLC board. Reporting to the Board† Review reporting arrangements on strategy implementation and review the KPIs or dashboard reports for key initiatives. Notes * In 2016 this finding was named ‘Greater awareness of Board Committee work’. † In 2016 this finding was named ‘Dealing more strategically with global regulation’. Further principles and practices were developed for interaction between the Board and the boards of Barclays UK and Barclays International, building on the Governance Guiding principles created in 2016. The Board skills matrix and succession plan were kept under review, with separate skills matrices established for the Barclays UK and Barclays International boards. Board members were updated on recruitment progress and details of potential candidates. The induction programme was reviewed to factor in tailored governance training for new Directors and was extended also to directors of Barclays UK, Barclays International and the Group Service Company. The form and content of reporting to the Board was reviewed and refreshed by management to ensure that the Board is provided with appropriate management information on strategy and execution priorities. 78 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportDiversity on the Board and Group Executive Committee The Board continues to have regard to the Hampton-Alexander Review recommendations to improve gender diversity among FTSE leadership teams and the Parker Review recommendations on the ethnic diversity of UK boards. With regard to ethnic diversity, the Board considers that Barclays is currently well-positioned in terms of representation at Board level and also at Group Executive Committee level when taking into account the Parker Review definition (being “individuals of Black, East Asian, Latin American, Middle Eastern or South Asian ethno-cultural backgrounds”). The Board will continue to monitor the overall diversity of our leadership pipeline to ensure we are attracting the broadest spectrum of leaders to Barclays. During 2017, the Committee received regular updates from the Global Head of Diversity and Inclusion covering the full spectrum of Barclays’ diversity and inclusion agenda, including the actions being taken regarding dynamic working, colleague inclusion, workforce diversity, mental health awareness and social mobility. The Committee is pleased with the progress being made and discussed ways in which inclusion might be tracked. Management is continuing to work on drawing together indicators across the Group to develop a metric to measure progress on inclusion. Further details about the current diversity balance of the Board can be found on page 46. More details on Barclays diversity and inclusion strategy and the progress made can be found on page 89. The Committee recognises the importance of ensuring that there is broad diversity inclusive of, but not limited to, gender, ethnicity, geography and business experience on the Board, while continuing to recommend all appointments based on merit in the context of the skills and experience required. Barclays’ approach to Board diversity is set out in full in the Board Diversity Policy, which can be found online at home.barclays/corporategovernance. Our Board Diversity Policy recognises that a truly diverse Board will include and make good use of the differences in skills, experience, background, race, gender and other distinctions brought by each Director, with such differences being considered in determining the optimum composition of the Board. When executive search firms are engaged to assist with the recruitment of a new Director, diversity is identified as a key factor. In addition, the external Board evaluation considered diversity when assessing the effectiveness of the Board. The Barclays Board target of 33% female representation among Directors by 2020 is formally reflected in the Board Diversity Policy as well as being noted in the Board skills matrix. Noting the current gender diversity balance on the Board, and as mentioned earlier in this report, the Committee has commissioned the recruitment of a further female non- executive Director to strengthen the diversity of gender on the Board. Further details about the current diversity balance of the Board can be found on page 46. The Committee is also mindful of the current gender diversity balance of the Group Executive Committee, but is satisfied with the overall level of diversity across that Committee standing at 33% and with the percentage of women among the direct reports of Group Executive Committee members strengthening our succession pipeline. Further, Barclays is committed to achieving 33% female representation among the Group Executive Committee and their direct reports by 2020, and is currently reporting 25% female representation among this population. In 2017, the Group Executive Committee continued the initiative introduced by the Group Chief Executive in 2016 of having one ex-officio position on the Committee to broaden the scope of perspectives and contributions made, with each appointee serving for a four-month rotation. home.barclays/annualreport Barclays PLC Annual Report 2017 79 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportHow we comply UK Corporate Governance Code (the Code) As Barclays is listed on the London Stock Exchange we apply the main principles of the Code and comply with the Code’s provisions. A copy of the Code can be found at frc.org.uk. Corporate Governance in Barclays contains a full description of our corporate governance practices and is available online at home.barclays/ corporategovernance. For the year ended 31 December 2017, and at the date of this report, we are pleased to confirm that we complied in full with the Code. Disclosure Guidance and Transparency Rules By virtue of the information included in this Governance section of the Annual Report we comply with the corporate governance statement requirements of the FCA’s Disclosure Guidance and Transparency Rules. Certain additional information that is required to be disclosed pursuant to DTR7.2.6 can be found on pages 85 to 88. New York Stock Exchange (NYSE) Barclays is permitted by NYSE rules to follow UK corporate governance practices instead of those applied in the US. However, any significant variations must be explained in Barclays’ Form 20-F filing, which can be accessed from the Securities and Exchange Commission’s EDGAR database or on our website, home.barclays. Leadership As highlighted earlier in this report, the Board of Directors is responsible for promoting the highest standards of corporate governance in Barclays. We act in a way that we consider promotes the success of Barclays for the benefit of shareholders as a whole, and are accountable to the shareholders for creating and delivering sustainable value. We are responsible for setting strategy and overseeing its implementation, and also ensuring that management maintains an effective system of internal control. For further information about the role of the Board and its responsibilities, together with the Board governance framework, please see page 50. Roles on the Board Executive and non-executive Directors share the same duties and are subject to the same constraints. However, in line with the principles of the Code, a clear division of responsibilities has been established. The Chairman is responsible for leading and managing the work of the Board, while responsibility for the day-to-day management of Barclays has been delegated to the Group Chief Executive. The Group Chief Executive is supported in this role by the Group Executive Committee. Further information on membership of the Group Executive Committee can be found on page 49. As a Board we have set out our expectations of each Director in Barclays’ Charter of Expectations. This includes role profiles and the behaviours and competencies required for each role on the Board, namely the Chairman, Deputy Chairman, Senior Independent Director, non-executive Directors, executive Directors and Committee Chairmen. The Charter of Expectations is reviewed annually to ensure it remains relevant and up to date. It is published on home.barclays/ corporategovernance to ensure that there is complete transparency of the standards we set for ourselves. Attendance As members of the Board of Directors we are expected to attend every Board meeting. In 2017, we attended both scheduled and additional Board meetings, as recorded in the table below. The Chairman met privately with the non-executive Directors ahead of each scheduled Board meeting, and if, owing to exceptional circumstances, a Director was not able to attend a Board meeting they ensured that their views were made known to the Chairman in advance of the meeting. Board attendance Independent Scheduled meetings eligible to attend Scheduled meetings attended % attendance Additional meetings eligible to attend Additional meetings attended % attendance Group Chairman John McFarlane Executive Directors Tushar Morzaria Jes Staley Non-executive Directors Mike Ashley Tim Breedon CBE Sir Ian Cheshire Mary Francis CBE Crawford Gillies Sir Gerry Grimstone Reuben Jeffery III Matthew Lester Dambisa Moyo Diane Schueneman Mike Turner CBE* Former Directors Diane de Saint Victor Steve Thieke Secretary Stephen Shapiro Former Secretaries Lawrence Dickinson Claire Davies On appointment Executive Director Executive Director Independent Independent Independent Independent Independent Senior Independent Director Independent Independent Independent Independent Independent Independent Independent 8 8 8 8 8 6 8 8 8 8 3 8 8 – 3 3 2 1 5 8 8 8 8 8 5 8 8 8 8 3 8 8 – 3 3 2 1 5 100 100 100 100 100 83 100 100 100 100 100 100 100 n/a 100 100 100 100 100 7 4 4 7 7 4 7 7 7 7 1 7 7 – 3 3 – 1 6 7 4 4 7 6 4 7 7 7 7 1 7 7 – 3 3 – 1 6 100 100 100 100 86 100 100 100 100 100 100 100 100 n/a 100 100 n/a 100 100 Note * Mike Turner CBE joined the Board with effect from 1 January 2018. As part of his induction programme, he attended the December 2017 Board meeting. 80 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportBoard Committee cross-membership The table below shows the number of cross-memberships of our non-executive Directors across our Board Committees. Board Audit Committee Board Nominations Committee Board Remuneration Committee Board Reputation Committee Board Risk Committee Board Reputation Committee Board Remuneration Committee Board Nominations Committee 4 1 2 3 3 2 2 1 2 1 Effectiveness Composition of the Board In line with the requirements of the Code, a majority of the Board are independent non-executive Directors. The Board currently comprises a Chairman, who was independent on appointment, two executive Directors and eleven non-executive Directors. We consider the independence of our non-executive Directors annually, using the independence criteria set out in the Code and by reviewing performance against behaviours that we have identified as essential in order to be considered independent. As part of this process, the Board keeps under review the length of tenure of all Directors, which is a factor that is considered as part of its deliberations when determining independence of our non- executive Directors. The independence criteria can be found in Corporate Governance in Barclays at home.barclays/corporategovernance. The Board Nominations Committee considers Board succession planning and regularly reviews the composition of the Board and the Board Committees to ensure that there is an appropriate balance and diversity of skills, experience, independence and knowledge. The size of the Board is not fixed and may be revised from time to time to reflect the changing needs of the business and the Board Nominations Committee will consider the balance of skills and experience of current Directors when considering a proposed appointment. Each year we carry out an effectiveness review in order to evaluate our performance as a Board, as well as the performance of each of the Board Committees and individual Directors. This annual review assesses whether each of us continues to discharge our respective duties and responsibilities effectively and is considered when deciding whether individual Directors will offer themselves for election or re-election at the AGM. More information on the 2017 Board effectiveness review can be found on page 78. Our biographies containing our relevant skills and experience, Board Committee membership and other principal appointments can be found on pages 47 and 48. Details of changes to the Board in 2017 and year to date are disclosed on page 85. The service contracts for the executive Directors and the letters of appointment for the Chairman and non-executive Directors are available for inspection at our registered office. Time commitment We are expected to allocate sufficient time to our role on the Board in order to discharge our responsibilities effectively. This includes attending, and being well-prepared for, all Board and Board Committee meetings, as well as making time to understand the business, meet with executives and regulators, and complete ongoing training. As stated in our Charter of Expectations, time commitment is agreed with each non-executive Director on an individual basis. Set out below is the average expected time commitment for the role of non-executive Directors and the other non-executive positions on the Board. For these additional positions there is an expectation that, in order to effectively fulfil extra responsibilities, additional time commitment is required. Role Chairman Deputy Chairman Senior Independent Director Non- executive Director Committee Chairmen Expected time commitment 80% of a full time position At least 0.5 days a week As required to fulfil the role 30 days a year (membership of one Board Committee included, increasing to 40 days a year if a member of two Board Committees) At least 60 days a year (including non-executive Director time commitment) The Chairman must commit to expend whatever time is necessary to fulfil his duties and, while this is expected to be equivalent to 80% of a full time position, his Chairmanship of the Group, and leadership of the Board, has priority over other business commitments. In exceptional circumstances, we are all expected to commit significantly more time to our work on the Board. Induction On appointment to the Board, all Directors receive a comprehensive induction which is tailored to the new Director’s individual requirements. The induction schedule is designed to quickly provide the new Director with an understanding of how the Group works and the key issues that it faces. The Company Secretary consults the Chairman when designing an induction schedule, giving consideration to the particular needs of the new Director. When a Director is joining a Board Committee the schedule includes an induction to the operation of that committee. On completion of the induction programme, the Director should have sufficient knowledge and understanding of the nature of the business, and the opportunities and challenges facing Barclays, to enable them to effectively contribute to strategic discussions and oversight of the Group. Following their appointment in 2017, Sir Ian Cheshire, Matthew Lester and Mike Turner CBE received induction programmes on joining the Board. In line with normal practice, they met with the Company Secretary, the current non-executive Directors and members of the Group Executive Committee and certain other senior executives. home.barclays/annualreport Barclays PLC Annual Report 2017 81 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportHow we comply Training and development In order to continue to contribute effectively to Board and Board Committee meetings, Directors are regularly provided with the opportunity to take part in ongoing training and development and can also request specific training that we may consider necessary or useful. As part of our annual performance review with the Chairman, we discuss any particular development needs that can be met through either formal training or meeting with a particular senior executive. In 2017, Directors received ongoing training in relation to legal and regulatory developments, including in relation to the requirements of, and responsibilities under, the UK Senior Managers Regime. Conflicts of interest In accordance with the Companies Act 2006 and the Articles of Association the Board has the authority to authorise conflicts of interest. Directors are required to declare any potential or actual conflicts of interest that could interfere with their ability to act in the best interests of the Group. The Company Secretary maintains a conflicts register, which is a record of actual and potential conflicts, together with any Board authorisation of the conflict. The authorisations are for an indefinite period but are reviewed annually by the Board Nominations Committee, which also considers the effectiveness of the process for authorising Directors’ conflicts of interest. The Board retains the power to vary or terminate the authorisation at any time. Information provided to the Board The Role Profile for the Chairman, as set out in our Charter of Expectations, confirms his responsibility for ensuring that members of the Board receive accurate, timely and high-quality information. In particular, we require information about Barclays’ performance to enable us to take sound decisions, monitor effectively and provide advice to promote the success of the Company. Working in collaboration with the Chairman, the Company Secretary is responsible for ensuring good governance and consults Directors to ensure that good information flows exist and that the Board receives the information it requires in order to be effective. Throughout the year both the executive Directors and senior executives keep the Board informed of key developments in the business through regular reports and updates. These are in addition to the presentations that the Board and Board Committees receive as part of their formal meetings. Directors are able to seek independent and professional advice at Barclays’ expense, if required, to enable Directors to fulfil their obligations as members of the Board. Accountability Risk management and internal control The Directors are responsible for ensuring that management maintains an effective system of risk management and internal control and for assessing its effectiveness. Such a system is designed to identify, evaluate and manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. Barclays is committed to operating within a strong system of internal control that enables business to be transacted and risk taken without exposing itself to unacceptable potential losses or reputational damage. Barclays has an overarching framework that sets out the Group’s approach to internal governance, The Barclays Guide, which establishes the mechanisms and processes by which management implements the strategy set by the Board to direct the organisation, through setting the tone and expectations from the top, delegating its authority and assessing compliance. A key component of The Barclays Guide is the Enterprise Risk Management Framework (ERMF). The purpose of the ERMF is to identify and set minimum requirements in respect of the main risks to achieving the Group’s strategic objectives and to provide reasonable assurance that internal controls are effective. The key elements of the Group’s system of internal control, which is aligned to the recommendations of The Committee of Sponsoring Organizations of the Treadway Commission, Internal Control – Integrated Framework (2013 COSO), are set out in the risk control frameworks relating to each of the Group’s Principal Risks. As well as incorporating our internal requirements, these reflect material Group-wide legal and regulatory requirements relating to internal control and assurance. Effectiveness of internal controls Key controls are assessed on a regular basis for both design and operating effectiveness. Issues arising out of business risk and control assessments and other internal and external sources are examined to identify pervasive themes. Where appropriate, control issues are reported to the Board Audit Committee (BAC). In addition, the BAC receives regular reports from management, BIA and the Finance, Compliance and Legal functions covering, in particular, financial controls, compliance and other operational controls. Risk management and internal control framework The ERMF is the Group’s internal control framework, which is refreshed annually. There are eight Principal Risks under the ERMF: Credit risk, Market risk, Treasury and capital risk, Operational risk, Model risk, Reputation risk, Conduct risk and Legal risk. The BAC formally reviews the system of internal control and risk management annually. Throughout the year ended 31 December 2017 and to date, the Group has operated a system of internal control that provides reasonable assurance of effective operations covering all controls, including financial and operational controls and compliance with laws and regulations. Processes are in place for identifying, evaluating and managing the Principal Risks facing the Group in accordance with the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ published by the Financial Reporting Council. The review of the effectiveness of the system of risk management and internal control is achieved through a four-step approach which is centred on reviewing the effectiveness of The Barclays Guide and its component parts: 1. Control meetings of the business and functional executive committees monitor, review and challenge the effective operation of key risk management and control processes, including the results of audits and reviews undertaken by BIA (which include assessments of the control environment and management control approach) and examinations and assessments undertaken by our primary regulators, on an ongoing basis as part of the system of risk management and internal control. The remediation of issues identified within the control environment is regularly monitored by management and the BAC. 2. Testing of the control meetings, held by the executive committees, provides assurance that the committees are effectively overseeing the control environment and associated risk management and internal control processes. 3. The owners of the key governance processes which comprise The Barclays Guide undertake a review to confirm that processes have been implemented. 4. The annual review of the system of risk management and internal control brings together the results of the activities completed in steps 1 to 3 to ensure that each of the key processes have been effectively reviewed. 82 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportInternal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the internal control over financial reporting as of 31 December 2017. In making its assessment, management utilised the criteria set out in the 2013 COSO framework and concluded that, based on its assessment, the internal control over financial reporting was effective as of 31 December 2017. The system of internal financial and operational controls is also subject to regulatory oversight in the UK and overseas. Further information on supervision by the financial services regulators is provided under Supervision and Regulation in the Risk review section on pages 197 to 204. Changes in internal control over financial reporting There have been no changes in the Group’s internal control over financial reporting that occurred during the period covered by this report which have materially affected or are reasonably likely to materially affect the Group’s internal control over financial reporting. Remuneration The Board has delegated responsibility for the consideration and approval of the remuneration arrangements of the Chairman, executive Directors, other senior executives and certain Group employees to the Board Remuneration Committee. The Board as a whole, with the non-executive Directors abstaining, considers annually the fees paid to non-executive Directors. Information on the activities of the Board Remuneration Committee in 2017 can be found in the Remuneration report on pages 93 to 116, which forms part of the corporate governance statement. Regular reports are made to the Board covering risks of Group-level significance. The Board Risk Committee and the Board Reputation Committee examine reports covering the Principal Risks as well as reports on risk measurement methodologies and risk appetite. Further details of risk management procedures and potential risk factors are given in the Risk review and risk management sections on pages 117 to 204. Controls over financial reporting A framework of disclosure controls and procedures is in place to support the approval of the Group’s financial statements. Specific governance committees are responsible for examining the Group’s financial reports and disclosures to ensure that they have been subject to adequate verification and comply with applicable standards and legislation. These committees report their conclusions to the BAC which debates its conclusions and provides further challenge. Finally, the Board scrutinises and approves results announcements and the Annual Report, and ensures that appropriate disclosures have been made. This governance process ensures that both management and the Board are given sufficient opportunity to debate and challenge the Group’s financial statements and other significant disclosures before they are made public. Management’s report on internal control over financial reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed under the supervision of the principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and issued by the International Accounting Standards Board (IASB). Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS and that receipts and expenditures are being made only in accordance with authorisations of management and the respective Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of assets that could have a material effect on the financial statements. home.barclays/annualreport Barclays PLC Annual Report 2017 83 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportHow we comply Stakeholder engagement Investor engagement The Board is committed to promoting effective channels of communication with our shareholders and upholding good corporate governance as a means of building stronger and more engaged relationships with them. Our comprehensive Investor Relations engagement with the market helps us to understand investor views about Barclays, which are communicated regularly to the Board. Our shareholder communication guidelines, which underpin all investor engagement, are available on our website at home.barclays/investorrelations. Institutional investors In 2017, our Investor Relations engagement with institutional investors took place throughout the year, both following our quarterly results as well as outside of the reporting cycle. This allowed the opportunity for existing and potential new investors to engage with Barclays regularly, promoting dialogue on longer-term strategic developments as well as on the recent financial performance of the Group. The Directors, in conjunction with the senior executive team and Investor Relations, participated in varied forms of engagement, including investor meetings, seminars and conferences across many geographic locations, reflecting the diverse nature of our equity and debt institutional ownership. Divisional management also presented extensively to investors, promoting greater awareness and understanding of our operating businesses. During 2017, discussions with investors were focused on the completion of our restructuring, including the sell-down of our interest in Barclays Africa Group Limited to 14.9% and the closure of Non-Core in June, as well as our revised Group financial targets and our plans to achieve them within the specified timelines. Investors were also kept informed about progress on structural reform, in particular the set up of the UK ring-fenced bank, which we expect to take place in the second quarter of 2018. Investor meetings focused on corporate governance also took place throughout the year, with the Chairman, Senior Independent Director, other Board representatives and the Company Secretary. We held conference calls/webcasts for our quarterly results briefings and an in-person presentation for our 2016 full year results in March 2017, all hosted by the Group Chief Executive and Group Finance Director. In addition, the Group Finance Director held a quarterly breakfast briefing for sell-side analysts, with a transcript of the discussions uploaded to our website. For fixed income investors we held conference calls at our full year and half year results, hosted by our Group Finance Director and Group Treasurer. The Investor Relations section of our website is an important communication channel that enables the effective distribution of information to the market in a clear and consistent manner. Executive management presentations, speeches and, where possible, webcast replays are uploaded to our website on a timely basis. Private shareholders During 2017, we continued to communicate with our private shareholders through our shareholder mailings. Shareholders can also choose to sign up to Shareview so that they receive information about Barclays and their shareholding directly by email. On a practical level, over 60,000 shareholders did not cash their Shares Not Taken Up (SNTU) cheque following the Rights Issue in September 2013. In 2017, we continued the tracing process to reunite these shareholders with their SNTU monies and any unclaimed dividends and by the end of the year, we had returned approximately £200,000 to our shareholders, in addition to the £1.65m returned in 2016 and £2.2m in 2015. Each year we launch a Share Dealing Service aimed at shareholders with relatively small shareholdings for whom it might otherwise be uneconomical to deal. One option open to shareholders is to donate their sale proceeds to ShareGift. As a result of this initiative, more than £61,000 was donated in 2017, taking the total donated since 2015 to over £299,000. Our AGM The Board and the senior executive team continue to consider our AGM as a key date for shareholder engagement. The AGM provides us with our main opportunity to engage with shareholders, particularly our private shareholders, on the key issues facing the Group and any questions they may have. A number of Directors, including the Chairman, were available for informal discussion either before or after the meeting. All resolutions proposed at the 2017 AGM, which were considered on a poll, were passed with votes ‘For’ ranging from 85.67% to 99.95% of the total votes cast. The 2018 AGM will be held on Tuesday 1 May 2018 at the QEII Conference Centre in London. The Notice of AGM can be found in a separate document, which is sent out at least 20 working days before the AGM and also made available at home.barclays/agm. Voting on the resolutions will again be by poll and the results will be announced via the Regulatory News Service and made available on our website on the same day. We encourage any shareholders who are unable to attend on the day to vote in advance of the meeting via home.barclays/ investorrelations/vote or through Shareview (shareview.co.uk). 2017 engagement timeline Reporting events Q1 Stakeholder engagement Corporate Governance engagement ahead of 2017 AGM 2016 full year results 2016 full year results presentation and fixed income conference call/ webcast Analyst briefing on 2016 results Q2 Q1 2017 results announcement Q1 2017 results conference call/ webcast Analyst briefing on Q1 2017 results Corporate Governance engagement ahead of 2018 AGM 2017 half full year results and fixed income conference call/webcast Analyst briefing on 2017 half year results 2017 AGM Q3 2017 half year results announcement Q4 Q3 2017 results announcement Q3 2017 results conference call/ webcast Analyst briefing on Q3 2017 results 84 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ report Governance: Directors’ report Other statutory information The Directors present their report together with the audited accounts for the year ended 31 December 2017. Other information that is relevant to the Directors’ report, and which is incorporated by reference into this report, can be located as follows: Employee involvement Policy concerning the employment of disabled persons Financial instruments Hedge accounting policy Remuneration policy, including details of the remuneration of each Director and Directors’ interests in shares Corporate governance report Risk review Viability statement Page 89 90 258 246 93 43 117 40 Disclosures required pursuant to Listing Rule 9.8.4R can be found on the following pages: Long-term incentive schemes Waiver of Director emoluments Allotment for cash of equity securities Waiver of dividends Page 123 112 297 85 Section 414A of the Companies Act 2006 requires the Directors to present a Strategic report in the Annual Report and Financial Statements. The information can be found on pages 2 to 41. The Company has chosen, in accordance with section 414C(11) of the Companies Act 2006, and as noted in this Directors’ report, to include certain matters in its Strategic report that would otherwise be disclosed in this Directors’ report. An indication of likely future developments may be found in the Strategic Report. The particulars of important events affecting the Company since the financial year end can be found in the Strategic report and Note 29, Legal, competition and regulatory matters. Profit and dividends Statutory loss after tax for 2017 was £894m (2016: profit £2,828m). The final dividend for 2017 of 2.0p per share will be paid on 5 April 2018 to shareholders whose names are on the Register of Members at the close of business on 2 March 2018. With the interim dividend totalling 1.0p per ordinary share, paid in September 2017, the total distribution for 2017 is 3.0p (2016: 3.0p) per ordinary share. The interim and final dividends for 2017 amounted to £509m (2016: £757m). For 2018, Barclays anticipates resuming a total cash dividend of 6.5p per share, subject to regulatory approvals. Shareholders may have their dividends reinvested in Barclays by joining the Barclays PLC Scrip Dividend Programme (the Programme). The Programme enables shareholders, if they wish, to receive new fully-paid ordinary shares in Barclays PLC instead of a cash dividend, without incurring dealing costs or stamp duty. The nominee company of certain Barclays’ employee benefit trusts holding shares in Barclays in connection with the operation of the Company’s share plans has lodged evergreen dividend waivers on shares held by it that have not been allocated to employees. The total amount of dividends waived during the year ended 31 December 2017 was £0.68m (2016: £2.6m). Barclays understands the importance of the ordinary dividend for our shareholders. Barclays is therefore committed to maintaining an appropriate balance between total cash returns to shareholders, investment in the business, and maintaining a strong capital position. Going forward, Barclays intends to pay an annual ordinary dividend that takes into account these objectives, and the medium-term earnings outlook of the Group. It is also the Board’s intention to supplement the ordinary dividends with additional returns to shareholders as and when appropriate. The Board notes that in determining any proposed distributions to shareholders, the Board will consider the expectation of servicing more senior securities. Board of Directors The names of the current Directors of Barclays PLC, along with their biographical details, are set out on pages 47 and 48 and are incorporated into this report by reference. Changes to Directors during the year are set out in the table below. Name Sir Ian Cheshire Role Non-executive Director Matthew Lester Non-executive Director Mike Turner CBE Non-executive Diane de Saint Victor Stephen Thieke Director Non-executive Director Non-executive Director Effective date of appointment/ resignation Appointed 3 April 2017 Appointed 1 September 2017 Appointed 1 January 2018 Retired 10 May 2017 Retired 10 May 2017 Appointment and retirement of Directors The appointment and retirement of Directors is governed by the Company’s Articles of Association (the Articles), the UK Corporate Governance Code (the Code), the Companies Act 2006 and related legislation. The Articles may only be amended by a special resolution of the shareholders. The Board has the power to appoint additional Directors or to fill a casual vacancy among the Directors. Any such Director holds office only until the next AGM and may offer himself/ herself for re-election. The Code recommends that all directors of FTSE 350 companies should be subject to annual re-election. All Directors will stand for election or re-election at the 2018 AGM. Directors’ indemnities Qualifying third party indemnity provisions (as defined by section 234 of the Companies Act 2006) were in force during the course of the financial year ended 31 December 2017 for the benefit of the then Directors and, at the date of this report, are in force for the benefit of the Directors in relation to certain losses and liabilities which they may incur (or have incurred) in connection with their duties, powers or office. In addition, the Company maintains Directors’ & Officers’ Liability Insurance which gives appropriate cover for legal action brought against its Directors. Qualifying pension scheme indemnity provisions (as defined by section 235 of the Companies Act 2006) were in force during the course of the financial year ended 31 December 2017 for the benefit of the then Directors, and at the date of this report are in force for the benefit of directors of Barclays Pension Funds Trustees Limited as Trustee of the Barclays Bank UK Retirement Fund. The directors of the Trustee are indemnified against liability incurred in connection with the company’s activities as Trustee of the Barclays Bank UK Retirement Fund. home.barclays/annualreport Barclays PLC Annual Report 2017 85 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportOther statutory information Similarly, qualifying pension scheme indemnities were in force during 2017 for the benefit of directors of Barclays Executive Schemes Trustees Limited as Trustee of Barclays Bank International Limited Zambia Staff Pension Fund (1965), Barclays Capital International Pension Scheme (No.1), and Barclays PLC Funded Unapproved Retirement Benefits Scheme. The directors of the Trustee are indemnified against liability incurred in connection with the Company’s activities as Trustee of the schemes above. Political donations The Group did not give any money for political purposes in the UK, the rest of the EU or outside of the EU, nor did it make any political donations to political parties or other political organisations, or to any independent election candidates, or incur any political expenditure during the year. In accordance with the US Federal Election Campaign Act, Barclays provides administrative support to a federal Political Action Committee (PAC) in the US funded by the voluntary political contributions of eligible employees. The PAC is not controlled by Barclays and all decisions regarding the amounts and recipients of contributions are directed by a steering committee comprising employees eligible to contribute to the PAC. Contributions to political organisations reported by the PAC during the calendar year 2017 totalled $67,250 (2016: $12,500). Environment Barclays focuses on addressing environmental issues where we believe we have the greatest potential to make a difference. We focus on managing our own carbon footprint and reducing our absolute carbon emissions, developing products and services to help enable the transition to a low-carbon economy, and managing the risks of climate change to our operations, clients, customers and society at large. We invest in improving the energy efficiency of our operations and offset the emissions remaining through the purchase of carbon credits, sourced from verified projects. We also have a long-standing commitment to managing the environmental and social risks associated with our lending practices, which is embedded into our Credit risk processes. A governance structure is in place to facilitate clear dialogue across the business and with suppliers around issues of potential environmental and social risk. We have disclosed global greenhouse gas emissions that we are responsible for as set out by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. We provide fuller disclosure on (i) financing solutions for the lower carbon economy, (ii) environmental risk management and (iii) management of our carbon and environmental footprint in the Barclays Environmental Social Governance (ESG) Report available on our website at home.barclays.com/citizenship. We have also provided initial disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) in the Strategic Report and ESG Report. 25,627 26,721 29,144 347,165 402,531 479,934 250,897 308,473 342,012 Previous reporting year 2016 Previous Current reporting reporting yeara year 2015 2017 Global Green House Gas (GHG) Emissionsb Total CO2e emissions (tonnes) Scope 1 CO2e emissions (tonnes)c Scope 2 CO2e emissions (tonnes)d Scope 3 CO2e emissions (tonnes)e Intensity Ratio Total Full Time Equivalent (Full Time Equivalent) Total CO2e emissions (tonnes) per FTEf Scope 2 CO2e market-based emissions (tonnes)d 298,469 337,483 79,900 76,500 93,989 70,641 67,336 85,800 4.34 5.26 5.59 Notes a The carbon reporting year for our GHG emissions is 1 October to 30 September. The carbon reporting year is not fully aligned to the financial reporting year covered by the Directors’ report. b The methodology used to calculate our GHG is the Greenhouse Gas Protocol (GHG): A Corporate Accounting and Reporting Standard Revised Edition, defined by the World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD). We have adopted the operational control approach on reporting boundaries to define our reporting boundary. Where properties are covered by Barclays’ consolidated financial statements but are leased to tenants, these emissions are not included in the Group GHG calculations. Where Barclays is responsible for the utility costs, these emissions are included. On 1 June 2017, we completed the sale of a 33.7% stake in Barclays Africa Group Limited (BAGL) resulting in a non-controlling position. In 2017, we have restated our GHG emissions through to the 2015 baseline to account for this and BAGL emissions are not reported from 2015 onwards in order to ensure accurate tracking against our 30% carbon reduction commitment. In addition, we have restated our Scope 3 emissions to remove erroneous air data which was identified as part of the 2017 reporting process. c Scope 1 covers direct combustion of fuels and company owned vehicles (from UK only, which is the most material contributors). Fugitive emissions reported in Scope 1 cover emissions from UK, Americas, Asia Pacific and Europe. d Scope 2 location and market emissions cover electricity and steam purchased for own use. Market based emissions have been reported for 2017 and 2016 only. e Scope 3 covers indirect emissions from business travel (global flights and ground transport from the UK, USA and India. USA and India ground transport covers onwards car hire only which is provided directly by the supplier. Ground transportation data (excluding Scope 1 company cars) covers only countries where robust data is available directly from the supplier. f Intensity ratio calculations have been calculated using location based emission factors only. Research and development In the ordinary course of business, the Group develops new products and services in each of its business divisions. Share capital Share capital structure The Company has ordinary shares in issue. The Company’s Articles also allow for the issuance of Sterling, US Dollar, Euro and Yen preference shares (preference shares). No preference shares have been issued as at 19 February 2018 (the latest practicable date for inclusion in this report). Ordinary shares therefore represent 100% of the total issued share capital as at 31 December 2017 and as at 19 February 2018 (the latest practicable date for inclusion in this report). Details of the movement in ordinary share capital during the year can be found in Note 31 on page 297. Voting Every member who is present in person or represented at any general meeting of the Company, and who is entitled to vote, has one vote on a show of hands. Every proxy present has one vote. The proxy will have one vote for and one vote against a resolution if he/she has been instructed to vote for or against the resolution by different members or in one direction by a member while another member has permitted the proxy discretion as to how to vote. On a poll, every member who is present or represented and who is entitled to vote has one vote for every share held. In the case of joint holders, only the vote of the senior holder (as determined by order in the share register) or his/her proxy may be counted. If any sum payable remains unpaid in relation to a member’s shareholding, that member is not entitled to vote that share or exercise any other right in relation to a meeting of the Company unless the Board otherwise determines. If any member, or any other person appearing to be interested in any of the Company’s ordinary shares, is served with a notice under section 793 of the Companies Act 2006 and does not supply the Company with the information required in the notice, then the Board, in its absolute discretion, may direct that that member shall not be entitled to attend or vote at any meeting of the Company. The Board may further direct that if the shares of the defaulting member represent 0.25% or more of the issued shares of the relevant class, that dividends or other monies payable on those shares shall be retained by the Company until the direction ceases to have effect and that no transfer of those shares shall be registered (other than certain specified ‘excepted transfers’). A direction ceases to have effect seven days after the Company has received the information requested, or when the Company is notified that an excepted transfer of all of the relevant shares to a third party has occurred, or as the Board otherwise determines. 86 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportTransfers Ordinary shares may be held in either certificated or uncertificated form. Certificated ordinary shares shall be transferred in writing in any usual or other form approved by the Company Secretary and executed by or on behalf of the transferor. Transfers of uncertificated ordinary shares shall be made in accordance with the Companies Act 2006 and CREST Regulations. The Board is not bound to register a transfer of partly-paid ordinary shares or fully-paid shares in exceptional circumstances approved by the FCA. The Board may also decline to register an instrument of transfer of certificated ordinary shares unless it is (i) duly stamped, deposited at the prescribed place and accompanied by the share certificate(s) and such other evidence as reasonably required by the Board to evidence right to transfer, (ii) it is in respect of one class of shares only, and (iii) it is in favour of a single transferee or not more than four joint transferees (except in the case of executors or trustees of a member). In accordance with the provisions of Section 84 of the Small Business, Enterprise and Employment Act 2015, preference shares may only be issued in registered form. Preference shares shall be transferred in writing in any usual or other form approved by the Company Secretary and executed by or on behalf of the transferor. The Company’s registrar shall register such transfers of preference shares by making the appropriate entries in the register of preference shares. Each preference share shall confer, in the event of a winding up or any return of capital by reduction of capital (other than, unless otherwise provided by their terms of issue, a redemption or purchase by the Company of any of its issued shares, or a reduction of share capital), the right to receive out of the surplus assets of the Company available for distribution among the members and in priority to the holders of the ordinary shares and any other shares in the Company ranking junior to the relevant series of preference shares and pari passu with any other class of preference shares (other than any class of shares then in issue ranking in priority to the relevant series of preference shares), repayment of the amount paid up or treated as paid up in respect of the nominal value of the preference share together with any premium which was paid or treated as paid when the preference share was issued in addition to an amount equal to accrued and unpaid dividends. Variation of rights The rights attached to any class of shares may be varied either with the consent in writing of the holders of at least 75% in nominal value of the issued shares of that class, or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class. The rights of shares shall not (unless expressly provided by the rights attached to such shares) be deemed varied by the creation of further shares ranking equally with them or subsequent to them. Limitations on foreign shareholders There are no restrictions imposed by the Articles of Association or (subject to the effect of any economic sanctions that may be in force from time to time) by current UK laws which relate only to non-residents of the UK and which limit the rights of such non- residents to hold or (when entitled to do so) vote the ordinary shares. Exercisability of rights under an employee share scheme Employee Benefit Trusts (EBTs) operate in connection with certain of the Group’s Employee Share Plans (Plans). The trustees of the EBTs may exercise all rights attached to the shares in accordance with their fiduciary duties other than as specifically restricted in the relevant Plan governing documents. The trustees of the EBTs have informed the Company that their normal policy is to abstain from voting in respect of the Barclays shares held in trust. The trustees of the Global Sharepurchase EBT and UK Sharepurchase EBTs may vote in respect of Barclays shares held in the EBTs, but only as instructed by participants in those Plans in respect of their partnership shares and (when vested) matching and dividend shares. The trustees will not otherwise vote in respect of shares held in the Sharepurchase EBTs. Special rights There are no persons holding securities that carry special rights with regard to the control of the Company. Major shareholders Major shareholders do not have different voting rights from those of other shareholders. Information provided to the Company by substantial shareholders pursuant to the FCA’s Disclosure Guidance and Transparency Rules are published via a Regulatory Information Service and is available on the Company’s website. As at 31 December 2017, the Company had been notified under Rule 5 of the Disclosure Guidance and Transparency Rules of the following holdings of voting rights in its shares. Number of Barclays shares Person interested The Capital Group Companies Incb 1,172,090,125 Qatar Holding LLCc 1,017,455,690 BlackRock, Incd 1,010,054,871 % of total voting rights attaching to issued share capitala 6.98 5.99 5.92 Notes a The percentage of voting rights detailed above was calculated at the time of the relevant disclosures made in accordance with Rule 5 of the Disclosure Guidance and Transparency Rules. b The Capital Group Companies Inc (CG) holds its shares via CG Management companies and funds. Part of the CG holding is held as American Depositary Receipts. On 14 February 2018, CG disclosed by way of a Schedule 13G filed with the SEC, beneficial ownership of 1,167,912,211ordinary shares of the Company as of 29 December 2017, representing 6.8% of that class of shares. c Qatar Holding LLC is wholly-owned by Qatar Investment Authority. On 17 January 2018, Qatar Holding LLC disclosed by way of a Schedule 13G filed with the SEC, beneficial ownership of 941,620,690 ordinary shares of the Company as of 31 December 2017, representing 5.52% of that class of shares. d Total shown includes 2,009,814 contracts for difference to which voting rights are attached. Part of the holding is held as American Depositary Receipts. On 30 January 2018, BlackRock, Inc. disclosed by way of a Schedule 13G filed with the SEC, beneficial ownership of 1,145,415,782 ordinary shares of the Company as of 31 December 2017, representing 6.7% of that class of shares. Between 31 December 2017 and 19 February 2018 (the latest practicable date for inclusion in this report), the Company was notified that BlackRock, Inc. now holds 990,743,261 Barclays shares, representing 5.80% of the total voting rights attached to issued share capital. home.barclays/annualreport Barclays PLC Annual Report 2017 87 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportOther statutory information Powers of Directors to issue or buy back the Company’s shares The powers of the Directors are determined by the Companies Act 2006 and the Company’s Articles. The Directors are authorised to issue and allot shares and to buy back shares subject to annual shareholder approval at the AGM. Such authorities were granted by shareholders at the 2017 AGM. It will be proposed at the 2018 AGM that the Directors be granted new authorities to allot and buy back shares. In preparing each of the Group and Parent company financial statements, the Directors are required to: ■■ assess the Group and Parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and ■■ use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent company or to cease operations, or have no realistic alternative but to do so. Repurchase of shares The Company did not repurchase any of its ordinary shares during 2017 (2016: none). As at 19 February 2018 (the latest practicable date for inclusion in this report) the Company had an unexpired authority to repurchase ordinary shares up to a maximum of 1,696m ordinary shares. Distributable reserves As at 31 December 2017, the distributable reserves of Barclays PLC (the Parent company) were £6,728m and the distributable reserves of Barclays Bank PLC were £24,021m. As at the date of this report, Barclays PLC, Barclays Bank PLC and Barclays Bank UK PLC (our future ring-fenced bank) intend to carry out a process in the second half of 2018 to increase their respective distributable reserves. Each process will require the relevant company to obtain shareholder and court approval, and for Barclays PLC we will be seeking shareholder approval at our 2018 AGM. In each case, the processes will involve the conversion of the share premium account into a distributable reserve, which is a reclassification within the equity of each company and will have no regulatory capital impact. Further information will be included in the Barclays PLC AGM Notice of Meeting (please see page 84 for further details about our AGM and how you can vote). Change of control There are no significant agreements to which the Company is a party that are affected by a change of control of the Company following a takeover bid. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. Going concern The Group’s business activities, financial position, capital, factors likely to affect its future development and performance and its objectives and policies in managing the financial risks to which it is exposed are discussed in the Strategic report and Risk review and Risk management sections. The Directors considered it appropriate to prepare the financial statements of the Group and Company on a going concern basis. Disclosure of information to the Auditor Each Director confirms that, so far as he/she is aware, there is no relevant audit information of which the Company’s auditors are unaware and that each of the Directors has taken all the steps that he/she ought to have taken as a Director to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given pursuant to section 418 of the Companies Act 2006 and should be interpreted in accordance with and subject to those provisions. Directors’ responsibilities The following statement, which should be read in conjunction with the Auditor’s report set out on page 228 to 233, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the Auditors in relation to the accounts. The Directors are required by the Companies Act 2006 to prepare Group and Company financial statements for each financial year and, with regards to Group accounts, in accordance with Article 4 of the IAS Regulation. The Directors have prepared Group and Company accounts in accordance with IFRS as adopted by the EU. Under the Companies Act 2006, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent company and of their profit or loss for that period. The Directors consider that, in preparing the financial statements, the Group and Company has used appropriate accounting policies, supported by reasonable judgements and estimates, and that all accounting standards which they consider to be applicable have been followed. Having taken all the matters considered by the Board and brought to the attention of the Board during the year into account, the Directors are satisfied that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Group and Company’s position and performance, business model and strategy. Directors are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Directors’ responsibility statement The Directors have responsibility for ensuring that the Company and the Group keep accounting records which disclose with reasonable accuracy the financial position of the Company and the Group and which enable them to ensure that the accounts comply with the Companies Act 2006. The Directors are also responsible for preparing a Strategic report, Directors’ report, Directors’ remuneration report and Corporate governance statement in accordance with applicable law and regulations. The Directors are responsible for the maintenance and integrity of the Annual Report and Financial Statements as they appear on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and Company and to prevent and detect fraud and other irregularities. The Directors, whose names and functions are set out on pages 47 and 48, confirm to the best of their knowledge that: (a) the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and (b) the management report, on page 4 to 37, which is incorporated in the Directors’ report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Stephen Shapiro Company Secretary 21 February 2018 Registered in England. Company No. 48839 88 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Directors’ reportGovernance: People People As highlighted in ‘Our People and Culture’ on pages 36 and 37, we have continued to make progress towards increasing the diversity of our workforce underpinned by an inclusive culture and engaged employees. Below provides an overview of some of the programmes, initiatives and ways in which we are supporting our colleagues, which in turn enables us to support our customers, clients and the community. Early careers and apprenticeships Our Early Careers offering includes graduate, internship and apprenticeship programmes. In 2017 we hired over 780 interns and 675 graduates, and since 2012 we have created over 3,400 apprenticeships. We provide pathways for progression from apprentice to graduate supported by recognised qualifications and, in doing so, help to create an internal talent pipeline. During 2017, we launched a new graduate programme across a number of our business areas to attract the workforce of the future, and within Technology and Barclays UK we increased the number of opportunities for both interns and graduates. Internal mobility By supporting internal mobility across Barclays and making it simple and easy for colleagues to move internally, we hope to successfully retain and develop our internal talent. We have developed multiple tools and resources for colleagues to find internal career opportunities and for managers to find and assess suitable internal candidates. In 2017 our rate of internal hiring was 40%, a reduction on 2016, which can be attributed to factors including a strategic move to hire externally for specific skill sets, particularly within Technology, and a focus on converting temporary staff into permanent roles. Leadership and learning In 2017, a consistent Barclays Leadership Capability framework launched across the organisation. Our leadership and learning solutions are underpinned by this framework and our values. The Barclays Academies and our Global Curriculum provide colleagues with face-to-face, virtual and self-managed development resources. All new joiners undertake the ‘Being Barclays’ induction, providing an in-depth understanding of the values and expected behaviours through the Global Code of Conduct (The Barclays Way). Industrial relations and managing change Barclays has a long-standing partnership approach to industrial relations and we value the relationships we have with over 14 trade unions, works councils and staff associations globally. Within the UK we have a formal partnership with Unite which has been in place for over 17 years. Following joint review, the partnership agreement was extended in 2017 for a further five years. As part of the review, Unite recognition was extended to cover an additional 1,500 employees. Throughout 2017, we have continued to have regular and constructive dialogue with employee representatives and employees on a wide range of topics. Earlier this year, as part of our implementation of structural reform, we consulted with Unite and employee forums on the successful transfer of c. 53,000 employees to new legal employing entities. We seek to avoid compulsory redundancies where possible and try to find ways in which we can achieve this during the consultation period. We continue to place significant emphasis on voluntary redundancy programmes as well as internal redeployment through our ‘Internals First’ programme. We also aim to keep in touch with former colleagues through the Barclays Global Alumni Programme. Performance management Barclays’ approach to performance management is key to the delivery of our strategy and to drive a values-based culture. Colleagues align their objectives (‘what’ they will deliver) to business and team goals to support our strategy and good customer outcomes. Behavioural expectations (‘how’ they will achieve their objectives) are set in the context of our values. Our global recognition programme provides colleagues the opportunity to recognise the achievements of those who have demonstrated our values. We continue to see a year-on-year increase in the number of colleagues receiving a values ‘Thank You’ message, with over 210,000 messages sent in 2017. Colleagues are also encouraged to be involved with the Company’s performance by participating in our all-employee share plans, which have been running successfully for over 10 years. Further details of our approach to remuneration are included in the Remuneration report on pages 93 to 116. Employee communications Barclays regularly updates employees on the financial and economic factors affecting the Company’s performance and the delivery of the strategy through Group CEO and senior leader communications, line manager briefing packs, interviews and talking points distributed to employees every quarter in accordance with our financial reporting calendar. We hold a variety of events for employees to hear directly from the Group Executive Committee and employees are kept regularly informed about what is happening in their area and across Barclays through engagement initiatives and communications. Campaigns and colleague stories throughout the year highlight our Citizenship work and how we are supporting our customers, clients and colleagues. Diversity and Inclusion We aim to ensure that employees of all backgrounds are treated equally and have the opportunity to be successful. Our global Diversity and Inclusion (D&I) strategy sets objectives, initiatives and plans across five core pillars: Gender, LGBT, Disability, Multicultural and Multigenerational, in support of that ambition. Our approach to building an inclusive work environment is focused on upskilling our leadership and we provide a range of development opportunities including our Unconscious Bias Training which has been delivered to over 10,000 leaders across Barclays, and Dynamic Working line manager clinics which have been attended by over 4,000 leaders. LGBT An inclusive culture that enables colleagues to bring their whole selves to work is built on having leadership participation and visible role models. Now in its third year, our Spectrum Allies campaign has identified over 8,000 leaders globally who have pledged to challenge homophobia, biphobia and transphobia in the workplace and provide support to LGBT colleagues. Through the ‘Your View’ survey we provide colleagues with the opportunity to identify as being LGBT, with 7% of colleagues identifying as LGBT in 2017. This year was the fourth consecutive year that Barclays supported Pride in London as the headline sponsor. The #lovehappenshere theme reached over 3 million people across multiple communications channels and across the UK over 1,000 Barclays colleagues participated in regional Pride events across the UK. Independent recognition reflects the progress we are making and the impact of our strategy. For the fifth consecutive year, Stonewall has recognised Barclays as one of only 12 Top Global Employers. The Human Rights Campaign has awarded Barclays with 100% on their corporate equity index. home.barclays/annualreport Barclays PLC Annual Report 2017 89 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportPeople Disability Under the UK Government’s Department of Work and Pensions Disability Confident scheme, Barclays has been recognised as a Disability Confident Leader for our efforts to support those who have a disability. This year, alongside PwC, we have further scaled the ‘This is Me in the City’ initiative along with the Lord Mayor of the City of London. The ‘This Is Me’ mental health and well-being campaign now includes over 280 organisations across London who have pledged to focus on eliminating the stigma associated with mental health in their workplace (over 1 million employees collectively). In 2018, through these partnerships, we plan to expand ‘This is Me’ further in the UK. Continuing our commitment to increase employment of those with a disability or mental health condition, this year we expanded our Able to Enable internship in the UK. This 13-week paid programme is aimed at recruiting talented individuals of all ages with a background of mental health conditions, providing them with opportunities to gain work experience, learn new skills and grow their experience and confidence. Multigenerational Our Dynamic Working campaign is relevant to colleagues at every life stage. It addresses the diverse needs of a workforce comprised of five generations, by encouraging the integration of personal and professional responsibilities through smarter work patterns. The campaign is having a positive impact on colleague engagement with the 59% of colleagues actively working dynamically in 2017 reporting 5% points higher than the Group sustainable engagement result. Dynamic Working is also enabling Barclays to have a positive impact on the retention of diverse talent, examples include a 13% improvement in maternity returners retained after 12 months, and 95% of those taking Shared Parental Leave are fathers. Addressing the changing needs of a multigenerational workforce will be an ongoing focus in 2018 but we are pleased that Working Families UK has recognised Barclays as one of the top 10 Employers for Working Families in 2017. Multigenerational % 69+ (Veterans/Traditionalists) 2017 (H2) 2016 (H2) 0.03 0.03 % 51 to 69 (Baby Boomers) 14 14 % 39 to 51 (Generation X) 22 23 % 20 to 39 (Generation Y) % 20 and below (Millennial) 0.06 0.07 62 62 For the purpose of comparability 2016 figures exclude Barclays Africa Group Limited headcount. Multicultural During 2017, the Embracing Us campaign was launched in celebration of World Cultural Day, aiming to challenge global stereotypes and mindsets in relation to nationality, faith, ethnicity, race and language. During the campaign our multicultural network, Embrace, engaged over 15,000 colleagues through multiple communications channels, leadership forums and Being Colour Brave development workshops. Barclays’ Apprenticeship Programme reflects our commitment to recruit a diverse workforce. Since the programme launched, we have focused on recruiting those who are NEET (Not in Education, Employment or Training). 19% of our apprentices identify as Black, Asian and Minority Ethnic, 8% points higher than the national apprenticeship average. In addition, 46% of our apprentices are female and 8% identify as a person with a disability. Through this scheme we are making a positive impact on youth unemployment and social mobility. Permanent employees by region As at 31 December United Kingdom Continental Europe and Middle East Americas Asia Pacific Africa Total Gender Pay Gap disclosure The gender pay gap measures the difference between the average male pay and the average female pay as a proportion of the average male pay. For example, average male pay of £100 per hour and average female pay of £85 per hour would indicate a gender pay gap of 15%. The calculation does not take into consideration the role that an employee performs or the seniority of the employee. As a result, gender pay gaps are often driven by higher proportions of women than men in more junior, lower paid roles and fewer women than men in senior, more highly paid roles. Equal Pay legislation in the UK specifically relates to an employee’s role, making it unlawful for an employer to pay individuals differently for performing the same or similar work. This right for women and men to receive the same pay for the same, or similar work, or work of equal value, has been a requirement under UK law since 1970. Paying our colleagues fairly and equitably relative to their role, skill, experience and performance is central to our global reward structures and benefits policies, which are reviewed regularly to ensure that there is no unfair bias in how employees are paid. At Barclays we are confident that men and women across our organisation are paid equally for doing the same job. The multicultural profile of the organisation was acknowledged externally by the City of London and the Social Mobility Commission through the Social Mobility Employer Index as a Top 50 Employer in 2017. Multicultural % UK % US % Global 32 29 49 47 50 51 Above shows the percentage of underrepresented populations that make up our global and regional populations. Underrepresented populations are defined regionally to ensure inclusion of all groups in the workplace. For the purposes of comparability 2016 figures exclude Barclays Africa Group Limited headcount. UK includes Asian, Mixed, Black, Other and Non-Disclosed and US includes Hispanic/Latino, Asian, Mixed, Black, Other and Non-Disclosed. 2017 48,700 3,600 10,400 17,200 – 79,900 2016 46,400 4,700 9,700 15,700 42,800 119,300 2015 49,000 7,400 10,600 18,800 43,600 129,400 The difference between the gender pay gap and equal pay can be illustrated by the fact that men and women who are paid equally for the same or similar roles, can still generate a gender pay gap driven by the relative proportions of men and women across the organisation. This is illustrated in graphic B. Our gender pay gap results shown in graphic C reflect the distribution of men and women between corporate grades within Barclays. As illustrated in graphic A, the percentage of women in our more senior corporate grades is lower than the percentage of women at Barclays overall. This correlates with the ordinary pay quartile data in graphic C, in which the entire population is arranged in order of ordinary pay (fixed pay), from lowest to highest, and then divided into four equal sub-populations. The numbers of male and female employees in each sub-population is then expressed as a proportion. The ordinary pay quartiles reflect the high proportions of women in more junior, lower paid roles (particularly evident in Barclays UK within the retail branch network) and the high proportions of men in senior, highly paid roles (particularly evident in Barclays International). 90 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: PeopleFor the purposes of comparability 2016 headcount figures exclude Barclays Africa Group Limited. Equal proportion of men and women in highly paid roles, more women than men in lower paid roles: Graphic A Female representation % female staff – all grades 2017 (H2) 2016 (H2) % female analysts (B1–B4) 47 48 % female Assistant Vice Presidents 36 36 33 33 % female Vice Presidents % female Directors 26 25 % female Managing Directors 15 14 The mean pay gap shown in graphic C is the difference between the average hourly pay of men and women. The median pay gap is the difference between the midpoints in the ranges of hourly pay of men and women. It arranges the hourly pay rates from highest to lowest and identifies the hourly pay in the middle of the range. The mean bonus gap is based on actual bonuses paid and does not make any adjustments to the amounts paid to employees who work a reduced number of hours. The demographics of our population and the resulting gender pay gaps emphasise the importance of maintaining our firm commitment to increasing female representation across Barclays, particularly among the senior leadership population. We welcome the introduction of gender pay gap reporting to bring further focus to our commitment to improving gender diversity – a commitment that is, and will remain, at the core of our talent management and leadership succession processes. How we are addressing the gender pay gap We recognise that tackling the gender pay gap will take time and therefore it is key that we remain focused on improving gender diversity through a workplace environment and culture that supports and empowers women. At Barclays, our focus goes beyond simply addressing the gender pay gap and extends to our internal and external gender equality commitments. Across both our organisation, and in the financial services industry, we are dedicated to enabling women to fulfil their career aspirations. To achieve this goal and thereby narrow our gender pay gap, we will continue to focus on ensuring there is no bias in the hiring, promotion, development and retention of women at Barclays. Equal pay All roles paid equally Gender pay gap 48.8% Equal pay All roles paid equally Gender pay gap 32% Graphic B Illustrative example of the difference between the gender pay gap and equal pay Greater proportion of men in highly paid roles, more women than men in lower paid roles: Role A £100k 58 57 Role B £30k Average £86k £44k Role A £100k Role B £30k Average £65k £44k Graphic C Barclays Gender Pay Gap results Barclays UK Barclays International Service Company Gender Pay Gap (fixed pay) Median Mean Median Mean Median Mean 14.2% 26.0% 43.5% 48.0% 29.9% 25.8% Gender Bonus Pay Gap Proportion of colleagues receiving a bonus payment Gender proportions in ordinary pay quartiles (fixed pay) Median Mean Median Mean Median Mean 46.9% 60.1% 73.3% 78.7% 24.0% 48.8% 95.2% 93.1% 93.4% 93.7% 92.5% 91.2% Q4 Q3 Q2 Q1 45% 55% Q4 19% 81% Q4 29% 31% 66% 67% 73% 34% 33% 27% Q3 Q2 Q1 51% 63% 69% 49% 37% Q3 Q2 Q1 36% 50% 58% 71% 64% 50% 42% Under the regulations we are required to report our gender pay data for each separate UK-based legal entity that has at least 250 employees therefore the Barclays PLC data is broken down by Barclays Bank UK Group PLC (Barclays UK), Barclays Bank PLC (Barclays International) and Barclays Services Limited (Group Service Company). home.barclays/annualreport Barclays PLC Annual Report 2017 91 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportPeople Gender diversity commitments As a founding signatory of the HM Treasury Women in Finance Charter and supporter of the Hampton-Alexander Review, to support our commitment to gender equality, we proactively set gender targets and we have made good progress towards these targets. Our goal to improve the percentage of female Managing Directors and Directors to 26% by the end of 2018 (23% at the end of 2017) has subsequently expanded with commitments of 33% female representation across our Board of Directors by 2020 (21% at the end of 2017) and 33% female representation among the Group Executive Committee and their direct reports (25% at the end of 2017). Alongside these targets, Barclays has been focused on and will continue to develop, a range of extensive initiatives, programmes and policies to improve gender diversity. Below are some highlights of the ways in which we are increasing female representation at Barclays and enabling women to fulfil their career aspirations. Creating new career opportunities We have expanded our graduate and apprenticeship programmes, reflecting our commitment to improve employment opportunities, tackle societal issues and attract diverse talent. We have transformed the way we recruit for our graduate programmes to drive diversity and inclusion as students are able to demonstrate ability and potential throughout the process, so that recruitment outcomes are based on performance and not on the basis of subjects studied, universities attended and previous work experience. In doing so we hope to increase the number of female graduate hires to 50% (40% at the end of 2017, up from 31% in 2014). For those looking to re-enter the workforce after taking time out of their careers, our Encore! Returnship Programme provides opportunities for experienced professionals to join a paid programme with a view to securing a permanent role at Barclays at the end of the programme. More broadly, we have policies and practices in place to ensure that all recruitment decisions are fair and candidate shortlists are diverse. Talent management and leadership development The creation of ex-officio positions on the Group Executive Committee and across the business unit and functional Executive Committees in 2016 by the Group Chief Executive, has provided development opportunities for a number of our high potential female leaders and has broadened the scope of the perspectives and decision making across our leadership teams. Our Unconscious Bias training, now attended by over 10,000 leaders, supports the continued elimination of bias from our people processes, and successful events that we run each year such as the Global Women in Leadership conference and the Enterprise Leaders Summit focus on building capability and upskilling leaders. Internally we are committed to: Leadership accountability including gender diversity targets and the introduction of a gender task force Focusing on a more inclusive work environment to ensure all colleagues have the flexibility to achieve personal and professional goals Ensuring we are developing leaders who are equipped to meet the demands of a more diverse workforce Externally we are committed to: Engaging men globally in gender equality in partnership with the United Nations Providing enhanced employment opportunities and attracting diverse candidates Community impact 2020 Gender diversity commitments ■■ Board of Directors 33% ■■ Leadership 33% (Group ExCo and their direct reports) Cultural change ■■ Dynamic Working ■■ Progressive parental policies ■■ Barclays’ Win Gender Network Talent management ■■ Leadership succession planning ■■ Ex-officio leadership roles ■■ Internal mobility Leadership development ■■ Unconscious bias training ■■ Global Women in Leadership Conference ■■ Enterprise Leaders summits UN HeForShe ■■ Global Impact Champion Barclays role models ■■ External engagement of Barclays’ senior women across Financial Services, IT and STEM Creating new career opportunities ■■ Encore! Returnship Programme ■■ Expanded Apprenticeship Programme ■■ 50% female graduate hires Strategic partnerships ■■ Women’s Business Council ■■ 30% Club Cultural change Providing a workplace that encourages colleagues to achieve their personal and professional goals is key to supporting and retaining our employees. We aim to do this through our progressive maternity, paternity, adoption and shared parental leave policies which go beyond the statutory requirements, as well as through our flexible working campaign Dynamic Working. Dynamic Working supports colleagues in all stages of their lives in achieving an optimal work and life balance, helping them with parenthood, studies, caring and hobbies. Across Barclays, our Women’s Initiative Network (Win) provides colleagues with career development and networking opportunities including mentoring, career fairs and senior leader speaker events. Strategic partnerships Barclays recognises that gender equality extends to the communities in which we work, support and live and greater gender equality is integral to our long-term investments to drive societal change. We demonstrate this through strategic partnerships, external engagement and leadership commitment, including but not limited to, our multi-year commitment to the United Nations HeForShe campaign and our partnership with the Women’s Business Council. So what next? Our existing pipeline of female talent is being further strengthened through the launch of a global gender task force, comprising of leaders from across the organisation who believe passionately in gender diversity and who will focus on new and improved initiatives to further accelerate our progress against our gender diversity commitments. We acknowledge that there is still a lot of work to do, but our determination and commitment to building a diverse and inclusive workforce through attracting, retaining and developing world class professionals is paramount, and we are working hard to foster an environment in which all employees have the opportunity to succeed, regardless of race, religion or belief, age, gender, disability, sexual orientation, gender identity or nationality. Further details on the gender pay gap and Barclays commitments to gender diversity and equality can be found at home.barclays/diversity Under the Companies Act 2006, Barclays is required to report on the gender breakdown of our employees and ‘senior managers’. Of our global workforce of 79,900 (45,100 male, 34,800 female), 555 were senior managers (401 male, 154 female), which include Officers of the Group, certain direct reports of the Chief Executive, heads of major business units, certain senior Managing Directors, and directors on the boards of undertakings of the Group, but exclude individuals who sit as Directors on the Board of the Company. The definition of senior managers within this disclosure has a narrower scope than the Managing Director and Director female representation data provided above. 92 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: PeopleGovernance: Remuneration report Annual statement from the Chairman of the Board Remuneration Committee We are committed to pay being aligned to performance, while ensuring that we are able to attract and retain the employees critical to delivering our strategy. Contents Annual statement At a glance – performance and pay for 2017 2017 Group incentives Remuneration policy for all employees Directors’ remuneration policy Annual report on Directors’ remuneration Page 93 95 96 97 100 103 Remuneration Committee members Chairman Members Crawford Gillies Tim Breedon Mary Francis Dambisa Moyo Dear Fellow Shareholders As Chairman of the Board Remuneration Committee, I am pleased to introduce the Remuneration report for 2017. As in previous years, we are committed to pay being aligned to performance, while ensuring that we are able to attract and retain the employees critical to delivering our strategy. The Committee believes that our pay outcomes for 2017 reflect overall Group performance, recognising improvements in profit before tax and significant achievements in restructuring the Group, while acknowledging the need for further improvement in returns. Further details on our performance and the decisions we have made on remuneration are outlined below. Performance and pay 2017 has been a year of significant strategic progress for the Group, achieving a number of milestones to deliver a simpler organisation. These include the sell down of our shareholding in Barclays Africa Group Limited (BAGL), the closure of Non-Core and the launch of the Group Service Company. A great deal has been accomplished in relation to the UK ring-fencing requirements, establishing the necessary entity structure, processes and governance. As well as positioning the simplified Group for growth in 2018, Barclays has achieved a CRD IV fully loaded Common Equity Tier 1 (CET1) ratio of 13.3%, within the end state target range. Group profit before tax is up 10% from 2016 to £3,541m driven by an £882m reduction in operating expenses. Against this background, the Committee approved a Group incentive pool of £1,506m, down 2% from 2016. This decision recognises the strong strategic execution across the Group, while being clear that Group returns are not yet where our shareholders, and the Board, want them to be. The Committee also recognises the need to ensure that areas of strong performance within the businesses are rewarded competitively, with key talent retained to deliver against our growth strategy going into 2018 and beyond. This pool also reflects appropriate adjustments for risk and conduct matters, which continue to be taken very seriously by the Committee. Key remuneration decisions for executive Directors The Committee considered the executive Directors’ performance against the financial and strategic/non-financial performance measures which had been set to reflect company priorities for 2017. Separately, performance against their personal objectives was assessed on an individual basis. Based on Jes Staley’s performance against the performance measures set at the beginning of the year, the Committee approved a 2017 bonus of £1,065,000 (48.5% of maximum) of which 62.4% will be deferred in shares for a period of up to seven years. The Committee’s deliberations on his 2017 personal performance have taken account of delivery against financial commitments including achieving the end state target range for the CET1 ratio as well as improvements to our cost: income ratio, while recognising that there is still some way to go in getting returns to where management, the Board and our investors expect them to be. The Committee has also taken account of the early completion of the strategic restructuring, including the sell down of BAGL and closure of Non-Core. The home.barclays/annualreport Barclays PLC Annual Report 2017 93 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic report Governance: Remuneration report Annual statement from the Chairman of the Board Remuneration Committee Fair pay agenda We are committed to fair pay, ensuring that all our employees are appropriately and fairly rewarded for their contributions. This concept touches on many areas of our work, including fair pay for the lowest paid in our organisation, as well as the alignment of executive reward outcomes with business performance. Additionally, the Board is committed to individuals being able to progress through the organisation based on capability and performance and irrespective of any other difference such as gender, age, ethnicity, religion, sexual orientation or disability. We take employees’ views into consideration throughout our deliberations and continue to review potential approaches to build on this. Barclays’ commitment to fair pay is illustrated by the repositioning of the incentive pools over recent years, during which incentive funding has been directed to provide more to junior employees, and our active engagement on pay matters with our unions to ensure that our staff are fairly treated across the organisation. The current 2017–2019 pay deal with Unite commits to a 7.5% agreed salary increase budget for the Unite recognised population and a minimum increase of 10% for the most junior graded employees over the course of the three-year deal. Barclays is also a long-standing supporter of the Living Wage under which Barclays commits to pay all UK permanent employees and those UK employees of third party contractors at least the current London or UK Living Wage. This is a commitment which we have also extended to our UK employed apprentices. By March 2018, the entry level for permanent, non- apprentice employees will already be above the Living Wage target level set for 2020 by the Government, two years early. Similarly, Barclays will meet the 2020 target level for its apprentice population by 2019. Further detail of our activities in relation to fair pay may be found on pages 98 to 99. Barclays has published its UK Gender Pay Gap report for the first time this year in line with UK requirements and further details can be found in the People section on pages 90 to 92. Looking ahead The Committee continues to monitor with interest the Government’s proposals in respect of the UK Corporate Governance Code, which will be an area of focus for the Committee and the Board going into 2018. In relation to fair pay, we have already chosen to publish our pay ratios on page 110 of this report, two years in advance of the Government requirements to reflect the ratios between the pay of our Group Chief Executive and our UK employees. We will continue to review our fair pay policies and practices to ensure that they remain appropriate as this important topic continues to evolve. We will also continue to work on the remuneration aspects of changes associated with structural reform, such as the addition of Remuneration Committees representing the two main subsidiary businesses. We will, of course, continue to engage constructively with regulators, shareholders and other stakeholders and value the insight these discussions provide. Remuneration report We have provided an ‘At a glance’ summary of 2017 performance and pay on the next page. The annual report on Directors’ remuneration provides further details. An abridged version of the DRP, as approved at the 2017 AGM, is set out on pages 100 to 102 for information. In line with the UK regulations, we are seeking shareholder approval at the 2018 AGM for the Remuneration report (other than the part containing the abridged version of the DRP). Further details can be found in the 2018 AGM Notice of Meeting. Crawford Gillies Chairman, Board Remuneration Committee 21 February 2018 Committee noted the significant work that has taken place in planning, following the EU referendum outcome. The Committee also recognised that Jes Staley has made continued progress towards ensuring a high performing culture in line with our Values, and Barclays has made improvements in some customer and client metrics such as a reduction in customer complaints, while noting the need for further improvement. As announced last year, the Committee will keep Jes Staley’s 2016 variable remuneration under review pending the outcome of the investigation relating to his involvement in a whistleblowing matter. The Committee will make a final decision on outcome once that investigation is complete. Based on Tushar Morzaria’s performance against the performance measures set at the beginning of the year, the Committee approved a 2017 bonus of £747,000 (50.5% of maximum) of which 46.5% will be deferred in shares for a period of up to seven years. The Committee in particular noted that Tushar Morzaria had been instrumental in the execution of the strategy including the sell down of BAGL, the closure of Non-Core, the setting up of the ring-fenced bank in the UK and in Barclays achieving its end state range capital position. Tushar Morzaria has also demonstrated effective management of key external stakeholders. The Committee decided to make an award under the 2018–2020 Long Term Incentive Plan (LTIP) cycle to Jes Staley and Tushar Morzaria (based on their performance in 2017) with a face value at grant of 120% of their respective Total fixed pay at 31 December 2017. The Committee reviewed the performance measures of the LTIP to ensure they are appropriate, given our growth strategy and align the interests of executive Directors and shareholders. Return on tangible equity (RoTE) and cost: income ratio have been retained as the key financial metrics, with the weighting on RoTE increased to 50% to emphasise the focus on improving returns across the Group. The calibrations have also been established to maintain direct alignment with the Group’s financial targets. The weighting on the cost: income ratio remains unchanged at 20%. CET1 ratio remains a key financial metric, but given the end state target range of c.13% has been achieved, the Committee concluded that this would now be more appropriate as an underpin measure on RoTE instead of a standalone measure. In line with the Directors’ remuneration policy (DRP) approved at the 2017 AGM, both executive Directors’ Fixed Pay will be unchanged for 2018 at £2,350,000 for Jes Staley and £1,650,000 for Tushar Morzaria. 94 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration report At a glance – performance and pay for 2017 Group performance and pay Key strategic highlights ■■ Non-Core closed early ■■ Completion of BAGL sell down ■■ Launch of the Group Service Company ■■ Preparatory work to establish UK ring- fenced entity Pay outcomes ■■ Group incentive pool has reduced by 57% since 2010 ■■ Group compensation to net income ratio reduced to 38.0% from 39.0% £3,541m Profit before tax up 10% 5.6% Group RoTE ex. litigation and conduct and other material items* 73% Cost: income ratio favourable 3% £7,123m Total compensation costs down 4% £1,506m Group incentive pool down 2% * Material items consist of charges for PPI, losses relating to the sell down of BAGL and a one-off net charge due to the remeasurement of US deferred tax assets. Executive Directors: Performance outcomes Annual bonus 2015–2017 Long Term Incentive Plan (a) Jes Staley (b) Tushar Morzaria (Tushar Morzaria only) £1,065k 48.5% of maximum £747k 50.5% of maximum £882k* 52.7% of maximum Performance measures (% weightings) 0% 50% 100% Performance measures (% weightings) 0% 50% 100% * By reference to Q4 2017 average share price. Financial (60%) Profit before tax excl. material items (22.5%) CET1 ratio (22.5%) Financial (60%) Net Generated Equity (30%) Core (RoRWA) excl. own credit (20%) Cost: income ratio excl. material items (15%) Non-Core drag on RoE excl. material items (10%) Strategic/Non-financial (20%) Loan loss rate (10%) Personal objectives (20%) Jes Staley Tushar Morzaria Balanced Scorecard (30%) Executive Directors: Remuneration outcomes Jes Staley* Tushar Morzaria 2016 2017 Max £4.23m £3.87m 2016 2017 £8.30m Max £3.66m £3.49m £5.59m Fixed pay Pension and benefits Annual bonus LTIP Fixed pay Pension and benefits Annual bonus LTIP * Jes Staley was not a participant in the 2014-2016 and 2015-2017 LTIP cycles; the LTIP figures for 2016 and 2017 are therefore zero for him. Executive Directors: Share ownership Shareholding requirement policy: ■■ minimum of 200% of Total fixed pay* (i.e. Fixed Pay plus Pension) within five years from date of appointment ■■ shareholding requirement for two years post termination of 100% of Total Fixed Pay (or pro-rata thereof ) introduced from 2017. Jes Staley Date of appointment: 1 December 2015 £5,492k £9,132k Tushar Morzaria Date of appointment: 15 October 2013 * Equivalent to 457% of Salary for Jes Staley under the previous DRP. Requirement Actual £3,700k £4,354k home.barclays/annualreport Barclays PLC Annual Report 2017 95 0 26 52 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic report 2017 Group incentives This section provides details of how the 2017 total incentive award decisions were made. 2017 pay and performance headlines The key performance considerations which the Committee took into account in making its remuneration decisions for 2017 are highlighted below: ■■ Significant strategic progress was made in 2017 with restructuring completed including: – the closure of Non-Core – completion of BAGL sell down – launch of the Group Service Company – preparatory work to establish the UK ring-fenced entity ■■ Group profit before tax was up 10% at £3,541m (2016: £3,230m). Group profit before tax excluding material items was up 16% at £4,242m (2016: £3,649m*) ■■ Group RoTE was negative 3.6% (2016: positive 3.6%). Excluding litigation and conduct and other material items, Group RoTE was 5.6% ■■ Group CET1 ratio was up to13.3% (2016: 12.4%). The pay outcomes and decisions can be summarised as follows: ■■ total compensation costs decreased 4% to £7,123m (2016: £7,445m) ■■ the Group incentive pool was down 2% at £1,506m (2016: £1,533m) ■■ Group compensation to net income ratio was 38.0% (2016: 39.0%) ■■ Corporate and Investment Bank (CIB) front-office incentive awards were also slightly down at £864m (2016: £875m). CIB front-office compensation to net income ratio was 26.1% (2016: 26.7%) ■■ robust differentiation based on business and individual performance. * Material items in 2016 included provisions for UK customer redress (£1bn), gain on disposal of Barclays’ share of Visa Europe Limited £615m and own credit (£35m). 2017 incentive award decisions The Committee’s 2017 incentives decisions took full consideration of financial and non-financial performance and also the material repositioning of incentives undertaken since 2010. Since 2010, the Group incentive pool has declined steadily, from £3,484m in 2010 to £1,506m in 2017 – a decrease of 57% over seven years. £3,484m (57%) Group £2,578m £2,378m £2,168m £1,860m £1,544m £1,533m £1,506m 2010 2011 2012 2013 2014a 2015b 2016 2017 Total incentive awards granted – current year Incentive awards granted Incentive pool Commissions and other incentives Total incentive awards granted Reconciliation of incentive awards granted to income statement charge: Less: deferred bonuses granted but not charged in current year Add: current year charges for deferred bonuses from previous years Othera Income statement charge for performance costs Total compensation costs Proportion of incentive pool that is deferred Notes a Part of the reduction in incentive pools in 2014 was due to the introduction of Role Based Pay (RBP). b The 2015 Group incentive pool has been restated from £1,669m to reflect the treatment of BAGL as a discontinued operation. The 2010 – 2014 Group incentive pools have not been restated. Barclays Group Year ended 31.12.17 £m Year ended 31.12.16 £m % change 1,432 74 1,506 (302) 457 29 1,690 7,123 31% 1,459 74 1,533 (300) 690 (26) 1,897 7,445 30% 2 – 2 (1) 34 11 4 Note a Difference between incentive awards granted and income statement charge for commissions and other incentives. 96 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportGovernance: Remuneration report Remuneration policy for all employees This section sets out Barclays’ remuneration policy for all employees, explaining the philosophy underlying the structure of remuneration packages, and how this links remuneration to the achievement of sustained high performance and long-term value creation. Remuneration philosophy In October 2015, the Committee formally adopted a revised, simplified remuneration philosophy which articulates Barclays’ overarching remuneration approach and is set out below. Barclays’ remuneration philosophy Attract and retain talent needed to deliver Barclays’ strategy Align pay with investor interests Reward sustainable performance Support Barclays’ Values and culture Align with risk appetite, risk exposure and conduct expectations Be clear, transparent and as simple as possible Long-term success depends on the talent of our employees. This means attracting and retaining an appropriate range of talent to deliver against our strategy, and paying the right amount for that talent Ensure employees’ interests are aligned with those of investors (equity and debt holders), both in structure and the appropriate balance of returns Sustainable performance means making a positive contribution to stakeholders, in both the short and longer term, playing a valuable role in society Results must be achieved in a manner consistent with our Values. Our Values and culture should drive the way that business is conducted Designed to reward employees for achieving results in line with the Bank’s risk appetite and conduct expectations All employees and stakeholders should understand how we reward our employees. Remuneration structures should be as simple as possible so that everyone can understand how they work and the behaviours they reward Performance and remuneration Barclays’ remuneration philosophy links remuneration to achieving sustained high performance and creating long-term value. Our remuneration philosophy applies to all employees globally across Barclays and aims to reinforce our belief that effective performance management is critical to enabling the delivery of our business strategy in line with our Values. Employees who adhere to the Barclays’ Values and contribute to Barclays’ success are rewarded accordingly. This is achieved by basing performance assessment on clear standards of delivery and behaviour, and starts with employees aligning their objectives (‘what’ they will deliver) to business and team goals in order to support the delivery of the business strategy and good client/customer outcomes. Behavioural expectations (‘how’ people will achieve their objectives) are set in the context of our Values. Performance is assessed against both financial and non-financial criteria. Other factors are also taken into consideration within the overall performance assessment, including core job responsibilities, behaviours towards risk and control, colleague and stakeholder feedback as well as input from the Risk and Compliance functions, where appropriate. Through our approach to performance, the equal importance of both ‘what’ an individual has delivered as well as ‘how’ the individual has achieved this is emphasised, encouraging balanced consideration of each dimension. Both of these elements are assessed and rated independently of each other. There is no requirement to have an overall rating which allows for more robust and reflective conversations between managers and team members on the individual components of performance. A key part of the performance philosophy promotes ongoing quality dialogue throughout the year. This helps manage performance messages effectively and allows for more timely recognition as well as appropriate coaching, feedback and support where needed. By linking individual performance assessment to Barclays’ strategy and our Values and, in turn, to remuneration decisions, a clear alignment between what we are striving to achieve, how we go about this, and ultimately, how we recognise this in individual financial terms is achieved. Risk, conduct and remuneration Another key feature of our remuneration philosophy is the alignment of remuneration with our risk appetite and with the conduct expectations of Barclays, our regulators and stakeholders. The Committee takes risk and conduct events very seriously and ensures that there are appropriate adjustments to individual remuneration and, where necessary, the incentive pool. The Remuneration Review Panel, which reports to the Committee, supports the Committee in this process. The Panel is chaired by the Chief Risk Officer and includes senior representatives from the key control functions of Risk, Compliance, Internal Audit, Legal and HR as well as the CEOs of Barclays UK and Barclays International. It sets the policy and processes for assessing compensation adjustments for risk and conduct events. We have robust processes for considering risk and conduct as part of individual performance management processes with outcomes reflected in individual remuneration decisions. Line managers have primary accountability for ensuring that risk and conduct issues are considered when assessing performance and making remuneration decisions. In addition, there is a secondary review by the control functions for individuals involved in significant failures of risk management, conduct issues, regulatory actions or other major incidents which impact either the Group or business to ensure these issues are also considered. When considering individual responsibility, a variety of factors are taken into account such as whether an individual was directly responsible or whether the individual, by virtue of seniority, could be deemed indirectly responsible, including staff who drive the Group’s culture and set its strategy. home.barclays/annualreport Barclays PLC Annual Report 2017 97 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportRemuneration policy for all employees Actions which may be taken where risk management and conduct falls below required standards include: Adjustment Current year annual bonuses are adjusted downwards where individuals are found to be responsible (either directly or indirectly) in a risk or misconduct event. Malus Clawback Deferred unvested bonuses from prior years are subject to malus provisions which enable the Committee to reduce the vesting level of deferred bonuses (including to nil) at its discretion. Events which may lead the Committee to do this include, but are not limited to, employee misconduct or a material failure of risk management. Clawback applies to any variable remuneration awarded to a Material Risk Taker (MRT) on or after 1 January 2015 in respect of years for which they are a MRT. Barclays may apply clawback if, at any time during the seven-year period from the date on which variable remuneration is awarded to a MRT: (i) there is reasonable evidence of employee misbehaviour or material error, and/or (ii) the firm or the business unit suffers a material failure of risk management, taking account of the individual’s proximity to and responsibility for that incident. Clawback may be extended to 10 years for PRA Senior Managers where there are outstanding internal or regulatory investigations at the end of the seven-year clawback period. In addition to reductions to individuals’ bonuses, the Committee considers and makes collective adjustments to the incentive pool for specific risk and conduct events. For 2017, the impact of these collective adjustments, resulting from both the direct financial impact on performance and the additional adjustments applied by the Committee, is a reduction of c.£180m. We have also adjusted the incentive pool to take account of an assessment of a wide range of future risks including conduct, non-financial factors that can support the delivery of a strong risk management, control and conduct culture and other factors including reputation, impact on customers, markets and other stakeholders. The Committee was supported in its consideration of this adjustment by the Board Risk Committee and the Board Reputation Committee. Fair pay agenda Barclays continues to look holistically at different aspects of how we pay our people, to ensure that we deliver fair and effective pay for performance, with pay decisions that are aligned with Barclays’ Values. This can be described as our fair pay agenda, which incorporates a number of themes currently highlighted by the Government and the media, although in practice our approaches to many of these aspects have evolved over many years. Our main areas of focus are: ■■ Fair pay for the lowest paid – Ensuring our people receive a fair day’s pay for a fair day’s work. – Barclays has been committed to paying the Living Wage since 2004, with all UK permanent employees and those UK employees of third party contractors who provide services to us at our sites being paid at least the current National or London Living Wage. This is a commitment we have also extended to all our UK employed apprentices. By March 2018, the entry level pay for permanent, non-apprentice employees, will already be above the Living Wage target level set for 2020 by the Government, two years early. Similarly, Barclays will meet the 2020 target Living Wage level for its apprentice population by 2019. – Our current pay deal with Unite (2017–2019) commits to a 7.5% agreed salary increase budget for the Unite recognised population. As part of the pay deal, our commitment to track the Living Wage and continue to progress junior pay will provide a 10% increase across the three years for the most junior employees. ■■ Ensuring every individual has the opportunity to progress through the organisation and earn more – Supporting initiatives to eliminate any ‘glass ceiling’ and ensure equal opportunities for progression for every individual. – We are an equal opportunities employer and have a number of initiatives in place to support diversity in our workplace e.g. increasing female representation at all levels across Barclays remains a core focus of our talent management and leadership succession processes. – Barclays has published its UK Gender Pay Gap for the first time this year (pages 90 to 92), as well as continuing to report the proportion of women at our more senior corporate grades. ■■ Equal pay – Barclays fully supports equal pay legislation (in place in the UK since 1970). – Barclays is committed to ensuring all employees are fairly paid for the work they do, and that men and women receive equal pay for the same or similar roles. We are explicit with those who make pay decisions that those pay decisions must not, directly or indirectly, take into account an individual’s gender, age, ethnicity, religion, sexual orientation, marital status, pregnancy, maternity, shared parental, paternity or parental leave, veteran status or disability. – To ensure our pay decisions are fair, and reflect our legal obligations, Barclays has a number of policies and processes in place to ensure that line management decisions that are made at the beginning on hiring and throughout the employment cycle are free from unlawful bias. This includes ensuring that our internal policies and processes are neutral in their application and free from any conscious or unconscious bias. We also share key data annually with Unite concerning their recognised population on pay distribution. ■■ Ensuring employees, like any other stakeholders, are appropriately represented in remuneration decision-making – Employee views are represented by senior management to the Committee. We continue to review potential approaches to build on this. – Employees are represented by their management through our internal remuneration decision-making processes. We are also proud of our long-standing relationship with Unite, through which we engage positively on remuneration. 98 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration report■■ Ensuring executive pay and employee pay are linked to business performance – The view that executive and employee remuneration should both be linked to the performance of the Company is one shared by the Committee. – Pay approaches for our executive Directors are demonstrably aligned to business performance through financial, non-financial performance and risk based performance measures, as described in the DRP. – Similar performance considerations are made by the Committee when determining the appropriate level of incentive funding for all of our people. Remuneration structure The remuneration structure for employees is closely aligned with that for executive Directors, set out in detail in the DRP which can be found on pages 108 to 120 of the 2016 Annual Report. The primary exception being that the executive Directors participate in the Barclays’ LTIP and receive part of their Fixed Pay in Barclays PLC shares. Employees receive salary, pension and other benefits and are eligible to be considered for an annual bonus. Employees in some customer-facing businesses participate in formulaic incentive plans, including plans which have good customer outcomes as the primary performance measure. The plans also recognise how results have been achieved in line with Barclays’ Values. Some senior employees also receive Role Based Pay (RBP). Remuneration of MRTs is subject to the 2:1 maximum ratio of variable to fixed remuneration. A total of 1,641 (2016: 1,561) individuals were MRTs in 2017. Capital requirements regulation (CRR) quantitative disclosures on MRTs are set out on pages 189 to 191 of Barclays PLC 2017 Pillar 3 Report. The remuneration of employees engaged in control functions is determined independently from the business they support and within the parameters of the incentive pool allocated to them by the Committee. Remuneration for control function employees is less weighted towards variable remuneration as compared to front-office employees and variable remuneration is typically limited to one times fixed remuneration. This leads to less volatility in overall control function remuneration as compared to front-office outcomes. Fixed remuneration Salary Salaries reflect individuals’ skills and experience and are reviewed annually in the context of annual performance assessment. They are increased where justified by role change, increased responsibility or a change in the appropriate market rate. Salaries may also be increased in line with local statutory requirements and in line with union and works council commitments. Role Based Pay (RBP) A small number of senior employees receive a class of fixed pay called RBP to recognise the seniority, breadth and depth of their role. Pension and benefits The provision of a competitive package of benefits is important to attracting and retaining the talented staff needed to deliver Barclays’ strategy. Employees have access to a range of country-specific company-funded benefits, including pension schemes, healthcare, life assurance and Barclays’ share plans as well as other voluntary employee funded benefits. The cost of providing these benefits is defined and controlled. Variable remuneration Annual bonus Annual bonuses incentivise and reward the achievement of Group, business and individual objectives, and reward employees for demonstrating individual behaviours in line with Barclays’ Values. The ability to recognise performance through variable remuneration enables the Group to control its cost base flexibly and to react to events and market circumstances. Bonuses remain a key feature of remuneration practice in the highly competitive and mobile market for talent in the financial services sector. The Committee is careful to control the proportion of variable to fixed remuneration paid to individuals and also to ensure an appropriate amount is deferred to future years. The typical deferral structures are: For MRTs: Incentive award < £500,000 £500,000 to £1,000,000 ≥ £1,000,000 Amount deferred 40% of total award 60% of total award 60% up to £1,000,000 100% above £1,000,000 Incentive award Up to £65,000 > £65,000 For non-MRTs: Amount deferred 0% Graduated level of deferral Deferred bonuses are generally delivered in equal portions as deferred cash and deferred shares subject to the rules of the deferred cash and share plans (as amended from time to time) and continued service. Deferred bonuses are subject to either a 3, 5 or 7 year deferral period in line with regulatory requirements. Where dividend equivalents cannot be delivered on deferred bonus shares, the number of deferred bonus shares awarded will be calculated using a share price discounted to reflect the absence of dividend equivalents during the vesting period. Share plans Alignment of senior employees with shareholders is achieved through deferral of incentive pay. We also encourage wider employee shareholding through the all-employee share plans. 86% of the global employee population is eligible to participate (up from 82% in 2016). home.barclays/annualreport Barclays PLC Annual Report 2017 99 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportGovernance: Remuneration report Directors’ remuneration policy This section sets out a summary of the Barclays’ forward-looking DRP and is provided for information only. The DRP was approved at the 2017 AGM held on 10 May 2017 and applies for three years from that date. The full DRP can be found on pages 108 to 120 of the 2016 Annual Report or at home.barclays/annualreport Remuneration policy summary – executive Directors Element and purpose Operation Fixed Pay To reward skills and experience appropriate for the breadth and depth of the role and to provide the basis for a competitive remuneration package Pension To enable executive Directors to build long-term retirement savings Benefits To provide a competitive and cost effective benefits package appropriate to the role and location Annual bonus To reward delivery of short- term financial targets set each year, the individual performance of the executive Directors in achieving those targets, and their contribution to delivering Barclays’ strategic objectives Delivery in part in shares with a holding period increases alignment with shareholders. Deferred bonuses encourage longer term focus and retention Implementation in 2018 No change from 2017. ■■ Jes Staley: £2,350,000 ■■ Tushar Morzaria: £1,650,000 These amounts are fixed and will not change during the policy period for these individuals. No change from 2017. ■■ Jes Staley: £396,000 ■■ Tushar Morzaria: £200,000 These amounts are fixed and will not change during the policy period for these individuals. No change from 2017. Fixed Pay is determined with reference to market practice and historical market data (on which the Committee receives independent advice), and reflects the individual’s experience and role. Total compensation is benchmarked against comparable roles in banks. 50% of Fixed Pay is delivered in cash (paid monthly), and 50% is delivered in shares. The shares are delivered quarterly and are subject to a holding period with restrictions lifting over five years (20% each year). As the executive Directors beneficially own the shares, they will be entitled to any dividends paid on those shares. There are no performance measures. Malus and clawback provisions do not apply to Fixed Pay. Executive Directors receive an annual cash allowance in lieu of participation in a pension arrangement. Executive Directors’ benefits provision includes, but is not restricted to, private medical cover, annual health check, life and ill health income protection, car cash allowance, and use of a Company vehicle and driver when required for business purposes. In addition to the above, if an executive Director were to relocate, additional support would be provided for a defined and limited period of time in line with Barclays’ general employee mobility policy. Barclays will pay the tax on relocation costs but will not tax equalise and will also not pay tax on any other employment income. The maximum annual bonus opportunity is 80% of Total fixed pay. For these purposes Total fixed pay is Fixed Pay plus Pension. Details of performance measures are set out on page 109. Shares issued are subject to a holding period of one year after vesting. As dividend equivalents are not permissible under regulations, the number of shares to be awarded will be calculated using a share price discounted to reflect the absence of dividend equivalents during the vesting period. The performance measures include financial and non-financial measures which also include risk related measures and personal objectives. Financial measures will be at least 60% of the bonus opportunity. The Committee has discretion to vary the measures and their respective weighting within each category. Annual bonuses are delivered as a combination of cash and shares, a proportion of which may be deferred and/or subject to a holding period. Deferral proportions and vesting profiles will be structured so that, in combination with any LTIP award, the proportion of variable pay that is deferred is no less than that required by regulations. Dividend equivalents are payable on vested deferred bonus shares. If dividend equivalents are not permissible under regulations, the number of shares to be awarded will be determined using a share price discounted by reference to the expected dividend yield. A notional discount may be applied to deferred bonuses for the purposes of calculating the 2:1 cap to the extent permitted by regulations. Awards are subject to malus during the vesting period and clawback for a period of seven years (10 years in specific circumstances) from the date of award. 100 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration report Element and purpose Operation Implementation in 2018 Annual bonus continued Long Term Incentive Plan (LTIP) award To reward execution of Barclays’ strategy over a multi-year period Long-term performance measurement, deferral and holding periods encourage a long-term view and align executive Directors’ interests with those of shareholders. Malus and clawback provisions discourage excessive risk- taking and inappropriate behaviours Non-deferred cash components of any bonus are paid following the performance year to which they relate, normally in March. Non-deferred share bonuses are also awarded normally in March and are subject to a holding period (after the payment of tax) in line with regulations. Deferred share bonuses are structured so that no deferred shares vest faster than permitted by regulations (currently in five equal tranches with the first vesting on or around the third anniversary of grant and the last tranche vesting on or around the seventh anniversary of grant). Any shares that vest are subject to an additional holding period (after payment of tax) in line with regulations. The maximum annual LTIP award is 120% of Total fixed pay. For these purposes Total fixed pay is Fixed Pay plus Pension. Forward-looking performance measures will be based on financial performance and other long-term strategic measures. Financial measures will be at least 70% of the total opportunity. Straight-line vesting applies between threshold and maximum for the financial measures with no more than 25% vesting at threshold performance. LTIP awards are structured so that when combined with the annual bonus the proportion of variable pay that is deferred is no less than that required by regulations. The Committee has discretion to vary the measures year on year and their respective weighting within each category. The Committee also has discretion to amend targets, measures and the number of awards in exceptional circumstances and to reduce the vesting of any award, including to nil, if it deems that the outcome is not consistent with performance. Dividend equivalents are payable on vested deferred shares. If dividend equivalents are not permissible under the regulations, the number of shares to be awarded will be determined using a share price discounted by reference to the expected dividend yield. A notional discount may be applied to LTIP awards for the purposes of calculating the 2:1 cap to the extent permitted by regulations. Awards are subject to malus during the vesting period and clawback for a period of seven years (10 years in specific circumstances) from the date of award. No LTIP award vests before the third anniversary of grant and an award vests no faster than permitted by regulations (currently in five equal tranches with the first tranche vesting on or around the third anniversary of grant and the last tranche vesting on or around the seventh anniversary of the grant date). Any shares that vest are subject to an additional holding period (after payment of tax) in line with regulations. Details of performance measures and targets for awards to be made in 2018 (in respect of 2017) are set out on page 107. For awards to be made in respect of 2018, the measures and targets will be determined at the end of 2018 for the performance period commencing on 1 January 2019. On vesting, the award is subject to a holding period of one year. As dividend equivalents are not permissible under regulations, the number of shares to be awarded will be calculated using a share price discounted to reflect the absence of dividend equivalents during the vesting period. Shareholding requirement To further enhance the alignment of shareholders’ and executive Directors’ interests in long-term value creation Executive Directors must build up a shareholding of 200% of Total fixed pay (i.e. Fixed Pay plus Pension) within five years from the date of appointment as executive Director. Executive Directors must also continue to hold a shareholding of 100% of Total fixed pay (or pro-rata thereof ) for two years post-termination. No change from 2017. (Equivalent to 457% of Salary for the Group Chief Executive under the previous DRP.) Executive Directors are also entitled to participate in all employee share plans, for example Barclays Sharesave and Barclays Sharepurchase, on the same basis as all other employees. home.barclays/annualreport Barclays PLC Annual Report 2017 101 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportDirectors’ remuneration policy Remuneration policy summary – non-executive Directors Element and purpose Operation Fees Reflect individual responsibilities and membership of Board Committees and are set to attract non-executive Directors who have relevant skills and experience to oversee the implementation of our strategy Fees are set at a level which reflects the role, responsibilities and time commitment which are expected from the Chairman, Deputy Chairman and non-executive Directors Benefits Expenses The Chairman and Deputy Chairman are paid an all-inclusive fee for all Board responsibilities. The Chairman has a minimum time commitment equivalent to at least 80% of a full-time role. The other non-executive Directors receive a basic Board fee, with additional fees payable where individuals serve as a member or Chairman of a Committee of the Board. Fees are reviewed each year by the Board as a whole. Other than in exceptional circumstances, fees will not increase by more than 20% above the current fee levels during this policy period (basic fees last increased in 2011). £30,000 (Chairman: £100,000) after tax and national insurance contributions per annum of each non-executive Director’s basic fee is used to purchase Barclays’ shares which are retained on the non- executive Director’s behalf until they retire from the Board. Some non-executive Directors may also receive fees as directors of subsidiary companies of Barclays PLC. The Chairman is provided with private medical cover subject to the terms of the Barclays’ scheme rules from time to time, and is provided with the use of a Company vehicle and driver when required for business purposes. Benefits which are minor in nature and do not exceed a cost of £500 may be provided to non-executive Directors in specific circumstances. Implementation in 2018 No change from 2017. No change from 2017. The Chairman and non-executive Directors are reimbursed for any reasonable and appropriate expenses incurred for business reasons. Any tax that arises on these reimbursed expenses is paid by Barclays. No change from 2017. Service contracts and letters of appointment All executive Directors have a service contract whereas all non-executive Directors have a letter of appointment. Copies of the service contracts and letters of appointment are available for inspection at the Company’s registered office. The dates of the current Directors’ service contracts and letters of appointment are shown in the table below. Chairman John McFarlane Executive Directors Jes Staley Tushar Morzaria Non-executive Directors Mike Ashley Tim Breedon Sir Ian Cheshire Mary Francis Crawford Gillies Sir Gerry Grimstone Reuben Jeffery III Matthew Lester Dambisa Moyo Diane Schueneman Mike Turner Effective date 1 January 2015 (non-executive Director), 24 April 2015 (Chairman) 1 December 2015 15 October 2013 18 September 2013 1 November 2012 3 April 2017 1 October 2016 1 May 2014 1 January 2016 16 July 2009 1 September 2017 1 May 2010 25 June 2015 1 January 2018 102 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportGovernance: Remuneration report Annual report on Directors’ remuneration This section explains how our Directors’ remuneration policy was implemented during 2017. Executive Directors Executive Directors: Single total figure for 2017 remuneration (audited) The following table shows a single total figure for 2017 remuneration in respect of qualifying service for each executive Director together with comparative figures for 2016. Jes Staleyb Tushar Morzariac Fixed Paya £000 Taxable benefits £000 Annual bonus £000 LTIP £000 Pension £000 Total £000 2017 2,350 1,614 2016 2,350 1,550 2017 62 44 2016 169 44 2017 1,065 747 2016 1,318 854 2017 – 882 2016 – 1,008 2017 396 200 2016 396 200 2017 3,873 3,487 2016 4,233 3,656 Notes a The 2016 figures for Fixed Pay relate to Salary and RBP. b Jes Staley’s 2016 benefits figure includes relocation expenses. c Tushar Morzaria’s Fixed Pay increased to £1,650,000 with effect from 10 May 2017. Additional information in respect of each element of pay for the executive Directors (audited) Fixed Pay Fixed Pay was introduced for 2017, replacing Salary and RBP, and is delivered 50% in cash and 50% in shares (subject to a five-year holding period lifting pro-rata). Taxable benefits Taxable benefits include private medical cover, life and ill health income protection, tax advice, relocation, car allowance, the use of a Company vehicle and driver when required for business purposes and other benefits that are considered minor in nature. Annual bonus Annual bonuses are typically awarded in Q1 following the financial year to which they relate. The Committee considered the executive Directors’ performance against the financial (60% weighting) and strategic/non-financial (20% weighting) performance measures which had been set to reflect company priorities for 2017. Performance against their individual personal objectives (20% weighting) was assessed on an individual basis. 2017 annual bonus outcomes Financial (60% weighting) The approach taken to assessing financial performance against each of the financial measures was based on a straight-line outcome between 25% for threshold performance and 100% applicable to each measure for achievement of maximum performance. The formulaic outcome from 2017 performance against the financial measures set at the beginning of the year gave a total of 22.5% out of 60% being payable attributable to those measures. A summary of the assessment is provided in the following table. Financial performance measure Profit before tax (excluding material items) CET1 ratio Cost: income ratio (excluding material items) Total Financial Weighting 22.5% 22.5% 15.0% 60% Threshold 25% £5.10bn 12.6% 67.0% Maximum 100% £6.20bn 13.0% 63.0% 2017 Actual £4.24bn 13.3% 70.0% 2017 Outcome 0% 22.5% 0% 22.5% home.barclays/annualreport Barclays PLC Annual Report 2017 103 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportAnnual report on Directors’ remuneration Strategic (20% weighting) Progress in relation to each of the strategic measures, organised around three main categories, was assessed by the Committee. The Committee used the following scale in relation to each measure: 0% to 1% firmly below performance expectations, 1.5% to 3% slightly below performance expectations, 3.5% to 5.5% meeting or slightly exceeding performance expectations, and 6% to 7% clearly above performance expectations. Based on this approach to assessing performance against 2017 Group Performance Measurement Framework milestones, the Committee agreed a 13% outcome out of a maximum of 20%. The assessment is provided in the following table. Customer and Client 2017 Outcome 3.0% Measure ■■ We have continued to make progress with our customer and client agenda. However, complaints remain an ongoing area of focus for management and the Board. ■■ Barclays Relationship Net Promoter Score (NPS) ended the year with an improved score of +14 (2016: +10) while Barclaycard UK Relationship NPS remained relatively flat (2017: +9). Barclaycard International business also continued to perform well on Relationship NPS. ■■ Underlying UK complaint volumes (Barclays UK, excluding PPI) reduced 13% year on year, however, there has been a small increase in PPI complaints (up 2% year on year) driven largely by the FCA deadline announcement. Barclays UK complaint volumes, including PPI, were down 7% year on year. Barclays International complaints reduced by 19% year on year. Complaints reduction remains a priority across the Group, and despite improvements in 2017, Barclays has more work to do, as can be seen from our position in the H1 2017 FCA complaints tables in the UK. ■■ The number of customers and clients in the UK using our digital services on a regular basis has increased to over 10 million customers (2016: nearly 9.5m). ■■ In our home markets of the UK and US, our CIB ranked 6th place by fee share across M&A, equity and debt capital markets and syndicated loan transactions (2016: 5th); and we were highly encouraged by the 1st place CIB ranking in the UK (Dealogic). Colleague ■■ Overall this has been a year of progress on increasing the diversity of our workforce and in 4.5% building an inclusive and engaged culture. ■■ Employee sustainable engagement improved by 3% year on year to 78%, with the majority of key survey question results recording improvements and the rest remaining stable. ■■ We remain focused on improving our gender diversity. We have made a 1% improvement in the percentage of female Managing Directors and Directors to 23% (on a like for like basis excluding Africa). Recognising the importance of strengthening our talent pipeline, we also have an ambition for 50% female graduate hires and have ended 2017 at 40%. ■■ External recognition includes: Stonewall recognising Barclays as one of 12 Top Global Employers; the Human Rights Campaign awarding Barclays 100% on their corporate equality index; Working Families UK recognising Barclays as one of the top 10 Employers for Working Families in 2017; and Barclays was acknowledged as a Top 50 Employer through the Social Mobility Employer Index in 2017. Citizenship ■■ This has been a very positive year in the Citizenship space, with further progress in many areas. ■■ We helped upskill over 2.1 million people (2016 1.7 million), driven by a range of regional 5.5% employability partnerships and our flagship LifeSkills programme in the UK. ■■ Barclays delivered £31.7bn in financing for selected social and environmental segments (2016: £30.5bn). ■■ We helped empower around 205,000 people (2016: 249,000) through initiatives such as: Barclaycard Initial for those with a limited credit history; our Digital Eagles network, comprised of specially trained Barclays’ employees working to provide free technology support to customers and non-customers; and the continued development of learning platforms. ■■ We reduced carbon emissions by 26.1% against the 2015 baseline, making good progress against our target of 30% reduction by 2018. ■■ We also achieved 89% (2016: 88%) on-time payment by value to our suppliers, ahead of our target of 85%, and published an updated Statement on Modern Slavery. 13% out of 20% Further details on the Group Performance Measurement Framework can be found on pages 15 to 22. 104 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportIndividual outcomes including assessment of personal objectives Performance against each of the executive Directors’ individual personal objectives (20% weighting overall) was assessed by the Committee on an individual basis. (i) Jes Staley A summary of the assessment for Jes Staley against his specific performance measures is provided in the following table. Performance measure Financial Strategic Personal objectives Total Final outcome approved by the Remuneration Committee See table on page 103 See table on page 104 Judgemental assessment – see below Weighting 60% 20% 20% 100% 2017 Outcome 22.5% 13.0% 13.0% 48.5% 48.5% The Committee assessed Jes Staley’s performance against his 2017 personal objectives (as set out on page 126 of the 2016 Annual Report). In relation to the joint personal objectives, the Committee has taken account of delivery against financial commitments including achieving the end state target range for the CET1 ratio as well as improvements to our cost: income ratio, while recognising that there is still some way to go in getting returns where management, the Board and our investors expect them to be. The Committee has also recognised the early closure of Non-Core and successful reintegration of remaining assets/businesses into Core as well as the achievement of the accounting deconsolidation and regulatory proportional consolidation of BAGL. It noted that the structural reform programme has been well executed, with the launch of the Group Service Company achieved. The Committee noted the significant work that has taken place in planning following the EU referendum outcome. Risk and control have also continued to be managed effectively, with further progress in resolving legacy conduct and litigation matters. In relation to his individual objectives, the Committee recognises that Jes Staley has made continued progress towards ensuring a high performing culture in line with our Values, and employee engagement has been strengthened in 2017. Barclays has made improvements in some customer and client metrics such as a reduction in customer complaints, while noting the need for further improvement. Succession planning for senior roles has been improved, and continued progress made in improving the percentage of women in senior leadership roles (5th consecutive year increasing the percentage of female Managing Directors and Directors). Finally, significant improvements have been made to the Group’s control environment, with a focus on operations and technology infrastructure, particularly through the establishment of the Group Service Company. While recognising the strong strategic delivery, given some of the remaining challenges, particularly around returns, the Committee judged that 13% of a maximum of 20% attributable to individual objectives was appropriate. In aggregate, the performance assessment for Jes Staley resulted in an overall formulaic outcome of 48.5% of maximum bonus opportunity being achieved. The Committee considered the outcome and agreed that a 2017 annual bonus of £1,065,000 (48.5% of maximum) was appropriate, of which 62.4% is deferred under the Share Value Plan in line with the Group-wide deferral structure. (ii) Tushar Morzaria A summary of the assessment for Tushar Morzaria against his specific performance measures is provided in the following table. Performance measure Financial Strategic Personal objectives Total Final outcome approved by the Remuneration Committee See table on page 103 See table on page 104 Judgemental assessment – see below Weighting 60% 20% 20% 100% 2017 Outcome 22.5% 13.0% 15.0% 50.5% 50.5% The Committee assessed Tushar Morzaria’s performance against his 2017 personal objectives (as set out on page 126 of the 2016 Annual Report). In relation to the joint personal objectives, the Committee recognised Tushar Morzaria’s contribution to the financial outcomes, including achieving the end state target range for the CET1 ratio as well as improvements to our cost: income ratio. The Committee also recognised that Tushar Morzaria had been instrumental in the execution of the strategy including the closure of Non-Core, the accounting deconsolidation and regulatory proportional consolidation of BAGL and the structural reform programme in the UK. He has also made significant contributions to Barclays’ planning in response to the EU referendum outcome and plays a key leadership role in managing risk and control as well as settling legacy conduct and litigation issues. In relation to his individual objectives, the Committee recognises that he is extremely well respected by both internal and external stakeholders including the Board, regulators, stakeholders, investors and colleagues across the organisation, effectively managing external relationships and the reputation of the Group. He has also continued to strengthen his team within Finance and has exemplified the Values expected by the Board – he is tireless in his commitment to the organisation and defines the notion of partnership. Given his strong personal performance during 2017, the Committee judged that 15% of a maximum 20% attributable to individual objectives was appropriate. In aggregate, the performance assessment for Tushar Morzaria resulted in an overall formulaic outcome of 50.5% of maximum bonus opportunity being achieved. The Committee considered the outcome and agreed that a 2017 annual bonus of £747,000 (50.5% of maximum) was appropriate, of which 46.5% is deferred under the Share Value Plan in line with the Group-wide deferral structure. In line with the DRP, and due to the regulations prohibiting dividend equivalents being paid on unvested deferred share awards, the number of shares awarded to each executive Director under the Share Value Plan will be calculated using a share price at the date of award, discounted to reflect the absence of dividend equivalents during the vesting period. The valuation will be aligned to IFRS 2, with the market expectations of dividends during the deferral period being assessed by an independent adviser. These shares will vest in five equal tranches from the third to seventh anniversary (subject to the rules of the Share Value Plan as amended from time to time). All shares (whether deferred or not) are subject to a further one-year holding period from the point of release. 2017 bonuses are subject to clawback provisions and, additionally, unvested deferred 2017 bonuses are subject to malus provisions which enable the Committee to reduce the vesting level of deferred bonuses (including to nil). home.barclays/annualreport Barclays PLC Annual Report 2017 105 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportAnnual report on Directors’ remuneration LTIP The LTIP amount included in Tushar Morzaria’s 2017 single total figure is the value of the amount scheduled to be released in relation to the LTIP award granted in 2015 in respect of performance period 2015–2017 (by reference to Q4 2017 average share price). As Jes Staley was not a participant in this cycle, the LTIP figure in the single figure table is zero for him. Release is dependent on, among other things, performance over the period from 1 January 2015 to 31 December 2017 with straight-line vesting applied between the threshold and maximum points. The performance achieved against the performance targets is as follows: Performance measure Net generated equitya Weighting 30% Core return on risk weighted assets (RoRWA) excluding own credit Non-Core drag on return on equity (RoE) excluding material items Loan loss rate Balanced Scorecard 20% 10% 10% 30% Average annual Core RoRWA of 1.81% Maximum vesting Net generated equity of £1,844m Threshold 7.5% of award vests for Net generated equity of £1,363m 5% of award vests for average annual Core RoRWA of 1.34% 2.5% of award vests for Non-Core drag on RoE of −4.02% 2.5% of award vests for average annual loan loss rate of 70bps Performance against the Balanced Scorecard was assessed by the Committee to determine the percentage of the award that may vest between 0% and 30%. Each of the 5Cs in the Balanced Scorecard has equal weighting. Average annual loss rate of 55bps or below Non-Core drag on RoE of −2.97% Actual £3,427m % of award vesting 30.0% 0.68% 0.0% −3.85% 3.7% 54bps 10.0% See below 9.0% Total 52.7% Note a Net generated equity is a metric which converts changes in the CET1 ratio into an absolute capital equivalent measure. The measure is expressed as an average over the period. A summary of the Committee’s assessment against the Balanced Scorecard performance measure over the three year performance period is provided below. Weighting 6% Performance ■■ Barclays UK Relationship NPS ended the year with a score +14, with improvement Vesting out of maximum 6% for each ‘C’ 1% Category Customer and Client Colleague 6% Citizenship 6% also seen in Barclaycard UK Relationship NPS (c.+2). However, performance against peers remained 4th throughout the period, below our 2018 target of 1st. ■■ Client Franchise Rank remained stable at 5th throughout the period. While this is a positive result given our shift in strategy to focus more narrowly on geographies and businesses of strength in the Investment Bank, we are not on track to achieve the 2018 target of Top 3. ■■ Continued improvement of +1% per year in the female representation across senior leadership roles (on a like for like basis excluding Africa) to 23% at the end of 2017. ■■ Colleague engagement improved from 74% in 2014 to 75% in 2015 and 2016 and 2% to 78% in 2017. However, engagement remains significantly below our 2018 targets. ■■ Met or exceeded 10/11 initiatives in 2015 and 6/6 Shared Growth Ambition goals in 4% 2016 and 2017. Of particular note: – financing to social and environmental segments rising to £31.7bn in 2017 – global carbon emissions decreased 26.1% against the 2015 baseline – supplier payment on time exceeded target of 85% throughout the period. Conduct Company 6% 6% ■■ Conduct reputation, as measured by the YouGov survey, has remained at 5.4 over 0% the period and below our 2018 target of 6.5. ■■ Significant strengthening in the CET1 ratio over the period, with the CET1 ratio now 2% within our end-state target range. ■■ However, returns excluding material items (both RoE and RoTE) were below target through much of the period. ■■ Cost: income ratio improved but still below long term target. Total 30% 9% The LTIP award is also subject to a discretionary underpin whereby the Committee must be satisfied with the underlying financial health of the Group. The Committee was satisfied that this underpin was met, and accordingly determined that the award should be considered for release at 52.7% of the maximum number of shares under the total award. The shares are scheduled to be released in March 2018. After release, the shares are subject to an additional two year holding period. Pension Executive Directors are paid cash in lieu of pension contributions. The cash allowance in 2017 was £396,000 for Jes Staley and £200,000 for Tushar Morzaria. No other benefits were received by the executive Directors from any Barclays’ pension plans. 106 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportExecutive Directors: other LTIP awards The Directors’ remuneration reporting regulations require inclusion in the single total figure of only the value of the LTIP awards whose last year of performance ends in the relevant financial year and whose vesting outcome is known. For 2017, this is the award to Tushar Morzaria under the 2015–2017 LTIP cycle and further details are set out on page 106. This section sets out other LTIP cycles in which the executive Directors participate, the outcome of which remains dependent on future performance. LTIP awards to be granted during 2018 The Committee decided to make an award under the 2018–2020 LTIP cycle to Jes Staley and Tushar Morzaria (based on their performance in 2017) with a face value at grant of 120% of their respective Total fixed pay at 31 December 2017. The 2018–2020 LTIP award will be subject to the following forward-looking performance measures. Performance measure Average return on tangible equity (RoTE) excluding material items Weighting 50% Average cost: income ratio excluding material items Risk Scorecard 20% 15% Strategic/Non-financial 15% Threshold 10% of award vests for average RoTE of 7.75% (based on an assumed CET1 ratio of c.13%) Vesting of this element will depend on CET1 levels during the performance period: ■■ if CET1 goes below the mandatory distribution restrictions (MDR) hurdlea in any year of the Maximum vesting Average RoTE of 10.25% period, no part of the RoTE element will vest ■■ if CET1 goes below the MDR hurdle +150bps but remains above the hurdle during the period, the Committee will exercise its discretion to determine what portion of the RoTE element should vest, based on the causes of the CET1 reduction. Average cost: income ratio of 58% 4% of award vests for average cost: income ratio of 62.5% The Risk Scorecard captures a range of risks and is aligned with the annual incentive risk alignment framework reviewed with the regulators. The current framework measures performance against three broad categories – Capital and Liquidity, Control Environment and Conduct – using a combination of quantitative and qualitative metrics. The framework may be updated from time to time in line with the Group’s risk strategy. Specific targets within each of the categories are deemed to be commercially sensitive. Retrospective disclosure will be made in the 2020 Remuneration report, subject to commercial sensitivity no longer remaining. The evaluation will focus on key performance measures from the Group Performance Measurement Framework, with a detailed retrospective narrative on progress throughout the period against each category. Performance against the Strategic/Non-financial measures will be assessed by the Committee to determine the percentage of the award that may vest between 0% and 15%. The measures are organised around three main categories: Customer and Client, Colleague and Citizenship. Each of the three main categories has equal weighting. Measures will likely include, but will not be limited to, the following: ■■ Customer and Client: NPS for consumer businesses, client rankings and market shares for the CIB, complaints performance and volume of lending provided to customers and clients. ■■ Colleague: Diversity and Inclusion statistics (including women in senior leadership), Employee sustainable engagement survey scores and conduct and culture measures. ■■ Citizenship: Delivery against our Shared Growth Ambition, Colleague engagement in Citizenship activities and external benchmarks and surveys. Note a The CET1 ratio underpin in 2018 will reference the expected end-state MDR hurdle, currently expected to be 11.4%. Straight-line vesting applies between the threshold and maximum points in respect of the financial measures. The award is subject to a discretionary underpin by which the Committee must be satisfied with the underlying financial health of the Group. home.barclays/annualreport Barclays PLC Annual Report 2017 107 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportAnnual report on Directors’ remuneration Outstanding LTIP awards (i) LTIP awards granted during 2016 The performance measures for the awards made under the 2016–2018 LTIP cycle are as follows: Performance measure Return on tangible equity (RoTE) excluding material items Weighting 25% CET1 ratio as at 31 December 2018 Cost: income ratio excluding material items Risk Scorecard 25% 20% 15% Balanced Scorecard 15% Threshold 6.25% of award vests for average RoTE of 7.5% CET1 ratio must remain at or above an acceptable level for any of this element to vest. The threshold will be reviewed and set annually based on market conditions and regulatory requirements (11.3% on 31 December 2018) 6.25% of award vests for CET1 ratio of 11.6% CET1 ratio of 12.7% Maximum vesting Average RoTE of 10.0% Average cost: income ratio of 58% 5% of award vests for average cost: income ratio of 66% Performance against the Risk Scorecard is assessed by the Committee, with input from the Group Risk function, Board Risk Committee and Board Reputation Committee as appropriate, to determine the percentage of the award that may vest between 0% and 15%. Since its introduction in 2016, the Risk Scorecard has been aligned by the Committee to the annual incentive risk alignment framework reviewed with the regulators. Following this alignment, the current framework measures performance against three broad categories – Capital and Liquidity, Control Environment and Conduct – using a combination of quantitative and qualitative metrics. Specific targets within each of the categories are deemed to be commercially sensitive. Retrospective disclosure of performance will be made in the 2018 Remuneration report subject to commercial sensitivity no longer remaining. Performance against the Balanced Scorecard is assessed by the Committee to determine the percentage of the award that may vest between 0% and 15%. Each of the 5Cs in the Balanced Scorecard has equal weighting. Assessment will be made against progress towards the 2018 targets. Straight-line vesting applies between the threshold and maximum points in respect of the financial measures. The award is subject to a discretionary underpin by which the Committee must be satisfied with the underlying financial health of the Group. (ii) LTIP awards granted during 2017 An award was made to Jes Staley and Tushar Morzaria on 23 June 2017 under the 2017–2019 LTIP cycle at a share price on the date of grant of £1.9545, in accordance with our DRP. This is the price used to calculate the face value below. Jes Staley Tushar Morzaria The performance measures for the 2017–2019 LTIP awards are as follows: % of Total fixed pay 120% 120% Number of shares 1,685,955 1,074,443 Face value at grant 3,295,200 2,100,000 Performance period 2017–2019 2017–2019 Performance measure Return on tangible equity (RoTE) excluding material items Weighting 25% CET1 ratio as at 31 December 2019 Cost: income ratio excluding material items Risk Scorecard 25% 20% 15% Strategic/Non-financial 15% Maximum vesting Average RoTE excluding material items of 9.5% CET1 ratio 200 basis points above the MDR hurdle Average cost: income ratio of 58% Threshold 6.25% of award vests for average RoTE excluding material items of 7.5% CET1 ratio must remain at or above an acceptable level for any of this element to vest. The threshold will be reviewed and set annually based on market conditions and regulatory requirements (11.3% on 31 December 2018) 6.25% of award vests for CET1 ratio 100 basis points above the MDR hurdle 5% of award vests for average cost: income ratio of 63% The Risk Scorecard captures a range of risks and is aligned with the annual incentive risk alignment framework reviewed with the regulators. The current framework measures performance against three broad categories – Capital and Liquidity, Control Environment and Conduct – using a combination of quantitative and qualitative metrics. The framework may be updated from time to time in line with the Group’s risk strategy. Specific targets within each of the categories are deemed to be commercially sensitive. Retrospective disclosure will be made in the 2019 Remuneration report. The evaluation will focus on key performance measures from the Group Performance Measurement Framework, with a detailed retrospective narrative on progress throughout the period against each category. Performance against the Strategic/Non-financial measures will be assessed by the Committee to determine the percentage of the award that may vest between 0% and 15%. The measures are organised around three main categories: Customer and Client, Colleague and Citizenship. Each of the three main categories has equal weighting. Measures will likely include, but will not be limited to, the following: ■■ Customer and Client: NPS for consumer businesses, Client rankings and market shares for the Corporate and Investment Bank, complaints performance and volume of lending provided to customers and clients ■■ Colleague: Diversity and Inclusion statistics (including women in senior leadership), Employee sustainable engagement survey scores and conduct and culture measures ■■ Citizenship: Delivery against our Shared Growth Ambition, Colleague engagement in Citizenship activities and external benchmarks and surveys. 108 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportStraight-line vesting applies between the threshold and maximum points in respect of the financial measures. The award is subject to a discretionary underpin by which the Committee must be satisfied with the underlying financial health of the Group. Executive Directors: Statement of implementation of remuneration policy in 2018 The executive Directors’ package for 2018 can be summarised as follows. Further details can be found on pages 100 to 101. Fixed Pay Pension Maximum Bonus Maximum LTIP Jes Staley £2,350,000 £396,000 80% of Total fixed paya 120% of Total fixed paya Tushar Morzaria £1,650,000 £200,000 80% of Total fixed paya 120% of Total fixed paya Comments No change from 2017. No change from 2017. Total variable opportunity unchanged. Bonus and LTIP combined for regulatory deferral purposes. Note a Total fixed pay is defined as Fixed Pay plus Pension. 2018 Annual bonus performance measures Performance measures with appropriately stretching targets have been selected to cover a range of financial and non-financial goals that support the key strategic objectives of the Company. The performance measures and weightings are shown below. Financial (60% weighting) ■■ Profit before tax excluding material items (40% weighting) A performance target range has been set for each financial measure. Strategic/Non-financial (20% weighting) Personal (20% weighting) Payout of this element will depend on the CET1 ratio during the performance year: – if CET1 goes below the expected end-state MDR hurdlea during the year, no part of this element will pay out – if CET1 goes below the end-state MDR hurdle + 150bps but remains above the hurdle during the period, the Committee will exercise its discretion to determine what portion of this element should pay out, based on the causes of the CET1 reduction ■■ Cost: income ratio excluding material items (20% weighting). The evaluation will focus on key performance measures from the Group Performance Measurement Framework, with a detailed retrospective narrative on progress during the year against each category. Performance against the Strategic/Non-financial measures will be assessed by the Committee to determine the percentage of the award that may vest between 0% and 20%. The measures are organised around three main categories: Customer and Client, Colleague and Citizenship. Each of the three main categories has equal weighting. Measures will likely include, but will not be limited to, the following: ■■ Customer and Client: NPS for consumer businesses, Client rankings and market shares for the Corporate and Investment Bank, complaints performance and volume of lending provided to customers and clients ■■ Colleague: Diversity and Inclusion statistics (including women in senior leadership), Employee sustainable engagement survey scores and conduct and culture measures ■■ Citizenship: Delivery against our Shared Growth Ambition, Colleague engagement in Citizenship activities and external benchmarks and surveys. The executive Directors have the following joint personal objectives for 2018: ■■ deliver on 2018 financial goals such that we remain on track to achieve our returns targets ■■ seek opportunities for further cost savings and optimise the capital allocation within the Group ■■ complete the structural reform programme successfully, ensuring the UK ring-fenced bank is fully operational ■■ finalise the implementation plan for an effective Brexit outcome ■■ continue to drive strategic initiatives to enhance growth in shareholder value in the medium term ■■ manage risk and control effectively and make continued progress in resolving outstanding conduct matters. In addition, individual personal objectives for 2018 are as follows: Jes Staley: ■■ continue to strengthen the Bank’s cyber readiness, operational and financial controls ■■ further improve customer and client satisfaction, with a particular focus on reducing the number of overall complaints ■■ as part of the ongoing succession planning for Group and Business Unit/Functional Executive Committees, continue the focus on improving the percentage of women in senior leader positions. Tushar Morzaria: ■■ continue to strengthen team performance (especially following the creation of the Group Service Company), talent base and employee engagement in Group Finance, Tax and Treasury ■■ demonstrate effective management of external relationships and reputation. Note a The end-state MDR hurdle is currently expected to be 11.4%. Detailed calibration of the Financial targets is commercially sensitive and it is not appropriate to disclose this information externally on a prospective basis. Disclosure of achievement will be made in the 2018 Annual Report subject to the targets no longer being commercially sensitive. The Committee may exercise its discretion to amend the formulaic outcome of assessment against the targets. Any exercise of discretion will be disclosed and explained. home.barclays/annualreport Barclays PLC Annual Report 2017 109 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportAnnual report on Directors’ remuneration Illustrative scenarios for executive Directors’ remuneration The charts below show the potential value of the current executive Directors’ 2018 total remuneration in three scenarios: ‘Minimum’ (i.e. Fixed Pay, Pension and benefits), ‘Maximum’ (i.e. Fixed Pay, Pension, benefits and the maximum variable pay that may be awarded) and ‘Mid-point’ (i.e. Fixed Pay, Pension, benefits and 50% of the maximum variable pay that may be awarded). For the purposes of these charts, the value of benefits is based on an estimated annual value for 2018. The scenarios do not reflect share price movement between award and vesting. A significant proportion of the potential remuneration of the executive Directors is variable and is therefore performance-related. It is also subject to deferral, additional holding periods, malus and clawback. Total remuneration opportunity: Group Chief Executive (£m) Minimum Total 2.81 42% 42% 16% Mid-point Total 5.55 21% 21% 8% 20% 30% Total remuneration opportunity: Group Finance Director (£m) Minimum Total 1.89 44% 44% 12% Mid-point Total 3.74 22% 22% 6% 20% 30% Maximum Total 8.30 Maximum Total 5.59 14% 14% 6% 26% 40% 15% 15% 4% 26% 40% 0 1.5 3 4.5 6 7.5 9 0 1.5 3 4.5 6 7.5 9 Fixed cash Fixed shares Pension and Benefits Bonus LTIP Fixed cash Fixed shares Pension and Benefits Bonus LTIP In the above illustrative scenarios, benefits include regular contractual benefits. Additional ad hoc benefits may arise, for example, overseas relocation of executive Directors, but will always be provided in line with the DRP. Performance graph and table The performance graph below illustrates the performance of Barclays over the financial years from 2009 to 2017 in terms of total shareholder return compared with that of the companies comprising the FTSE 100 index. The index has been selected because it represents a cross-section of leading UK companies. Total shareholder return – rebased to 2008 Barclays PLC FTSE 100 Index 250 180 127 2009 174 143 2010 140 120 2011 2008 210 183 193 184 182 178 183 154 Year ended 31 December 217 187 243 173 2012 2013 2014 2015 2016 2017 In addition, the table below provides a summary of the total remuneration of the relevant Group Chief Executive over the same period as the above graph. For the purpose of calculating the value of the remuneration of the Group Chief Executive, data has been collated on a basis consistent with the ‘single figure’ methodology. The table also provides pay ratios of the Group Chief Executive’s total remuneration to average remuneration for UK employees and the Group Executive Committee (Group ExCo) respectively. Year Group Chief Executive Group Chief Executive single figure of total remuneration £000s Annual bonus against maximum opportunity % Long-term incentive vesting against maximum opportunity % Ratio of single figure of total remuneration to: UK employee median UK employee mean Ratio of single figure of total remuneration to: Group ExCo median Group ExCo mean 2009 John Varley 2010 John Varley 2011 Bob Diamond 2012 Bob Diamonda Antony Jenkinsb 2013 Antony Jenkins 2014 Antony Jenkins 2015 John McFarlanec Antony Jenkinsb Jes Staleyd 2016 Jes Staley 2017 Jes Staley 2,050 4,567 11,070e 1,892 529 1,602 5,467f 3,399 305 277 4,233 3,873 0% 100% 80% 0% 0% 0% 57% 48% N/A N/A 60% 48.5% 50% 16% N/Ag 0% N/Ag N/Ag 30% 39% N/Ag N/Ag N/Ag N/Ag 75 x 39 x 165 x 86 x 391 x 204 x 0.5 x 0.3 x 1.0 x 0.5 x 2.4 x 1.3 x 84 x 44 x 1.2 x 0.8 x 54 x 29 x 175 x 94 x 0.4 x 0.4 x 2.2 x 2.0 x 126 x 69 x 1.6 x 1.3 x 137 x 73 x 119 x 65 x 1.1 x 1.1 x 1.0 x 0.7 x Notes a Bob Diamond left the Board on 3 July 2012. b Antony Jenkins became Group Chief Executive on 30 August 2012 and left the Board on 16 July 2015. c John McFarlane was Executive Chairman from 17 July 2015 to 30 November 2015. His fees, which remained unchanged, have been pro-rated for his time in the position. He was not eligible to receive a bonus or LTIP. d Jes Staley became Group Chief Executive on 1 December 2015. e This figure includes £5,745k tax equalisation as set out in the 2011 Remuneration report. Bob Diamond was tax equalised on tax above the UK rate where that could not be offset by a double tax treaty. f Antony Jenkins’ 2014 pay is higher than in earlier years since he declined a bonus in 2012 and 2013 and did not have LTIP vesting in those years. g Not a participant in a long-term incentive award which vested in the period. 110 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportAs we focus on our fair pay agenda, we are publishing our CEO pay ratios two years in advance of the disclosure becoming a statutory requirement. The pay ratios compare amounts disclosed in the single total figure table for the Group Chief Executive to (a) the median and mean annual total compensation of all UK employees, and (b) the median and mean annual total compensation of the Group ExCo. Where there was more than one Group Chief Executive in a given year (2012 and 2015), the pay ratio references the sum of the Group Chief Executive single total figures for that year. It is worth noting that the ratios can be volatile. This is a result of a number of factors, including the tenure of our Group Chief Executives and the variation in LTIP payouts (in some years, the Group Chief Executive may not be a participant in a vesting LTIP). Our current Group Chief Executive’s Fixed Pay is fixed for the duration of the current DRP, his 2017 bonus has reduced from 2016 and he has no LTIP vesting this year. This contrasts with the outcome for more junior populations where average fixed pay and average bonuses have increased between 2016 and 2017. Percentage change in Group Chief Executive’s remuneration The table below shows how the percentage change in the Group Chief Executive’s salary, benefits and bonus between 2016 and 2017 compared with the percentage change in the average of each of those components of pay for UK based employees. Group Chief Executive Average based on UK employeesa Note a Certain populations were excluded to enable a meaningful like for like comparison. Fixed Pay 0% 3.3% Benefits −63.3% 0.6% Annual bonus −19.2% 1.2% We have chosen UK based employees as the comparator group as it is the most representative for pay structure comparisons. Relative importance of spend on pay A year on year comparison of Group compensation costs and distributions to shareholders is shown below. Group compensation costs (£m) Dividends to shareholders (£m) 0 2017 2016 2,500 5,000 7,500 0 200 400 600 800 1,000 £7,123 £7,445 2017 2016 £509 £757 Total remuneration of the employees in the Barclays Group The table below shows the number of employees in the Barclays Group as at 31 December 2016 and 2017 in bands by reference to total remuneration. Total remuneration comprises salary, RBP, other allowances, bonus and the value at award of LTIP awards. Total remuneration of the employees in the Barclays Group Remuneration band £0 to £25,000 £25,001 to £50,000 £50,001 to £100,000 £100,001 to £250,000 £250,001 to £500,000 £500,001 to £1,000,000 £1,000,001 to £2,000,000 £2,000,001 to £3,000,000 £3,000,001 to £4,000,000 £4,000,001 to £5,000,000 £5,000,001 to £6,000,000 Above £6,000,000 Number of employees 2017 31,406 24,280 17,604 9,818 2,113 811 262 70 21 5 7 4 2016 Constant currency 33,434 23,081 16,942 9,453 2,183 829 273 65 26 7 9 3 2016 Actual 33,989 22,927 17,063 9,098 2,093 771 264 61 21 7 9 2 Barclays is a global business. Of those employees earning above £1m in total remuneration for 2017 in the table above, 61% are based in the US, 32% in the UK, and 7% in the rest of the world. The number of employees paid above £1m is down year on year on a constant currency basis (369 in 2017 vs. 383 in 2016). home.barclays/annualreport Barclays PLC Annual Report 2017 111 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportAnnual report on Directors’ remuneration Chairman and non-executive Directors Remuneration for non-executive Directors reflects their responsibilities and time commitment and the level of fees paid to non-executive Directors of comparable major UK companies. Chairman and non-executive Directors: Single total figure for 2017 fees (audited) Chairman John McFarlane Non-executive Directors Mike Ashley Tim Breedon Sir Ian Cheshirea Mary Francisb Crawford Gillies Sir Gerry Grimstonec Reuben Jeffery III Matthew Lesterd Dambisa Moyo Diane de Saint Victore Diane Schuenemanfg Steve Thiekefh Wendy Lucas-Bulli Frits van Paasschenj Total Fees 2017 £000 800 215 225 360 135 195 375 120 45 135 38 308 87 – – 3,038 2016 £000 800 207 220 – 29 195 250 120 – 135 118 232 221 64 35 2,626 Benefits 2017 £000 2016 £000 2 – – – – – – – – – – – – – – 2 1 – – – – – – – – – – – – – – 1 Total 2017 £000 802 215 225 360 135 195 375 120 45 135 38 308 87 – – 3,040 2016 £000 801 207 220 – 29 195 250 120 – 135 118 232 221 64 35 2,627 Non-executive Directors are reimbursed expenses that are incurred for business reasons. Any tax that arises on these reimbursed expenses is paid by Barclays. The Chairman is provided with private medical cover and the use of a Company vehicle and driver when required for business purposes. Notes a Sir Ian Cheshire joined the Board as a non-executive Director and the Barclays UK Board as Chairman with effect from 3 April 2017. The 2017 figure includes fees of £300,000 for his role on the Barclays UK Board. b Mary Francis joined the Board as a non-executive Director with effect from 1 October 2016. c Sir Gerry Grimstone joined the Board as a non-executive Director from 1 January 2016 succeeding Sir Michael Rake as Senior Independent Director and Deputy Chairman. He was appointed Chairman of the Barclays International Divisional Board on 1 August 2017. His Board Deputy Chairman fees were reduced to £150,000 with effect from this appointment. The 2017 figure includes fees of £167,000 for his role on the Barclays International Divisional Board. d Matthew Lester joined the Board as a non-executive Director with effect from 1 September 2017. e Diane de Saint Victor retired from the Board with effect from 10 May 2017. f Diane Schueneman and Steve Thieke both served in 2016 on the US Governance Review Board and subsequently the board of the US intermediate holding company on its formation. The 2016 figures include fees of $138,000 and $150,000 respectively for their roles on the US Governance Review Board and the board of the US intermediate holding company. In 2016, Steve Thieke also waived fees of $63,000. The 2017 figures include fees of $170,000 and $63,000 respectively for their role on the board of the US intermediate holding company. In 2017, Steve Thieke also waived fees of $34,000. g Diane Schuneneman was appointed Chair of the Group Service Company Board on 1 September 2017. The 2017 figure includes fees of £41,000 for her role on the Group Service Company Board. h Steve Thieke retired from the Board with effect from 10 May 2017. i Wendy Lucas-Bull retired from the Board with effect from 1 March 2016. 2016 figures include fees received by Wendy Lucas-Bull for her role as Chairman of BAGL. j Frits van Paasschen retired from the Board with effect from 28 April 2016. Chairman and non-executive Directors: Statement of implementation of remuneration policy in 2018 2018 fees, subject to annual review in line with policy, for the Chairman and non-executive Directors are shown below. Chairmana Deputy Chairmanb Board memberc Additional responsibilities Senior Independent Director Chairman of Board Audit or Board Remuneration Committee Chairman of Board Risk Committee Chairman of Board Reputation Committee Membership of Board Audit or Board Remuneration Committee Membership of Board Reputation or Board Risk Committee Membership of Board Nominations Committee 1 January 2018 £000 800 250 80 1 January 2017 £000 800 250 80 30 70 70 50 30 25 15 30 70 70 50 30 25 15 Notes a The Chairman does not receive any other additional responsibility fees in addition to the Chairman fees. b The Deputy Chairman does not receive any additional fees in respect of being a member or Chairman of Board Committees or for his role as Senior Independent Director. The current Deputy Chairman’s fees have been reduced to £150,000 with effect from his appointment as Chairman of the Barclays International Divisional Board. c The basic Board member fee payable to non-executive Directors was last increased in May 2011. 112 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportPayments to former Directors Former Group Finance Director: Chris Lucas In 2017, Chris Lucas continued to be eligible to receive life assurance cover, private medical cover and payments under the Executive Income Protection Plan (EIPP). Full details of his eligibility under the EIPP were disclosed in the 2013 Directors’ Remuneration report (page 115 of the 2013 Annual Report). Chris Lucas did not receive any other payment or benefit in 2017. Directors’ shareholdings and share interests Executive Directors’ shareholdings and share interests (audited) The chart below shows the value of Barclays’ shares held beneficially by Jes Staley and Tushar Morzaria as at 19 February 2018 that count towards the shareholding requirement of, as a minimum, Barclays’ shares worth 200% of Total fixed pay (i.e. Fixed Pay plus Pension). The current executive Directors have five years from their respective date of appointment to meet this requirement. At close of business on 19 February 2018, the market value of Barclays’ ordinary shares was £2.01. Jes Staley (£000) Tushar Morzaria (£000) Requirement Actual £5,492 £9,132 Requirement Actual £3,700 £4,354 Interests in Barclays PLC shares (audited) The table below shows shares owned beneficially by all the Directors and shares over which executive Directors hold awards which are subject to either deferral terms and/or performance measures. The shares shown below that are subject to performance measures are the maximum number of shares that may be released. Executive Directors Jes Staley Tushar Morzaria Chairman John McFarlane Non-executive Directors Mike Ashley Tim Breedon Sir Ian Cheshirea Mary Francis Crawford Gillies Sir Gerry Grimstone Reuben Jeffery III Matthew Lesterb Dambisa Moyo Diane de Saint Victorc Diane Schueneman Steve Thieked Mike Turnere Unvested Owned outright Subject to performance measures Not subject to performance measures Total as at 31 December 2017 (or date of retirement from the Board, if earlier) Total as at 19 February 2018 4,543,088 2,166,204 1,685,955 3,172,878 398,406 492,782 6,627,449 5,831,864 6,627,449 5,831,864 72,043 73,517 37,124 82,851 14,099 77,796 110,972 211,189 10,000 59,036 42,823 27,255 59,724 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 72,043 72,043 73,517 37,124 82,851 14,099 77,796 110,972 211,189 10,000 59,036 42,823 27,255 59,724 – 73,517 37,124 82,851 14,099 77,796 110,972 211,189 10,000 59,036 – 27,255 – – Notes a Sir Ian Cheshire joined the Board as a non-executive Director with effect from 3 April 2017. b Matthew Lester joined the Board as a non-executive Director with effect from 1 September 2017. c Diane de Saint Victor retired from the Board as a non-executive Director with effect from 10 May 2017. d Steve Thieke retired from the Board as a non-executive Director with effect from 10 May 2017. e Mike Turner joined the Board as a non-executive Director with effect from 1 January 2018. home.barclays/annualreport Barclays PLC Annual Report 2017 113 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic report Annual report on Directors’ remuneration Barclays Board Remuneration Committee The Board Remuneration Committee is responsible for overseeing Barclays’ remuneration as described in more detail below. Terms of Reference The role of the Committee is to: ■■ set the overarching principles and parameters of remuneration policy across the Group ■■ consider and approve the remuneration arrangements of (i) the Chairman, (ii) the executive Directors, (iii) members of the Barclays Group Executive Committee and any other senior executives specified by the Committee from time to time, and (iv) all other Group employees whose total annual compensation exceeds an amount determined by the Committee from time to time (currently £2m) ■■ exercise oversight for remuneration issues. The Committee considers all aspects of the design and operation of remuneration policy to ensure a coherent approach is taken in respect of all employees. In discharging this responsibility the Committee seeks to ensure that the policy assesses, among other things, the impact of pay arrangements on culture and all elements of risk management. The Committee also approves incentive pools for all major businesses and functions, reviews the design and provision of retirement benefits, and considers and approves measures designed to promote the alignment of the interests of shareholders and employees. The Committee and its members work as necessary with other Board Committees, and is authorised to select and appoint its own advisers as required. The Terms of Reference can be found at home.barclays/corporategovernance or from the Company Secretary on request. Chairman and members The Chairman and members of the Committee are as follows: ■■ Crawford Gillies, Committee member since 1 May 2014 and Chairman since 24 April 2015 ■■ Tim Breedon, Committee member since 1 December 2012 ■■ Mary Francis, Committee member since 1 November 2016 ■■ Dambisa Moyo, Committee member since 1 September 2015. All current members are considered independent by the Board. Remuneration Committee attendance in 2017 Crawford Gillies Tim Breedon Mary Francis Dambisa Moyo Meetings attended/eligible to attend 7/7 7/7 7/7 7/7 The performance of the Committee is reviewed each year as part of the Board Effectiveness Review. The results of the January 2018 review were positive and concluded that the Committee is composed of the right level of experience and skills. Full details of the Board Effectiveness Review can be found on page 78. Advisers to the Remuneration Committee Between February 2016 and September 2017, the Board Remuneration Committee did not engage an independent adviser. PricewaterhouseCoopers (PwC) was appointed as the independent adviser to the Committee in October 2017. Prior to the appointment of KPMG as auditors on 31 March 2017 (and formally approved at the 2017 AGM in May 2017), PwC was the Group’s external auditor. The Committee is satisfied that the advice provided by PwC to the Committee is independent and objective. PwC is a signatory to the voluntary UK Code of Conduct for executive remuneration consultants. Throughout 2017, Willis Towers Watson continued to provide the Committee with market data on compensation when considering incentive levels and remuneration packages. PwC and Willis Towers Watson were paid £78,000 in aggregate (excluding VAT) in fees for their advice to the Committee in 2017 relating to the executive Directors (either exclusively or along with other employees within the Committee’s Terms of Reference). In addition to advising the Committee, PwC provided unrelated consulting advice to the Group in respect of corporate taxation, climate-related financial disclosures, data strategy, technology consulting and internal audit. In the course of its deliberations, the Committee also considers the views of the Group Chief Executive, the Group Human Resources Director and the Group Reward and Performance Director. The Group Finance Director and the Chief Risk Officer provide regular updates on Group and business financial performance and risk profile respectively. No Barclays’ employee or Director participates in discussions with, or decisions of, the Committee relating to his or her own remuneration. No other advisers provided services to the Committee in the year. 114 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportRemuneration Committee activities in 2017 The following provides a summary of the Committee’s activities during 2017 and at the January and February 2018 meetings at which 2017 remuneration decisions were finalised. Meeting January 2017 Fixed and variable pay issues Governance, risk and other mattersa ■■ 2016 incentive funding proposals including risk adjustments ■■ 2016 bonus proposals for senior executives ■■ Barclays deferral approach February 2017 ■■ Approved executive Directors’ and senior executives’ 2017 ■■ Approved 2016 Remuneration report fixed pay ■■ Review of Committee effectiveness ■■ Approved 2017 executive Directors’ annual bonus performance measures ■■ Group fixed pay budgets for 2017 ■■ Approved final 2016 incentive funding including risk adjustments ■■ Approved proposals for executive Directors’ and senior executives’ 2016 bonuses and 2017–2019 LTIP awards for executive Directors April 2017 May 2017 July 2017 ■■ Incentive funding approach ■■ 2017 ex ante risk adjustment methodology ■■ Consideration of whistleblowing event ■■ Non-executive Directors’ fees for subsidiary boards ■■ Structural reform update ■■ Gender Pay Gap reporting ■■ Annual all employee share plans update ■■ Non-executive Directors’ fees for subsidiary boards October 2017 ■■ 2017 incentive funding projections including risk adjustments ■■ US benefits arrangements ■■ Annual review of Group Chairman’s remuneration ■■ BAGL – approach for 2017 pay round December 2017 ■■ Initial considerations on executive Directors’ and senior executives’ 2017 bonuses and 2018 fixed pay and bonus approach ■■ 2018 LTIP performance measures ■■ 2017 incentive funding proposals including risk adjustments ■■ Approved changes to deferral plans ■■ Review of Committee activity, Terms of Reference and Control Framework January 2018 ■■ 2017 incentive funding proposals including risk adjustments ■■ Non-executive Directors’ fees for ■■ 2017 bonus proposals for senior executives subsidiary boards February 2018 ■■ Approved executive Directors’ and senior executives’ ■■ Approved 2017 Remuneration report 2018 fixed pay ■■ Review of Committee effectiveness ■■ Approved 2018 executive Directors’ annual bonus performance measures ■■ Group fixed pay budgets for 2018 ■■ Approved final 2017 incentive funding including risk adjustments ■■ Approved proposals for executive Directors’ and senior executives’ 2017 bonuses and 2018–2020 LTIP awards for executive Directors Note a The Committee is also provided with updates at each scheduled meeting on: regulatory and stakeholder matters, Finance and Risk, Remuneration Review Panel meetings, operation of the Committee’s Control Framework on hiring, retention and termination, headcount and employee attrition, and extant LTIP performance. home.barclays/annualreport Barclays PLC Annual Report 2017 115 GovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategic reportAnnual report on Directors’ remuneration Statement of shareholder voting at Annual General Meeting The table below shows the voting result in respect of our remuneration arrangements at the AGM held on 10 May 2017: Advisory vote on the 2016 Remuneration report Binding vote on the Directors’ remuneration policy For % of votes cast Number 97.22% 11,879,285,601 97.91% 12,062,616,141 Against % of votes cast Number 2.78% 339,664,546 2.09% 257,416,828 Withheld Number 152,439,545 51,369,054 At the AGM held on 24 April 2014, shareholders of Barclays PLC voted 96.02% (10,364,453,159 votes) for the resolution in respect of a fixed to variable remuneration ratio of 1:2 for ‘Remuneration Code Staff ’ (now known as MRTs). On 14 December 2017, the Board of Barclays PLC as shareholder of Barclays Bank PLC approved the resolution that Barclays Bank PLC and any of its current and future subsidiaries be authorised to apply a ratio of the fixed to variable components of total remuneration that exceeds 1:1, provided the ratio does not exceed 1:2. 116 Barclays PLC Annual Report 2017 home.barclays/annualreport Governance: Remuneration reportRisk review Contents The management of risk is a critical underpinning to the execution of Barclays’ strategy. The material risks and uncertainties the Group faces across its business and portfolios are key areas of management focus. Barclays’ risk disclosures are provided in the Annual Report and in the Barclays PLC Pillar 3 Report 2017. Risk management Overview of Barclays’ approach to risk management. A detailed overview together with more specific information on policies that the Group determines to be of particular significance in the current operating environment can be found in Barclays PLC Pillar 3 Report 2017 or at Barclays.com ■■ Enterprise Risk Management Framework (ERMF) ■■ Principal Risks ■■ Risk Appetite for the Principal Risks ■■ Roles and responsibilities in the management of risk ■■ Frameworks, Policies and Standards ■■ Assurance ■■ Effectiveness of risk management arrangements ■■ Learning from our mistakes ■■ Barclays’ Risk Culture ■■ Group-wide risk management tools ■■ Risk management in the setting of strategy Material existing and emerging risks Insight into the level of risk across our business and portfolios, the material existing and emerging risks and uncertainties we face and the key areas of management focus. ■■ Material existing and emerging risks to the Group’s future performance ■■ Material existing and emerging risks potentially impacting more than one Principal Risk ■■ Credit risk ■■ Market risk ■■ Treasury and capital risk ■■ Operational risk ■■ Model risk ■■ Conduct risk ■■ Reputation risk ■■ Legal risk and legal, competition and regulatory matters Principal Risk management Barclays’ approach to risk management for each Principal Risk with focus on organisation and structure and roles and responsibilities. Risk performance Credit risk: The risk of loss to the firm from the failure of clients, customers or counterparties, including sovereigns, to fully honour their obligations to the firm, including the whole and timely payment of principal, interest, collateral and other receivables. Market risk: The risk of a loss arising from potential adverse changes in the value of the firm’s assets and liabilities from fluctuation in market variables including, but not limited to, interest rates, foreign exchange, equity prices, commodity prices, credit spreads, implied volatilities and asset correlations. ■■ Credit risk management ■■ Management of credit risk mitigation techniques and counterparty credit risk ■■ Market risk management ■■ Management of securitisation exposures ■■ Treasury and capital risk management ■■ Operational risk management ■■ Model risk management ■■ Conduct risk management ■■ Reputation risk management ■■ Legal risk management ■■ Credit risk overview and summary of performance ■■ Analysis of the balance sheet ■■ The Group’s maximum exposure and collateral and other credit enhancements held ■■ The Group’s approach to management and representation of credit quality ■■ Analysis of the concentration of credit risk ■■ Loans and advances to customers and banks ■■ Analysis of specific portfolios and asset types ■■ Analysis of problem loans ■■ Impairment ■■ Analysis of debt securities ■■ Analysis of derivatives ■■ Market risk overview and summary of performance ■■ Balance sheet view of trading and banking books ■■ Traded market risk review ■■ Review of regulatory measures Annual Report 119 119 119 119 n/a n/a n/a n/a 120 n/a n/a 121 121 123 123 124 124 125 125 126 126 127 n/a 129 n/a 130 132 134 135 136 137 139 139 139 142 144 147 148 151 156 157 157 160 161 162 163 Pillar 3 Report 122 122 122 122 125 125 125 125 125 126 128 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 129 146 150 158 162 170 174 176 178 180 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 93 94 95 96 home.barclays/annualreport Barclays PLC Annual Report 2017 117 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceContents Risk performance continued Treasury and capital risk – Liquidity: The risk that the firm is unable to meet its contractual or contingent obligations or that it does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets. Treasury and capital risk – Capital: The risk that the firm has an insufficient level or composition of capital to support its normal business activities and to meet its regulatory capital requirements under normal operating environments or stressed conditions (both actual and as defined for internal planning or regulatory testing purposes). This includes the risk from the firm’s pension plans. Treasury and capital risk – Interest rate risk in the banking book: The risk that the firm is exposed to capital or income volatility because of a mismatch between the interest rate exposures of its (non-traded) assets and liabilities. Operational risk: The risk of loss to the firm from inadequate or failed processes or systems, human factors or due to external events (for example, fraud) where the root cause is not due to credit or market risks. Model risk: The risk of the potential adverse consequences from financial assessments or decisions based on incorrect or misused model outputs and reports. Conduct risk: The risk of detriment to customers, clients, market integrity, competition or Barclays from the inappropriate supply of financial services, including instances of wilful or negligent misconduct. Reputation risk: The risk that an action, transaction, investment or event will reduce trust in the firm’s integrity and competence by clients, counterparties, investors, regulators, employees or the public. Legal risk: The risk of loss or imposition of penalties, damages or fines from the failure of the firm to meet its legal obligations including regulatory or contractual requirements. ■■ Liquidity risk overview and summary of performance ■■ Liquidity risk stress testing ■■ Liquidity pool ■■ Funding structure and funding relationships ■■ Encumbrance ■■ Credit ratings ■■ Contractual maturity of financial assets and liabilities ■■ Capital risk overview and summary of performance ■■ Regulatory minimum capital and leverage requirements ■■ Capital resources ■■ Risk weighted assets ■■ Leverage ratios and exposures ■■ Foreign exchange risk ■■ Pension risk review ■■ Minimum requirement for own funds and eligible liabilities ■■ Interest rate risk in the banking book overview and summary of performance ■■ Net interest income sensitivity ■■ Economic capital by business unit ■■ Analysis of equity sensitivity ■■ Volatility of the available for sale portfolio in the liquidity pool ■■ Operational risk overview and summary of performance ■■ Operational risk profile Annual Report 166 166 168 169 171 174 175 179 180 181 183 184 185 186 187 188 189 189 190 190 191 192 Pillar 3 Report n/a n/a n/a n/a 188 n/a n/a n/a 8 19 26 31 113 114 34 112 115 116 116 117 118 120 ■■ Model risk overview and summary of performance 193 n/a ■■ Conduct risk overview and summary of performance 194 n/a ■■ Reputation risk overview and summary of performance 195 n/a ■■ Legal risk overview and summary of performance 196 n/a Supervision and regulation The Group’s operations, including its overseas branches, subsidiaries and associates, are subject to a significant body of rules and regulations. ■■ Supervision of the Group ■■ Global regulatory developments ■■ Financial regulatory framework ■■ Structural reform Pillar 3 Report Contains extensive information on risk as well as capital management. Risk and capital position review: Provides a detailed breakdown of Barclays’ regulatory capital adequacy and how this relates to Barclays’ risk management. ■■ Summary of risk profile ■■ Notes on basis of preparation ■■ Scope of application of Basel rules ■■ Group capital resources, requirements, leverage and liquidity ■■ Analysis of credit risk ■■ Analysis of counterparty credit risk ■■ Analysis of market risk ■■ Analysis of securitisation exposures ■■ Analysis of treasury and capital risk ■■ Analysis of operational risk 197 198 199 204 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 3 5 6 17 36 78 93 99 112 118 118 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewRisk review Risk management Barclays’ risk management strategy Introduction Barclays engages in activities which entail risk taking, every day, throughout its business. This section introduces these risks, and outlines key governance arrangements for managing them. These include roles and responsibilities, frameworks, policies and standards, assurance and lessons learned processes. The Group’s approach to fostering a strong Risk Culture is also described. Enterprise Risk Management Framework (ERMF) The ERMF sets the strategic direction for risk management by defining standards, objectives and responsibilities for all areas of Barclays. It supports the Chief Executive Officer (CEO) and Group Chief Risk Officer (CRO) in embedding effective risk management and a strong Risk Culture. The ERMF sets out: ■■ Principal Risks faced by the Group ■■ Risk Appetite requirements ■■ Roles and responsibilities for risk management ■■ Risk Committee structure. Principal Risks The ERMF identifies eight Principal Risks (see table below) and sets out associated responsibilities and risk management standards. Risk Appetite for the Principal Risks Risk Appetite is defined as the level of risk which the Group is prepared to accept in the conduct of its activities. The Risk Appetite of the Group specifies the level of risk we are willing to take and why, to enable specific risk taking activities. Risk Appetite is approved and disseminated across legal entities and businesses, including by use of Mandate and Scale limits to enable and control specific activities that have material concentration risk implications for the Group. Roles and responsibilities in the management of risk The Three Lines of Defence All colleagues are responsible for understanding and managing risks within the context of their individual roles and responsibilities, as set out in the ‘Three Lines of Defence’. First Line of Defence The First Line comprises all employees engaged in the revenue generating and client facing areas of the Group and all associated support functions, including Finance, Treasury, Human Resources and the Chief Operating Officer (COO) function. Employees in the First Line are responsible for: ■■ identifying all the risks and developing appropriate policies, standards and controls to govern their activities Financial Principal Risks Non-Financial Principal Risks Operational risk: The risk of loss to the firm from inadequate or failed processes or systems, human factors or due to external events (for example, fraud) where the root cause is not due to credit or market risks. Model risk: The risk of the potential adverse consequences from financial assessments or decisions based on incorrect or misused model outputs and reports. Conduct risk: The risk of detriment to customers, clients, market integrity, competition or Barclays from the inappropriate supply of financial services, including instances of wilful or negligent misconduct. Reputation risk: The risk that an action, transaction, investment or event will reduce trust in the firm’s integrity and competence by clients, counterparties, investors, regulators, employees or the public. Legal risk: The risk of loss or imposition of penalties, damages or fines from the failure of the firm to meet its legal obligations including regulatory or contractual requirements. Credit risk: The risk of loss to the firm from the failure of clients, customers or counterparties, including sovereigns, to fully honour their obligations to the firm, including the whole and timely payment of principal, interest, collateral and other receivables. Market risk: The risk of loss arising from potential adverse changes in the value of the firm’s assets and liabilities from fluctuation in market variables including, but not limited to, interest rates, foreign exchange, equity prices, commodity prices, credit spreads, implied volatilities and asset correlations. Treasury and capital risk: ■ Liquidity risk: The risk that the firm is unable to meet its contractual or contingent obligations or that it does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets. ■ Capital risk: The risk that the firm has an insufficient level or composition of capital to support its normal business activities and to meet its regulatory capital requirements under normal operating environments or stressed conditions (both actual and as defined for internal planning or regulatory testing purposes). This includes the risk from the firm’s pension plans. ■ Interest rate risk in the banking book: The risk that the firm is exposed to capital or income volatility because of a mismatch between the interest rate exposures of its (non-traded) assets and liabilities. ■■ operating within any and all limits which the Risk and Compliance functions establish in connection with the Risk Appetite of the Group ■■ escalating risk events to senior managers in Risk and Compliance. Second Line of Defence Employees of Risk and Compliance comprise the Second Line of Defence. The role of the Second Line is to establish the limits, rules and constraints under which First Line activities shall be performed, consistent with the Risk appetite of the Group, and to monitor the performance of the First Line against these limits and constraints. Third Line of Defence Employees of Internal Audit comprise the Third Line of Defence. They provide independent assurance to the Board and Executive Management over the effectiveness of governance, risk management and control over current, systemic and evolving risks. The Legal function does not sit in any of the three lines, but supports them all. The Legal function is, however, subject to oversight from Risk and Compliance, with respect to operational and conduct risks. Risk Committees Business Risk Committees consider risk matters relevant to their business, and escalate as required to the Group Risk Committee (GRC), whose Chairman, in turn, escalates to Board Committees and the Board. There are three Board-level forums which oversee the application of the ERMF and review and monitor risk across the Group. These are: the Board Risk Committee, the Board Audit Committee, and the Board Reputation Committee. Additionally, the Board Remuneration Committee oversees pay practices focusing on aligning pay to sustainable performance. Finally, the main Board of Barclays receives regular information on the risk profile of the Group, and has ultimate responsibility for risk appetite and capital plans. The Chairman of each Committee prepares a statement each year on the Committee’s activities, which are included in this report on pages 45 to 79. The Board One of the Board’s (Board of Directors of Barclays Bank PLC) responsibilities is the approval of Risk Appetite (see page 126 of the Barclays PLC Pillar 3 Report 2017). The Group CRO regularly presents a report to the Board summarising developments in the risk environment and performance trends in the key portfolios. The Board is also responsible for the ERMF. home.barclays/annualreport Barclays PLC Annual Report 2017 119 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk management Barclays’ risk management strategy Board Committees Board Board Risk Committee Board Audit Committee Board Reputation Committee Board Remuneration Committee Management Level Committees/Forums Group ExCo Group Risk Committee Remuneration Review Panel Business Level Committees/Forums Business Risk Committees The Board Risk Committee (BRC) The BRC monitors the Group’s risk profile against the agreed financial appetite. Where actual performance differs from expectations, the actions taken by management are reviewed to verify that the BRC is comfortable with them. After each meeting, the Chairman of the BRC prepares a report for the next meeting of the Board. All members are independent non-executive Directors. The Group Finance Director (GFD) and the Group CRO attend each meeting as a matter of course. The BRC also considers the Group’s Risk Appetite statement for operational risk and evaluates the Group’s operational risk profile and operational risk monitoring. The BRC receives regular and comprehensive reports on risk methodologies, the effectiveness of the risk management framework, and the Group’s risk profile, including the key issues affecting each business portfolio and forward risk trends. The Committee also commissions in-depth analyses of significant risk topics, which are presented by the Group CRO or senior risk managers in the businesses. The Board Audit Committee (BAC) The BAC receives regular reports on the effectiveness of internal control systems, quarterly reports on material control issues of significance, and quarterly papers on accounting judgements (including impairment). It also receives a half-yearly review of the adequacy of impairment allowances, which it reviews relative to the risk inherent in the portfolios, the business environment, the Group’s policies and methodologies. The Chairman of the BAC also sits on the BRC. The Board Reputation Committee (RepCo) The RepCo reviews management’s recommendations on conduct and reputation risk and the effectiveness of the processes by which the Group identifies and manages these risks. It also reviews and monitors the effectiveness of Barclays’ citizenship strategy, including the management of Barclays’ economic, social and environmental contribution. The Board Remuneration Committee (RemCo) The RemCo receives a detailed report on risk management performance and risk profile, and proposals on ex-ante and ex-post risk adjustments to variable remuneration. These inputs are considered in the setting of performance incentives. Induction programmes support new colleagues in understanding how risk management culture and practices support how the Group does business and the link to Barclays’ values. The Leadership Curriculum covers the building, sustaining and supporting of a trustworthy organisation and is offered to colleagues globally. Other Risk Culture drivers In addition to values and conduct, we consider the following determinants of Risk Culture: ■■ Management and governance: This means a consistent tone from the top and clear responsibilities to enable identification and challenge. ■■ Motivation and incentives: The right behaviours are rewarded and modelled. ■■ Competence and effectiveness: This means that colleagues are enabled to identify, coordinate, escalate and address risk and control matters. ■■ Integrity: Colleagues are willing to meet their risk management responsibilities; colleagues escalate issues on a timely basis. Summaries of the relevant skills, experience and background of the Directors of the Board are presented in the Board of Directors section on pages 47 to 48. The terms of reference and additional details on membership and activities for each of the principal Board Committees are available from the Corporate Governance section of Barclays’ website at: home.barclays/about-barclays/barclays- corporate-governance.html Barclays’ Risk Culture Risk Culture can be defined as ‘norms, attitudes and behaviours related to risk awareness, risk taking and risk management’. At Barclays this is reflected in how we identify, escalate and manage risk matters. Our Code of Conduct – the Barclays Way Globally, all colleagues must attest to the ‘Barclays Way’, our Code of Conduct, and all frameworks, policies and standards applicable to their roles. The Code of Conduct outlines the Purpose and Values which govern our Barclays Way of working across our business globally. It constitutes a reference point covering all aspects of colleagues’ working relationships, specifically (but not exclusively) with other Barclays employees, customers and clients, governments and regulators, business partners, suppliers, competitors and the broader community. Embedding of a values-based, conduct culture The Group Executive Committee reconfirmed Conduct, Culture and Values as one of its execution priorities for 2017 with the aim of embedding the cultural measurement tool developed in 2016. The effectiveness of the Risk and Control environment, for which all colleagues are responsible, depends on the continued embedment of strong values. Please see the Board Reputation Committee report on pages 69 to 74 for further details. 120 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewRisk review Material existing and emerging risks Material existing and emerging risks to the Group’s future performance Material risks are those to which senior management pay particular attention and which could cause the delivery of the Group’s strategy, results of operations, financial condition and/or prospects to differ materially from current expectations. Emerging risks are those that have largely unknown components, the impact of which could crystallise over a longer time horizon. These could currently be considered immaterial but over time may individually or cumulatively affect the Group’s strategy and cause the same outcomes as detailed above regarding material risks. In addition, certain factors beyond the Group’s control, including escalation of terrorism or global conflicts, natural disasters and similar calamities, although not detailed below, could have a similar impact on the Group. The risks described below are material risks that senior management has identified with respect to the Group, which is defined as Barclays PLC and its consolidated subsidiaries (including the Barclays Bank PLC Group). In connection with the planned implementation in the first half of 2018 of ring-fencing certain of the Group’s UK businesses, Barclays Bank PLC will transfer what are materially the assets and business of the Barclays UK division to another subsidiary of the Group, Barclays Bank UK PLC. Senior management expects that upon this transfer, the material risks with respect to the Barclays Bank PLC Group will be the same in all material respects as those risks with respect to the Group. For more information on certain risks senior management has identified with respect to the Barclays Bank PLC Group, see v) Certain potential consequences of ring-fencing to Barclays Bank PLC. Material existing and emerging risks potentially impacting more than one Principal Risk i) Business conditions, general economy and geopolitical issues The Group offers a broad range of services, including to retail, institutional and government customers, in a large number of countries. The breadth of these operations means that deterioration in the economic environment, or an increase in political instability in countries where the Group is active, or in any systemically important economy, could adversely affect the Group’s operating performance, financial condition and prospects. Although economic activity continued to strengthen globally in 2017 a change in global economic conditions and the reversal of the improving trend may result in lower client activity of the Group and/or an increase of the Group’s default rates, delinquencies, write-offs, and impairment charges, which in turn could adversely affect the Group’s performance and prospects. In several countries, reversals of capital inflows, as well as fiscal austerity, have already caused deterioration in political stability. This could be exacerbated by a renewed rise in asset price volatility or sustained pressure on government finances. In addition, geopolitical tensions in some areas of the world, such as the Korean Peninsula, the Middle East and Eastern Europe, are already acute and at risk of further deterioration, thus potentially increasing market uncertainties and adverse global economic and market conditions. In the US, there is uncertainty around the policy platform of the administration which took office in 2017. There is the possibility of significant changes in policy in sectors including trade, healthcare and commodities which may have an impact on associated Barclays portfolios. A significant proportion of the Group’s portfolio is located in the US, including a major credit card portfolio and a range of corporate and investment banking exposures. Stress in the US economy, weakening GDP, an unexpected rise in unemployment and/or an increase in interest rates could lead to increased levels of impairment. Most major central banks have indicated that they expect prevailing loose monetary policies to tighten. Should ‘normalisation’ paths diverge substantially, flows of capital between countries could alter significantly, placing segments with sizeable foreign currency liabilities, in particular emerging markets, under pressure. In addition, possible divergence of monetary policies between major advanced economies risks triggering further financial market volatility (see also ii) Interest rate rises adversely impacting credit conditions, below). In the UK, the vote in favour of leaving the EU (see iii) Process of UK withdrawal from the European Union, below) has given rise to political uncertainty with attendant consequences for investment and market confidence. The initial impact was a depreciation of Sterling resulting in higher costs for companies exposed to imports and a more favourable environment for exporters. Rising domestic costs resulting from higher import prices may impact household incomes and the affordability of consumer loans and mortgages. In turn, this may affect businesses dependent on consumers for revenue. There has also been a reduction in activity in both commercial and residential real estate markets which has the potential to impact value of real estate assets and adversely affect mortgage assets. Sentiment towards emerging markets as a whole continues to be driven in large part by developments in China, where there is some concern around the ability of authorities to manage growth while transitioning from manufacturing towards services. Although the Chinese government’s efforts to stably increase the weight of domestic demand have had some success, the pace of credit growth remains a concern, given the high level of leverage and despite regulatory action. A stronger than expected slowdown could result if authorities fail to appropriately manage the end of the investment and credit-led boom. Deterioration in emerging markets could affect the Group if it results in higher impairment charges for the Group via sovereign or counterparty defaults. More broadly, a deterioration of conditions in the key markets where the Group operates could affect performance in a number of ways including, for example: (i) deteriorating business, consumer or investor confidence leading to reduced levels of client activity, including demand for borrowing from creditworthy customers, or indirectly, a material adverse impact on GDP growth in significant markets and therefore on Group performance; (ii) higher levels of default rates and impairment; (iii) mark to market losses in trading portfolios resulting from changes in factors such as credit ratings, share prices and solvency of counterparties; (iv) reduced ability to obtain capital from other financial institutions for the Group operations; and (v) lower levels of fixed asset investment and productivity growth overall. ii) Interest rate rises adversely impacting credit conditions To the extent that central banks increase interest rates particularly in the Group’s main markets, in the UK and the US, there could be an impact on consumer debt affordability and corporate profitability. While interest rate rises could positively impact the Group’s profitability, as retail and corporate business income may increase due to margin de-compression, future interest rate increases, if larger or more frequent than expectations, could cause stress in the loan portfolio and underwriting activity of the Group. Higher credit losses driving an increased impairment allowance would most notably impact retail unsecured portfolios and wholesale non-investment grade lending. Interest rates rising faster than expected could also have an adverse impact on the value of high quality liquid assets which are part of the Group Treasury function’s investment activity that could consequently create more volatility through the Group’s available for sale reserves than expected. iii) Process of UK withdrawal from the European Union The uncertainty and increased market volatility following the UK’s decision to leave the EU in 2019 is likely to continue until the exact nature of the future trading relationship with the EU becomes clear. The potential risks associated with an exit from the EU include: ■■ Increased market risk with the impact on the value of trading book positions, mainly in Barclays International, expected to be driven predominantly by currency and interest rate volatility. ■■ Potential for credit spread widening for UK institutions which could lead to reduced investor appetite for Barclays’ debt securities, which could negatively impact the cost of and/or access to funding. Potential for continued market and interest rate volatility could affect the interest rate risk underlying, and potentially affect the value of the assets home.barclays/annualreport Barclays PLC Annual Report 2017 121 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceMaterial existing and emerging risks in the banking book, as well as securities held by Barclays for liquidity purposes. The implementation of these changes involves a number of risks which include: ■■ Changes in the long-term outlook for UK interest rates which may adversely affect IAS 19 pension liabilities and the market value of equity investments funding those liabilities. ■■ Increased risk of a UK recession with lower growth, higher unemployment and falling UK house prices. This would likely negatively impact a number of Barclays’ portfolios, particularly in Barclays UK, notably: higher Loan to Value mortgages, UK unsecured lending including credit cards and Commercial Real Estate exposures. ■■ Changes to current EU ‘Passporting’ rights which will likely require adjustments to the current model for the Group’s cross-border banking operation which could increase operational complexity and/or costs. ■■ The ability to attract, or prevent the departure of, qualified and skilled employees may be impacted by the UK’s future approach to the EU freedom of movement and immigration from the EU countries and this may impact Barclays’ access to the EU talent pool. ■■ The legal framework within which Barclays operates could change and become more uncertain as the UK takes steps to replace or repeal certain laws currently in force, which are based on EU legislation and regulation (including EU regulation of the banking sector). Certainty of existing contracts, enforceability of legal obligations and uncertainty around the outcome of disputes may be affected until the impacts of the loss of the current jurisdictional arrangements between UK and EU courts and the universal enforceability of judgements across the EU (including the status of existing EU case law) are fully known. iv) Regulatory change agenda and impact on business model The Group remains subject to ongoing significant levels of regulatory change and scrutiny in many of the countries in which it operates (including, in particular, the UK and the US). As a result, regulatory risk will remain a focus for senior management and consume significant levels of business resources. Furthermore, a more intensive regulatory approach and enhanced requirements together with the uncertainty (particularly in light of the UK’s decision to withdraw from the EU) and potential lack of international regulatory co-ordination as enhanced supervisory standards are developed and implemented may adversely affect the Group’s business, capital and risk management strategies and/or may result in the Group deciding to modify its legal entity structure, capital and funding structures and business mix, or to exit certain business activities altogether or not to expand in areas despite otherwise attractive potential. The most significant of the regulatory reforms affecting the Group in 2018 is the creation of the ring-fenced bank under the Bank’s structural reform programme (for more on structural reform, see Supervision and Regulation on page 204). ■■ The Group is restructuring its intra-group and external capital, funding and liquidity arrangements to meet regulatory requirements and support business needs. The changes will impact the sources of funding available to the different entities including their respective ability to access the capital markets. These changes may affect funding costs. ■■ The changes to the Group structure may negatively impact the assessment made by credit rating agencies and creditors over time. The risk profile and key risk drivers of the ring-fenced bank and the non ring-fenced bank will be specific to the activities and risk profile of each entity. As a result, different Group entities such as Barclays Bank PLC may also be assessed differently in future which could result in differences in credit ratings. Changes to the credit assessment at the Group or individual entity level, including the potential for ratings downgrades and ratings differences across entities, could impact access and cost of certain sources of funding. ■■ Implementation of ring-fencing introduces a number of execution risks. Technology change could result in outages or operational errors. Legal challenge to the ring-fence transfer scheme may delay the transfer of assets and liabilities to the ring-fenced bank. Delayed delivery could increase reputational risk or result in regulatory non-compliance. ■■ There is a risk that Barclays does not meet regulatory requirements across the new structure. Failure to meet these requirements may have an adverse impact on the Group’s profitability, operating flexibility, flexibility of deployment of capital and funding, return on equity, ability to pay dividends, credit ratings, and/or financial condition. In addition to structural reform there are several other significant pieces of legislation/ areas of focus which will require significant management attention, cost and resource: ■■ Changes in prudential requirements, including the proposals for amendment of the CRD IV and the BRRD (as part of the EU’s risk reduction measures package) may impact minimum requirements for own funds and eligible liabilities (MREL) (including requirements for internal MREL), leverage, liquidity or funding requirements, applicable buffers and/or add-ons to such minimum requirements and risk weighted assets calculation methodologies all as may be set by international, EU or national authorities from time to time. Such or similar changes to prudential requirements or additional supervisory and prudential expectations, either individually or in aggregate, may result in, among other things, a need for further management actions to meet the changed requirements, such as: increasing capital, MREL or liquidity resources, reducing leverage and risk weighted assets; restricting distributions on capital instruments; modifying the terms of outstanding capital instruments; modifying legal entity structure (including with regard to issuance and deployment of capital, MREL and funding for the Group); changing the Group’s business mix or exiting other businesses; and/or undertaking other actions to strengthen the Group’s position. (See Treasury and capital risk on pages 164 to 190 and Supervision and regulation on pages 197 to 204 for more information). ■■ The derivatives market has been the subject of particular focus for regulators in recent years across the G20 countries and beyond, with regulations introduced which require the reporting and clearing of standardised over the counter (OTC) derivatives and the mandatory margining of non-cleared OTC derivatives. Reforms in this area are ongoing with further requirements expected to be implemented in the course of 2018. More broadly, the recast Markets in Financial Instruments Directive in Europe (MiFID II), which came into force in January 2018, has fundamentally changed the European regulatory framework, and entails significant operational changes for market participants in a wide range of financial instruments as well as changes in market structures and practices. In addition, the EU Benchmarks Regulation which also came into force in January 2018 regulates the administration and use of benchmarks in the EU. Compliance with this evolving regulatory framework entails significant costs for market participants and is having a significant impact on certain markets in which the Group, notably Barclays International, operates. Other regulations applicable to swap dealers, including those promulgated by the US Commodity Futures Trading Commission, have imposed significant costs on the Group’s derivatives business. These and any future requirements, including the US SEC’s regulations relating to security-based swaps and the possibility of overlapping and/or contradictory requirements imposed on derivative transactions by regulators in different jurisdictions, are expected to continue to impact such business. ■■ The Group and certain of its members are subject to supervisory stress testing exercises in a number of jurisdictions. These exercises currently include the programmes of the BoE, the EBA, the FDIC and the FRB. These exercises are designed to assess the resilience of banks to adverse economic or financial developments and enforce robust, forward- looking capital and liquidity management processes that account for the risks associated with their business profile. Assessment by regulators is on both a quantitative and qualitative basis, the latter focusing on the Group’s or certain of its members’ business model, data provision, stress testing capability and internal management processes and controls. The stress testing requirements to which the Group and its members are subject are becoming increasingly stringent. Failure to meet requirements of regulatory stress tests, or the failure by regulators to approve the stress test results and capital plans of the 122 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewGroup, could result in the Group being required to enhance its capital position, limit capital distributions or position additional capital in specific subsidiaries. For more information on stress testing, please see Supervision and regulation on page 200. ■■ The introduction and implementation of both PSD2 and the Open API standards and data sharing remedy imposed by the UK Competition and Markets Authority following its Retail Banking Market Investigation Order (together ‘Open Banking’) from January 2018 is anticipated to transform the traditional UK banking model and conventional relationship between a customer and their bank. It will do this by providing customers with the ability to share their transactional data with authorised third party service providers either for aggregation or payment services. It is anticipated that these aggregation or payment services will be offered by third parties to Barclays’ customers. Members of the Barclays Group will be able to offer these same services to customers of other banks. A failure to comply with Open Banking requirements could expose Barclays to regulatory sanction, potential financial loss and reputational detriment. While Open Banking will affect the Group as a whole, the impact is likely to be particularly relevant for Barclays UK. v) Certain potential consequences of ring-fencing to Barclays Bank PLC In connection with the planned implementation in the first half of 2018 of ring-fencing certain of the Group’s UK businesses, Barclays Bank PLC will transfer what are materially the assets and business of the Barclays UK division to another subsidiary of the Group, Barclays Bank UK PLC. Senior management expects that upon this transfer, the material risks with respect to the Barclays Bank PLC Group will be the same in all material respects as those risks with respect to the Group. However, senior management has identified certain potential differences in risks with respect to the Barclays Bank PLC Group as compared to risks to the Group. The transfer of the assets and liabilities of the Barclays UK division from Barclays Bank PLC will mean that the Barclays Bank PLC Group will be less diversified than the Group as a whole. Barclays Bank PLC will not be the parent of Barclays Bank UK PLC and thus will not have recourse to the assets of Barclays Bank UK PLC. Relative to the Group, the Barclays Bank PLC Group will be, among other things: ■■ more focused on businesses outside the UK, particularly in the US, and thus more exposed to the US economy and more affected by movements in the US Dollar (and other non-Sterling currencies) relative to Sterling, with a relatively larger portion of its business exposed to US regulation ■■ more focused on wholesale businesses, such as corporate and investment banking and capital markets, which expose Barclays Bank PLC Group to a broader range of market conditions and to counterparty and operational risks and thus the financial performance of Barclays Bank PLC may be subject to greater fluctuations relative to that of the Group as a whole or that of the ring-fenced bank ■■ more dependent on wholesale funding sources, as the UK retail deposit base will be transferred to the ring-fenced bank. The UK retail mortgage assets will also be transferred to the ring-fenced bank, which reduces Barclays Bank PLC’s access to funding sources reliant on residential mortgage collateral. The Barclays Bank PLC Group may therefore experience more difficult financing conditions and/or higher costs of funding including in situations of stress. As a result of the implementation of ring-fencing, different Group entities, such as Barclays Bank PLC, may be assessed differently by credit rating agencies, which may result in different, and possibly more negative, assessments of Barclays Bank PLC’s credit and thus in lower credit ratings than the credit ratings of the Group, which in turn could adversely affect the sources and costs of funding for Barclays Bank PLC ■■ potentially subject to different regulatory obligations, including different liquidity requirements and capital buffers. As a result of any or all of the foregoing, implementation of ring-fencing may adversely affect the market value and/or liquidity of securities issued by Barclays Bank PLC. Material existing and emerging risks impacting individual Principal Risks i) Credit risk a) Impairment The introduction of the impairment requirements of IFRS 9 Financial Instruments, implemented on 1 January 2018, results in higher impairment loss allowances that are recognised earlier, on a more forward looking basis and on a broader scope of financial instruments than is the case under IAS 39 and, as a result, will have a material impact on the Group’s financial condition. Measurement involves increased complex judgement and impairment charges will tend to be more volatile. Unsecured products with longer expected lives, such as revolving credit cards, are the most impacted. The capital treatment on the increased reserves has the potential to adversely impact regulatory capital ratios. In addition, the move from incurred to expected credit losses has the potential to impact the Group’s performance under stressed economic conditions or regulatory stress tests. For more information please refer to Note 1 on pages 241 to 246. b) Specific sectors The Group is subject to risks arising from changes in credit quality and recovery rate of loans and advances due from borrowers and counterparties in a specific portfolio. Any deterioration in credit quality could lead to lower recoverability and higher impairment in a specific sector. The following are areas of uncertainties to the Group’s portfolio which could have a material impact on performance. ■■ UK real estate market. With UK property representing a significant portion of the overall UK Corporate and Retail credit exposure, the Group is at risk from a fall in property prices in both the residential and commercial sectors in the UK. Strong house price growth in London and the south-east of the UK, fuelled by foreign investment, strong buy-to-let (BTL) demand and subdued housing supply, has resulted in affordability metrics becoming stretched. Average house prices as at the end of 2017 were more than 5.6 times average earnings. ■■ Large single name losses. The Group has large individual exposures to single name counterparties both in its lending activities and in its financial services and trading activities, including transactions in derivatives and transactions with brokers, central clearing houses, dealers, other banks, mutual and hedge funds and other institutional clients. The default of such counterparties could have a significant impact on the carrying value of these assets. In addition, where such counterparty risk has been mitigated by taking collateral, credit risk may remain high if the collateral held cannot be realised, or has to be liquidated at prices which are insufficient to recover the full amount of the loan or derivative exposure. Any such defaults could have a material adverse effect on the Group’s results due to, for example, increased credit losses and higher impairment charges. ■■ Leverage finance underwriting. The Group takes on sub-investment grade underwriting exposure, including single name risk, particularly in the US and Europe. The Group is exposed to credit events and market volatility during the underwriting period. Any adverse events during this period may potentially result in loss for the Group, mainly through Barclays International, or an increased capital requirement should there be a need to hold the exposure for an extended period. ii) Market risk Market volatility Elevated market volatility, which can be triggered and/or aggravated by disappointment in economic data, divergent monetary policies, political uncertainty or conflicts, would likely entail a significant deflation of assets which in turn may put under strain counterparties and have knock-on effects on the bank. In addition, the Group’s trading business is generally exposed to a prolonged period of elevated asset price volatility, particularly if it negatively affects the depth of marketplace liquidity. Such a scenario could impact the Group’s ability to execute client trades and may also result in lower client flow-driven income and/or market-based losses on its existing portfolio of market risks. These can include having to absorb higher hedging costs from rebalancing risks that need to be managed dynamically as market levels and their associated volatilities change. home.barclays/annualreport Barclays PLC Annual Report 2017 123 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceMaterial existing and emerging risks iii) Treasury and capital risk The Group may not be able to achieve its business plans due to, among other things: a) being unable to maintain appropriate capital ratios; b) being unable to meet its obligations as they fall due; c) rating agency downgrades; d) adverse changes in foreign exchange rates on capital ratios; e) adverse movements in the pension fund; f) non-traded market risk/ interest rate risk in the banking book. a) Inability to maintain prudential ratios and other regulatory requirements Inability to maintain appropriate prudential ratios could lead to: an inability to support business activity; a failure to meet regulatory capital requirements including any additional capital add-ons or the requirements set for regulatory stress tests; increased cost of funding due to deterioration in investor appetite or credit ratings; restrictions on distributions including the ability to meet dividend targets; and/or the need to take additional measures to strengthen the Group’s capital or leverage position. b) Inability to manage liquidity and funding risk effectively Inability to manage liquidity and funding risk effectively may result in the Group either not having sufficient financial resources to meet its payment obligations as they fall due or, although solvent, only being able to meet these obligations at excessive cost. This could cause the Group to fail to meet regulatory liquidity standards, be unable to support day-to-day banking activities (including meeting deposit withdrawals or funding new loans) or no longer be a going concern. The stability of the Group’s current funding profile, in particular that part which is based on accounts and savings deposits payable on demand or at short notice, could be affected by the Group failing to preserve the current level of customer and investor confidence. The Group also regularly accesses the capital markets to provide long-term funding to support its operations. Several factors, including adverse macroeconomic conditions, adverse outcomes in legal, regulatory or conduct matters and loss of confidence by investors, counterparties and/or customers in the Group, can affect the ability of the Group to access the capital markets and/or the cost and other terms upon which the Group is able to obtain market funding. c) Credit rating changes and the impact on funding costs Any potential or actual credit rating agency downgrades could significantly increase the Group’s borrowing costs, credit spreads and materially adversely affect the Group’s interest margins and liquidity position which may, as a result, significantly diverge from current expectations. Such adverse changes would also have a negative impact on the Group’s overall performance. d) Adverse changes in FX rates impacting capital ratios The Group has capital resources, risk weighted assets and leverage exposures denominated in foreign currencies. Changes in foreign currency exchange rates may adversely impact the Sterling equivalent value of these items. As a result, the Group’s regulatory capital ratios are sensitive to foreign currency movements, and any failure to appropriately manage the Group’s balance sheet to take account of foreign currency movements could result in an adverse impact on regulatory capital and leverage ratios. e) Adverse movements in the pension fund Adverse movements in pension assets and liabilities for defined benefit pension schemes could result in a pension deficit which, depending on the specific circumstance, may require the Group to make substantial additional contributions to its pension plans. The liabilities discount rate is a key driver and, in accordance with International Financial Reporting Standards (IAS 19), is derived from the yields of high quality corporate bonds (deemed to be those with AA ratings) and consequently includes exposure to both UK sovereign gilt yields and corporate credit spreads. Therefore, the valuation of the Group’s defined benefits schemes would be adversely affected by a prolonged fall in the discount rate due to a persistent low rate and/or credit spread environment. Inflation is another significant risk driver to the pension fund, as the liabilities are adversely impacted by an increase in long-term inflation expectations. f) Non-traded market risk/interest rate risk in the banking book A liquidity buffer investment return shortfall could increase the Bank’s cost of funds and impact the capital ratios. The Bank’s structural hedge programmes for interest rate risk in the banking book rely heavily on behavioural assumptions, as a result, the success of the hedging strategy is not guaranteed. A potential mismatch in the balance or duration of the hedge assumptions could lead to earnings deterioration. iv) Operational risk a) Cyber threat The frequency of cyber attacks continues to grow on an annual basis and is a global threat which is inherent across all industries, including the financial sector. As the financial sector remains a primary target for cyber criminals, 2017 saw a number of highly publicised attacks involving ransomware, theft of intellectual property, customer data and service unavailability across a wide range of organisations. The cyber threat increases the inherent risk to the availability of the Group’s services and to the Group’s data (whether it is held by the Group or in its supply chain), to the integrity of financial transactions of the Group, its clients, counterparties and customers. Failure to adequately manage this threat and to continually evolve enterprise security and provide an active cyber security response capability could result in increased fraud losses, inability to perform critical economic functions, customer detriment, potential regulatory censure and penalty, legal liability, reduction in shareholder value and reputational damage. b) Service resilience Loss of, or disruption to, the Group’s business processing, whether arising through impacts on technology systems, real estate services, personnel availability or the support of major suppliers, represents a material inherent risk theme for the Group. Building resilience into business processes and into the services of technology, real estate and suppliers on which those processes depend can reduce disruption to the Group’s business activities or avoid it altogether. Failure to do so may result in significant customer detriment, cost to reimburse losses incurred by our customers, potential regulatory censure or penalty, and reputational damage. c) Outsourcing The Group depends on suppliers for the provision of many of its services and the development of future technology driven product propositions, though the Group continues to be accountable for risk arising from the actions of such suppliers. Failure to monitor and control the Group’s suppliers could potentially lead to client information, or critical infrastructures and services, not being adequately protected or available when required. The dependency on suppliers and sub-contracting of outsourced services introduces concentration risk where the failure of specific suppliers could have an impact on our ability to continue to provide services that are material to the Group, especially for those individual businesses within the Group to which many services are provided centrally by the newly established Group Service Company. Failure to adequately manage outsourcing risk through control environments which remain robust to ever changing threats and challenges could result in increased losses, inability to perform critical economic functions, customer detriment, potential regulatory censure and penalty, legal liability and reputational damage. d) Operational precision and payments The risk of material errors in operational processes, including payments, are exacerbated during the present period of significant levels of structural and regulatory change, the evolving technology landscape, and a transition to digital channel capabilities. Material operational or payment errors could disadvantage the Group’s customers, clients or counterparties and could result in regulatory censure and penalties, legal liability, reputational damage and financial loss by the bank. 124 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewe) New and emergent technology Technological advancements present opportunities to develop new and innovative ways of doing business across the Group, with new solutions being developed both in-house and in association with third party companies. Introducing new forms of technology has the potential to increase inherent risk. Failure to closely monitor risk exposure could lead to customer detriment, loss of business, regulatory censure, missed business opportunity and reputational damage. f) Fraud Fraud is a constantly evolving risk to the Group. This is exacerbated during periods of significant change, including the digitisation of products, which carry higher levels of inherent risk. As the Group continues to invest in new and upgraded fraud systems, criminals continually adapt and become ever more sophisticated in their approach. Risks from social engineering and attempts to trick customers into authorising payments also continue to grow and increasing regulatory focus is placing more responsibility on the industry to protect consumers. In addition, internal fraud arising from areas such as failure of the Group’s trading controls could result in high profile material losses together with regulatory censure/penalties and significant reputational damage. g) Ability to hire and retain appropriately qualified employees The Group has resource requirements to support existing revenue streams, moves into new business models and to deliver complex multi-year regulatory commitments and mandatory change. These commitments require diversified and specialist skilled colleagues and Barclays’ ability to attract, develop and retain such a diverse mix of talent is key to the delivery of its core business activity and strategy. This is impacted by a range of external and internal factors. External regulation such as the introduction of the Individual Accountability Regime and the required deferral and clawback provisions of our compensation arrangements may make Barclays a less attractive proposition relative to both our international competitors and other industries. Similarly, the impact of exit of the UK from the EU, in March 2019 (see Process of UK withdrawal from the European Union on pages 121 and 122), could potentially have a more immediate impact on our ability to hire and retain key employees. Failure to attract or prevent the departure of appropriately qualified and skilled employees who are dedicated to overseeing and managing current and future regulatory standards and expectations, or who have the necessary diversified skills required to deliver the Group strategy, could negatively impact our financial performance, control environment and level of employee engagement. Additionally, this may result in disruption to service which could in turn lead to disenfranchising certain customer groups, customer detriment and reputational damage. h) Tax risk The Group is required to comply with the domestic and international tax laws and practice of all countries in which it has business operations. There is a risk that the Group could suffer losses due to additional tax charges, other financial costs or reputational damage as a result of failing to comply with such laws and practice, or by failing to manage its tax affairs in an appropriate manner, with much of this risk attributable to the international structure of the Group. The Tax Cuts and Jobs Act has introduced substantial changes to the US tax system, including the introduction of a new tax, the Base Erosion Anti-Abuse Tax. These changes have increased the Group’s tax compliance obligations and require a number of system and process changes which introduce additional operational risk. In addition, increasing customer tax reporting requirements around the world and the digitisation of the administration of tax has potential to increase the Group’s tax compliance burden further. i) Critical accounting estimates and judgements The preparation of financial statements in accordance with IFRS requires the use of estimates. It also requires management to exercise judgement in applying relevant accounting policies. The key areas involving a higher degree of judgement or complexity, or areas where assumptions are significant to the consolidated and individual financial statements include credit impairment charges for amortised cost assets, taxes, fair value of financial instruments, pensions and post-retirement benefits, and provisions including conduct and legal, competition and regulatory matters. There is a risk that if the judgement exercised, or the estimates or assumptions used, subsequently turn out to be incorrect, this could result in significant loss to the Group, beyond what was anticipated or provided for. The further development of standards and interpretations under IFRS could also significantly impact the financial results, condition and prospects of the Group. j) Data management and information protection The Group holds and processes large volumes of data, including personally identifiable information, intellectual property, and financial data. Failure to accurately collect and maintain this data, protect it from breaches of confidentiality and interference with its availability exposes the Bank to the risk of loss or unavailability of data (including customer data covered under vi), c) Data protection and privacy, below), data integrity issues and could result in regulatory censure, legal liability and reputational damage. v) Model risk Enhanced model risk management requirements Barclays relies on models to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures (including the calculation of impairment), conducting stress testing, assessing capital adequacy, supporting new business acceptance and risk/reward evaluation, managing client assets, and meeting reporting requirements. Models are, by their nature, imperfect and incomplete representations of reality because they rely on assumptions and inputs, and so they may be subject to errors affecting the accuracy of their outputs. For instance, the quality of the data used in models across Barclays has a material impact on the accuracy and completeness of our risk and financial metrics. Models may also be misused. Model errors or misuse may result in the Group making inappropriate business decisions and being subject to financial loss, regulatory risk, reputational risk and/or inadequate capital reporting. vi) Conduct risk There is the risk of detriment to customers, clients, market integrity, competition or Barclays from the inappropriate supply of financial services, including instances of wilful or negligent misconduct. This risk could manifest itself in a variety of ways: a) Product governance and life cycle Ineffective product governance, including design, approval and review of products, inappropriate controls over internal and third party sales channels and post sales services could lead to poor customer outcomes, as well as regulatory sanctions, financial loss and reputational damage. b) Financial crime The Group may be adversely affected if it fails to effectively mitigate the risk that its employees or third parties facilitate, or that its products and services are used to facilitate financial crime (money laundering, terrorist financing, bribery and corruption and sanctions evasion). A major focus of US and UK government policy relating to financial institutions continues to be combating money laundering and enforcing compliance with US and EU economic sanctions. The failure to comply with such regulations may result in enforcement actions by the regulators and in the imposition of severe penalties, with a consequential impact on the Group’s reputation and financial results. c) Data protection and privacy Proper handling of personal data is critical to sustaining long-term relationships with our customers and clients and to meeting privacy laws and obligations. Failure to protect personal data can lead to potential detriment to our customers and clients, reputational damage, regulatory sanctions and financial loss, which under the new EU Data Protection Regulation may be substantial. home.barclays/annualreport Barclays PLC Annual Report 2017 125 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernancecompliance program designed to prevent and detect the conduct that gave rise to the plea agreement, and (iii) strengthen its compliance and internal controls as required by relevant regulatory or enforcement agencies. Potential consequences of breaching the plea agreement include the imposition of additional terms and conditions on the Group, an extension of the agreement, or the criminal prosecution of Group entities, which could, in turn, entail further financial penalties and collateral consequences and have a material adverse effect on the Group’s business, operating results or financial position. There is also a risk that the outcome of any legal, competition or regulatory matters in which the Group is involved may give rise to changes in law or regulation as part of a wider response by relevant law makers and regulators. A decision in any matter, either against the Group or another financial institution facing similar claims, could lead to further claims against the Group. Material existing and emerging risks d) Regulatory focus on culture and accountability Regulators around the world continue to emphasise the importance of culture and personal accountability and the adoption and enforcement of adequate internal reporting and whistleblowing procedures in helping to promote appropriate conduct and drive positive outcomes for customers, clients and markets. Failure to meet the requirements and expectations of the UK Senior Managers Regime, Certification Regime and Conduct Rules may lead to regulatory sanctions, both for the individuals and the firm. vii) Reputation risk Barclays’ association with sensitive sectors and its impact on reputation A risk arising in one business area can have an adverse effect upon Barclays’ overall reputation; any one transaction, investment or event that, in the perception of key stakeholders reduces their trust in the Group’s integrity and competence, has the potential to give rise to reputation risk for Barclays and may result in loss of business, regulatory censure and missed business opportunity. Barclays’ association with sensitive sectors is an area of concern for stakeholders and the following topics are of regular interest: ■■ Disclosure of climate risks and opportunities, including the activities of certain sections of the client base. This is becoming the subject of increased scrutiny from regulators, NGOs and other stakeholders. ■■ The risks of association with human rights violations through the perceived indirect involvement in human rights abuses committed by clients and customers. ■■ The manufacture and export of military and riot control goods and services by clients and customers. viii) Legal risk and legal, competition and regulatory matters Legal disputes, regulatory investigations, fines and other sanctions relating to conduct of business and breaches of legislation and/or regulations may negatively affect the Group’s results, reputation and ability to conduct its business. Legal outcomes can arise as a consequence of legal risk or because of past and future actions, behaviours and business decisions as a result of other Principal Risks. The Group conducts diverse activities in a highly regulated global market and therefore is exposed to the risk of fines and other sanctions relating to the conduct of its business. In recent years, authorities have increasingly investigated past practices, pursued alleged breaches and imposed heavy penalties on financial services firms. This trend is expected to continue. A breach of applicable legislation and/or regulations could result in the Group or its staff being subject to criminal prosecution, regulatory censure, fines and other sanctions in the jurisdictions in which it operates, particularly in the UK and the US. Where clients, customers or other third parties are harmed by the Group’s conduct, this may also give rise to legal proceedings, including class actions. Other legal disputes may also arise between the Group and third parties relating to matters such as breaches, enforcement of legal rights or obligations arising under contracts, statutes or common law. Adverse findings in any such matters may result in the Group being liable to third parties seeking damages, or may result in the Group’s rights not being enforced as intended. Details of legal, competition and regulatory matters to which the Group is currently exposed are set out in Note 29. In addition to matters specifically described in Note 29, the Group is engaged in various other legal proceedings in the UK and US and a number of other overseas jurisdictions which arise in the ordinary course of business. The Group is also subject to requests for information, investigations and other reviews by regulators, governmental and other public bodies in connection with business activities in which the Group is, or has been, engaged. The Group is cooperating with the relevant authorities and keeping all relevant agencies briefed as appropriate in relation to these matters and others described in Note 29 on an ongoing basis. The outcome of legal, competition and regulatory matters, both those to which the Group is currently exposed and any others which may arise in the future, is difficult to predict. However, in connection with such matters the Group may incur significant expense, regardless of the ultimate outcome, and any such matters could expose the Group to any of the following outcomes: substantial monetary damages, settlements and/or fines; remediation of affected customers and clients; other penalties and injunctive relief; additional litigation; criminal prosecution in certain circumstances; the loss of any existing agreed protection from prosecution; regulatory restrictions on the Group’s business operations including the withdrawal of authorisations; increased regulatory compliance requirements; suspension of operations; public reprimands; loss of significant assets or business; a negative effect on the Group’s reputation; loss of confidence by investors, counterparties, clients and/or customers; risk of credit rating agency downgrades; potential negative impact on the availability and/or cost of funding and liquidity; and/or dismissal or resignation of key individuals. In light of the uncertainties involved in legal, competition and regulatory matters, there can be no assurance that the outcome of a particular matter or matters will not be material to the Group’s results of operations or cash flow for a particular period, depending on, among other things, the amount of the loss resulting from the matter(s) and the amount of income otherwise reported for the period. In January 2017, Barclays PLC was sentenced to serve three years of probation from the date of the sentencing order in accordance with the terms of its May 2015 plea agreement with the Department of Justice (DOJ). During the term of probation Barclays PLC must, among other things, (i) commit no crime whatsoever in violation of the federal laws of the US, (ii) implement and continue to implement a 126 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewRisk review Principal Risk management Credit risk management Credit risk (audited) The risk of loss to the firm from the failure of clients, customers or counterparties, including sovereigns, to fully honour their obligations to the firm, including the whole and timely payment of principal, interest, collateral and other receivables. For wholesale portfolios, credit risk approval is undertaken by experienced credit risk professionals operating within a clearly defined delegated authority framework, with only the most senior credit officers entrusted with the higher levels of delegated authority. The largest credit exposures, which are outside the Risk Sanctioning Unit or Risk Distribution Committee authority require the support of the Group Senior Credit Officers (GSCOs), the Group’s most senior credit risk sanctioners. For exposures in excess of the GSCOs’ authority, approval from the Group CRO is required. In the wholesale portfolios, credit risk managers are organised in sanctioning teams by geography, industry and/or product. The role of the Central Risk function is to provide Group-wide direction, oversight and challenge of credit risk taking. Central Risk sets the Credit Risk Control Framework, which provides the structure within which credit risk is managed, together with supporting credit risk policies. Overview The credit risk that the Group faces arises mainly from wholesale and retail loans and advances together with the counterparty credit risk arising from derivative contracts with clients. Other sources of credit risk arise from trading activities, including: debt securities, settlement balances with market counterparties, available for sale assets and reverse repurchase loans. Credit risk management objectives are to: ■■ maintain a framework of controls to enable credit risk taking to be based on sound credit risk management principles ■■ identify, assess and measure credit risk clearly and accurately across the Group and within each separate business, from the level of individual facilities up to the total portfolio ■■ control and plan credit risk taking in line with external stakeholder expectations and avoiding undesirable concentrations ■■ monitor credit risk and adherence to agreed controls ■■ enable risk-reward objectives to be met. More information covering the reporting of credit risk can be found in Barclays PLC Pillar 3 Report 2017. Organisation and structure Wholesale and retail portfolios are managed separately to reflect the differing nature of the assets; wholesale balances tend to be larger and are managed on an individual basis, while retail balances are larger in number but smaller in value and are, therefore, managed on a homogeneous portfolio basis. Credit risk management responsibilities have been structured so that decisions are taken as close as possible to the business, while enforcing robust review and challenge of performance, risk infrastructure and strategic plans. The credit risk management teams in each business are accountable to the relevant Business CRO who, in turn, reports to the Group CRO. Roles and responsibilities The responsibilities of the credit risk management teams in the businesses, the sanctioning team and other shared services include: sanctioning new credit agreements (principally wholesale); setting policies for approval of transactions (principally retail); setting risk appetite; monitoring risk against limits and other parameters; maintaining robust processes, data gathering, quality, storage and reporting methods for effective credit risk management; performing effective turnaround and workout scenarios for wholesale portfolios via dedicated restructuring and recoveries teams; maintaining robust collections and recovery processes/units for retail portfolios; and review and validation of credit risk measurement models. Organisation and structure Board Risk Committee ■ reviews and recommends to the Board the Group’s risk appetite for wholesale and retail credit risk ■ reviews the Group’s risk profile on behalf of the Board for wholesale and retail credit risk ■ commissions, receives and considers reports on wholesale and retail credit risk issues Group Risk Committee ■ reviews appetite for wholesale and retail credit risk and makes recommendations on the setting of limits to the Board ■ monitors the risk profile for wholesale and retail credit risk ■ reviews and monitors the control environment for wholesale and retail credit risk Business Unit Risk Committees ■ oversee activities and manage information relating to business unit portfolios, Wholesale and Retail Credit Risk Management Committees ■ monitor the wholesale and retail credit risk profile against plan and agree and identify actions needed to mitigate current and arising credit risks ■ review and approve business unit mandate and scale limits and, where relevant, provide recommendations for limits managed by wholesale and retail risk committees ■ review relevant decisions made by, and material issues and topics raised by, other forums and committees required actions ■ review key wholesale and retail risk issues ■ review credit risk policies and framework ■ monitor risk appetite consumption – key credit portfolio (mandate and scale) limits home.barclays/annualreport Barclays PLC Annual Report 2017 127 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk review Principal Risk management Credit risk management Credit risk mitigation The Group employs a range of techniques and strategies to actively mitigate credit risks. These can broadly be divided into three types: ■■ netting and set-off ■■ collateral ■■ risk transfer. Netting and set-off In most jurisdictions in which the Group operates, credit risk exposures can be reduced by applying netting and set-off. In exposure terms, this credit risk mitigation technique has the largest overall impact on net exposure to derivative transactions, compared with other risk mitigation techniques. For derivative transactions, the Group’s normal practice is to enter into standard master agreements with counterparties (e.g. ISDAs). These master agreements typically allow for netting of credit risk exposure to a counterparty resulting from derivative transactions against the obligations to the counterparty in the event of default, and so produce a lower net credit exposure. These agreements may also reduce settlement exposure (e.g. for foreign exchange transactions) by allowing payments on the same day in the same currency to be set-off against one another. Collateral The Group has the ability to call on collateral in the event of default of the counterparty, comprising: ■■ home loans: a fixed charge over residential property in the form of houses, flats and other dwellings. The value of collateral is impacted by property market conditions which drive demand and therefore value of the property. Other regulatory interventions on ability to repossess, longer period to repossession and granting of forbearance may also affect the collateral value ■■ wholesale lending: a fixed charge over commercial property and other physical assets, in various forms ■■ other retail lending: includes charges over motor vehicle and other physical assets; second lien charges over residential property, which are subordinate to first charges held either by the Group or by another party; and finance lease receivables, for which typically the Group retains legal title to the leased asset and has the right to repossess the asset on the default of the borrower ■■ derivatives: the Group also often seeks to enter into a margin agreement (e.g. Credit Support Annex) with counterparties with which the Group has master netting agreements in place. These annexes to master agreements provide a mechanism for further reducing credit risk, whereby collateral (margin) is posted on a regular basis (typically daily) to collateralise the mark to market exposure of a derivative portfolio measured on a net basis. The Group may additionally negotiate the receipt of an independent amount further mitigating risk by collateralising potential mark to market exposure moves ■■ reverse repurchase agreements: collateral typically comprises highly liquid securities which have been legally transferred to the Group subject to an agreement to return them for a fixed price ■■ financial guarantees and similar off-balance sheet commitments: cash collateral may be held against these arrangements. Risk transfer A range of instruments including guarantees, credit insurance, credit derivatives and securitisation can be used to transfer credit risk from one counterparty to another. These mitigate credit risk in two main ways: ■■ if the risk is transferred to a counterparty which is more creditworthy than the original counterparty, then overall credit risk is reduced ■■ where recourse to the first counterparty remains, both counterparties must default before a loss materialises. This is less likely than the default of either counterparty individually so credit risk is reduced. Detailed policies are in place to appropriately recognise and record credit risk mitigation and more information can be found in the Barclays PLC Pillar 3 Report 2017. 128 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk review Principal Risk management Market risk management Market risk (audited) The risk of loss arising from potential adverse changes in the value of the firm’s assets and liabilities from fluctuation in market variables including, but not limited to, interest rates, foreign exchange, equity prices, commodity prices, credit spreads, implied volatilities and asset correlations. Overview Market risk arises primarily as a result of client facilitation in wholesale markets, involving market-making activities, risk management solutions and execution of syndications. Upon execution of a trade with a client, the Group will look to hedge against the risk of the trade moving in an adverse direction. Mismatches between client transactions and hedges result in market risk due to changes in asset prices. Organisation and structure Market risk in the businesses resides primarily in Barclays International and Group Treasury. These businesses have the mandate to incur market risk. Market risk oversight and challenge is provided by Business Committees and Group Committees, including the Market Risk Committee. Roles and responsibilities The objectives of market risk management are to: ■■ understand and control market risk by robust measurement, limit setting, reporting and oversight ■■ facilitate business growth within a controlled and transparent risk management framework ■■ control market risk in the businesses according to the allocated appetite. To meet the above objectives, a well established governance structure is in place to manage these risks consistent with the ERMF. See pages 119 and 120 on risk management strategy, governance and risk culture. The BRC recommends market risk appetite to the Board for their approval. The Market Risk Principal Risk Lead (PR Lead) is responsible for the Market Risk Control Framework and, under delegated authority from the Group CRO, agrees with the Business CROs a limit framework within the context of the approved market risk appetite. The Market Risk Committee approves and makes recommendations concerning the Group-wide market risk profile. This includes overseeing the operation of the Market Risk Framework and associated standards and policies; reviewing arising market or regulatory issues, limits and utilisation; and risk appetite levels to the Board. The Committee is chaired by the PR Lead and attendees include the business heads of market risk, business aligned market risk managers and Internal Audit. The head of each business is accountable for all market risks associated with its activities, while the head of the market risk team covering each business is responsible for implementing the risk control framework for market risk. More information on market risk management can be found in Barclays PLC Pillar 3 Report 2017. Management Value at Risk ■■ estimates the potential loss arising from unfavourable market movements, over one day for a given confidence level ■■ differs from the Regulatory value at risk (VaR) used for capital purposes in scope, confidence level and horizon VaR is an estimate of the potential loss arising from unfavourable market movements if the current positions were to be held unchanged for one business day. For internal market risk management purposes, a historical simulation methodology with a two-year equally weighted historical period, at the 95% confidence level is used for all trading books and some banking books. The Management VaR model in some instances may not appropriately measure some market risk exposures, especially for market moves that are not directly observable via prices. Market risk managers are required to identify risks which are not adequately captured in VaR (‘risks not in VaR’ or ‘RNIVs’). When reviewing VaR estimates, the following considerations are taken into account: ■■ the historical simulation uses the most recent two years of past data to generate possible future market moves, but the past may not be a good indicator of the future ■■ the one-day time horizon may not fully capture the market risk of positions that cannot be closed out or hedged within one day ■■ VaR is based on positions as at close of business and consequently, it is not an appropriate measure for intra-day risk arising from a position bought and sold on the same day ■■ VaR does not indicate the potential loss beyond the VaR confidence level. Limits are applied at the total level as well as by risk factor type, which are then cascaded down to particular trading desks and businesses by the market risk management function. ■■ backtesting is performed to test the model is fit for purpose. See page 162 for a review of management VaR in 2017. Organisation and structure Board Risk Committee ■ reviews and recommends to the Board the Group’s risk appetite for market risk ■ reviews material events impacting market risk Group Risk Committee ■ monitors risk profile with respect to financial risk appetite ■ debates and agrees actions on the financial risk profile and risk strategy across the Group ■ considers issues escalated by Risk Type Heads and Business Risk Directors Market Risk Committee ■ oversees the management of the Group’s market risk profile ■ reviews market risk appetite proposals from the business ■ reviews arising market or regulatory issues ■ reviews state of the implementation of the risk frameworks in the businesses home.barclays/annualreport Barclays PLC Annual Report 2017 129 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk review Principal Risk management Treasury and capital risk management Treasury and capital risk Liquidity risk: The risk that the firm is unable to meet its contractual or contingent obligations or that it does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets. Capital risk: The risk that the firm has an insufficient level or composition of capital to support its normal business activities and to meet its regulatory capital requirements under normal operating environments or stressed conditions (both actual and as defined for internal planning or regulatory testing purposes). This includes the risk from the firm’s pension plans. Interest rate risk in the banking book: The risk that the firm is exposed to capital or income volatility because of a mismatch between the interest rate exposures of its (non-traded) assets and liabilities. Overview Barclays Treasury manages treasury and capital risk on a day-to-day basis with the Treasury Committee acting as the principal management body. To enforce effective oversight and segregation of duties and in line with the ERMF, the Treasury and Capital risk function is responsible for oversight of key capital, liquidity, interest rate risk in the banking book (IRRBB) and pension risk management activities. The following describes the structure and governance associated with the risk types within the Treasury and Capital risk function. Liquidity risk management (audited) Overview The efficient management of liquidity is essential to the Group in retaining the confidence of the financial markets and maintaining that the business is sustainable. There is a control framework in place for managing liquidity risk and this is designed to meet the following objectives: ■■ to maintain liquidity resources that are sufficient in amount and quality and a funding profile that is appropriate to meet the liquidity risk appetite as expressed by the Board ■■ to maintain market confidence in the Group’s name. Organisation and structure This is achieved via a combination of policy formation, review and governance, analysis, stress testing, limit setting and monitoring. Together, these meet internal and regulatory requirements. Roles and responsibilities The Treasury and Capital Risk function is responsible for the management and governance of the liquidity risk mandate defined by the Board and the production of ILAAPs. Treasury has the primary responsibility for managing liquidity risk within the set risk appetite. The CRO for treasury and capital risk reports to the Group CRO. Barclays’ comprehensive control framework for managing the Group’s liquidity risk is designed to deliver the appropriate term and structure of funding consistent with the Liquidity Risk Appetite (LRA) set by the Board. The Board sets the LRA based on the internal liquidity risk model and external regulatory requirements namely the Liquidity Coverage Ratio (LCR). The LRA is represented as the level of risk the Group chooses to take in pursuit of its business objectives and in meeting its regulatory obligations. The approved LRA is implemented in line with the control framework and policy for liquidity risk. The control framework incorporates a range of ongoing business management tools to monitor, limit and stress test the Group’s balance sheet and contingent liabilities and Board Risk Committee ■ reviews and recommends to the Board the Group’s risk appetite for treasury and capital risk ■ reviews material issues impacting treasury and capital risk ■ approves the ICAAP and ILAAP Group Risk Committee ■ reviews and recommends risk appetite to the BRC ■ escalates material issues impacting treasury and capital risk to the BRC ■ reviews and recommends the ICAAP and ILAAP to the BRC for approval Treasury and Capital Risk Committee ■ manages treasury and capital risk appetite ■ monitors the treasury and capital risk profile ■ monitors the treasury and capital risk control environment ■ reviews and recommends risk appetite to the GRC and BRC ■ escalates material issues impacting treasury and capital risk to the GRC and BRC the Recovery Plan. Limit setting and transfer pricing are tools that are designed to control the level of liquidity risk taken and drive the appropriate mix of funds. Together, these tools reduce the likelihood that a liquidity stress event could lead to an inability to meet the Group’s obligations as they fall due. The control framework is subject to internal conformance testing and internal audit review. The liquidity stress tests assess the potential contractual and contingent stress outflows under a range of scenarios, which are then used to determine the size of the liquidity pool that is immediately available to meet anticipated outflows if a stress occurs. The Group maintains a range of management actions for use in a liquidity stress, these are documented in the Group Recovery Plan. Since the precise nature of any stress event cannot be known in advance, the actions are designed to be flexible to the nature and severity of the stress event and provide a menu of options that can be drawn upon as required. The Barclays Group Recovery Plan also contains more severe recovery options to generate additional liquidity in order to facilitate recovery in a severe stress. Any stress event would be regularly monitored and reviewed using key management information by key Treasury, Risk and business representatives. Capital risk management (audited) Overview Capital risk is managed through ongoing monitoring and management of the capital position, regular stress testing and a robust capital governance framework. Roles and responsibilities The management of capital risk is integral to the Group’s approach to financial stability and sustainability management, and is embedded in the way businesses and legal entities operate. Capital risk management is underpinned by a control framework and policy. The capital management strategy, outlined in the Group and legal entity capital plans, is developed in alignment with the control framework and policy for capital risk, and is implemented consistently in order to deliver on the Group’s objectives. 130 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk review■■ lag risk: arises from the delay in repricing customer rates for certain variable/managed rate products, following an underlying change to market interest rates. This is typically driven by either regulatory constraint around customer notification on pricing changes, processing time for the Group’s notification systems or contractual agreements within a product’s terms and conditions ■■ asset swap spread risk: the spread between Libor and sovereign bond yields that arises from the management of the liquidity buffer investments and its associated hedges. Furthermore, liquidity buffer investments are generally subject to available for sale accounting rules, whereby changes in the value of these assets impact capital via other comprehensive income (OCI), creating volatility in capital directly. Roles and responsibilities The non-traded market risk team provides risk management oversight and monitoring of all traded and non-traded market risk in Treasury and customer banking books, which specifically includes: ■■ interest rate risk assessment in the customer banking books ■■ review and challenge the behavioural assumptions used in hedging and transfer pricing ■■ risk management of the liquidity buffer investments and funding activities ■■ oversight of balance sheet hedging ■■ review of residual risk in the hedge accounting solution and hedging of net investments ■■ proposes and monitors risk limits to manage traded and non-traded market risk within the agreed risk appetite. The Board approves the Group capital plan, internal stress tests and results of regulatory stress tests, and the Group recovery plan. The Treasury Committee is responsible for monitoring and managing capital risk in line with the Group’s capital management objectives, capital plan and risk frameworks. The Treasury and Capital Risk Committee monitors and reviews the capital risk profile and control environment, providing Second Line oversight of the management of capital risk. The BRC reviews the risk profile, and annually reviews risk appetite and the impact of stress scenarios on the Group capital plan/ forecast in order to agree the Group’s projected capital adequacy. Local management assures compliance with an entity’s minimum regulatory capital requirements by reporting to local Asset and Liability Committees with oversight by the Group’s Treasury Committee, as required. Treasury has the primary responsibility for managing and monitoring capital and reports to the Group Finance Director. The Treasury and Capital Risk function contains a Capital Risk Oversight team, and is an independent risk function that reports to the Group CRO and is responsible for oversight of capital risk and production of ICAAPs. Pension risk The Group maintains a number of defined benefit pension schemes for past and current employees. The ability of the pension fund to meet the projected pension payments is maintained principally through investments. Pension risk arises because the estimated market value of the pension fund assets might decline; investment returns might reduce; or the estimated value of the pension liabilities might increase. The Group monitors the pension risks arising from its defined benefit pension schemes and works with Trustees to address shortfalls. In these circumstances the Group could be required or might choose to make extra contributions to the pension fund. The Group’s main defined benefit scheme was closed to new entrants in 2012. Interest rate risk in the banking book management Overview Banking book operations generate non-traded market risk, primarily through the mismatch between the duration of assets and liabilities and where interest rates on products reset at different dates. As per the Group’s policy to remain within the defined risk appetite, interest rate and FX risks residing in the banking books of the businesses are transferred to Treasury where they are centrally managed. Currently, these risks are transferred to Treasury via funding arrangements, interest rate or FX swaps. However, the businesses remain susceptible to market risk from seven key sources: ■■ repricing/residual risk: the impact from the mismatch between the run-off of product balances and the associated interest rate hedges or from unhedged liquidity buffer investments ■■ structural risk: the change to the net interest income on hedge replenishment due to adverse movements in interest rates, assuming that the balance sheet is held static ■■ prepayment risk: the potential loss in value if actual prepayment or early withdrawal behaviour from customers deviates from the expected or contractually agreed behaviour, which may result in a hedge or funding adjustment at a cost to the bank. Exposures are typically considered (where appropriate) net of any applicable offsetting early repayment charges. This risk principally relates to early repayment of fixed rate loans or withdrawal from fixed rate savings products ■■ recruitment risk: the potential loss in value if the actual completion or drawdown behaviour from customers deviates from the expected behaviour, which may result in a hedge or funding adjustment at a cost to the bank. This risk principally relates to the completion timing around the Bank’s fixed rate mortgage pipeline process ■■ margin compression risk: the effect of internal or market forces on a bank’s net margin where, for example, in a low rate environment any fall in rates will further decrease interest income earned on the assets whereas funding cost cannot be reduced as it is already at the minimum level Capital risk management primary objectives Capital risk management core practices ■ maintain adequate capital to withstand the impact of the risks that may arise under the normal and stressed conditions analysed by the Group ■ maintain adequate capital to cover the Group’s current and forecast business needs and associated risks in order to provide a viable and sustainable business offering ■ meet minimum regulatory requirements in all jurisdictions ■ maintain capital buffers over regulatory minimums ■ perform Group-wide internal and regulatory stress tests ■ develop contingency plans for severe and extreme stresses, which include stress management actions and recovery actions ■ maintain capital ratios aligned with rating agency expectations ■ maintain a capital plan on a short-term and medium-term basis aligned with the Group’s strategic objectives, balancing capital generation of the business with business growth and shareholder distributions home.barclays/annualreport Barclays PLC Annual Report 2017 131 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk review Principal Risk management Operational risk management Operational risk The risk of loss to the firm from inadequate or failed processes, systems, human factors or due to external events (for example, fraud) where the root cause is not due to credit or market risks. Overview The management of operational risk has three key objectives: ■■ deliver an operational risk capability owned and used by business leaders which is pragmatic, relevant, and enables business leaders to make sound risk decisions over the long term ■■ provide the frameworks, policies and tools to enable management to meet their risk management responsibilities while the Second Line of Defence provides robust, independent, and effective oversight and challenge ■■ deliver a consistent and aggregated measurement of operational risk that will provide clear and relevant insights, so that the right management actions can be taken to keep the operational risk profile consistent with the Group’s strategy, the stated risk appetite, the client franchise, and other stakeholder needs. The Group is committed to the management and measurement of operational risk and was granted a waiver by the FSA (now the PRA) to operate an advanced measurement approach (AMA) for operational risk, which commenced in January 2008. The majority of the Group calculates regulatory capital requirements using AMA (94% of capital requirements), except for small parts of the organisation acquired since the original permission (6% of capital requirements) using the basic indicator approach (BIA). The Group works to benchmark its internal operational risk management and measurement practices with peer banks. ■■ fraud risk: The risk of financial loss when an internal or external party acts dishonestly with the intent to obtain an undue benefit, cause a loss to, or to expose either the Group or its customers and clients to a risk of loss The Group is committed to operating within a strong system of internal controls that enables business to be transacted and risk taken without exposing the Group to unacceptable potential losses or reputational damages. The Group has an overarching ERMF that sets out the approach to internal governance. The ERMF establishes the mechanisms and processes by which the Board directs the organisation, through setting the tone and expectations from the top, delegating authority and monitoring compliance. Organisation and structure Operational risk comprises a number of specific risks defined as follow: ■■ data management and information risk: The risk that Barclays information is not captured, retained, used or protected in accordance with its value and legal and regulatory requirements ■■ financial reporting risk: The risk of a material misstatement or omission within the Group’s external financial, regulatory reporting or internal management reporting ■■ payments process risk: The risk of payments being processed inaccurately, with delays, without appropriate authentication and authorisation ■■ people risk: The risk that Barclays is exposed to by virtue of being an employer (excluding Health and Safety related risk) ■■ premises and security risk: The risk of interruption to Barclays’ business due to the unavailability of premises and infrastructure as a result of intentional or accidental damage to premises and moveable assets, physical security breaches and safety and security incidents ■■ supplier risk: The risk that is introduced to the firm or entity as a consequence of obtaining services or goods from another legal entity as a result of inadequate selection, inadequate exit and supplier management, resulting in operational, financial, or reputational risk to the bank, failure of services and/or negative customer impact Organisation and structure Board Risk Committee ■ approves Operational Risk Management Framework ■ operational risk capital oversight ■ recommends and monitors operational risk appetite and the residual risk position, supported by feedback from the Board Audit Committee/Group Chief Controls Officer Board Audit Committee ■ oversees that the operating effectiveness of the control environment is satisfactory ■ oversees remediation of control issues ■ feedback to the Board Risk Committee where concerns exist over the impact on residual risk through either the design or operating effectiveness of the control environment Group Risk Committee ■ reviews and recommends risk appetite and risk limits across the Principal Risks to the Board ■ monitors the Group risk profile and the utilisation of risk appetite ■ reviews appetite, limit usage and risk management within tolerance agreed by the Board ■ reviews deep dives of specific risks as requested ■ reviews the impact of any material acquisitions and disposals on the risk profile ■ reviews remediation plans and actions taken, and agrees any further action required ■ escalations to Board level Group Controls Committee ■ oversees effectiveness of control environment ■ reviews and recommends control framework ■ oversees control remediation activities ■ oversees execution of Operational Risk Management Framework consistently across the Group ■ oversees risk and internal control matters including significant issues ■ escalations to Board level Business and Function Risk Committees ■ manage and oversee the risk at the Business Unit/Function level ■ escalate to Group level Business and Function Control Committees ■ manage and oversee the control environment at the Business Unit/ Function level ■ escalate to Group level 132 Barclays PLC Annual Report 2017 home.barclays/annualreport [•] Risk reviewThe Group Head of Operational Risk is responsible for establishing, owning and maintaining an appropriate Group-wide Operational Risk Management Framework and for overseeing the portfolio of operational risk across the Group. Operational Risk Management (ORM) acts in a Second Line of Defence capacity, and is responsible for defining and overseeing the implementation of the framework and monitoring Barclays operational risk profile. ORM alerts management when risk levels exceed acceptable ranges or risk appetite in order to drive timely decision-making and actions by the First Line of Defence. Through attendance at Business Risk Committee meetings, ORM provide specific risk input into the issues highlighted and the overall risk profile of the business. Operational risk issues escalated from these meetings are considered through the Second Line of Defence review meetings. Depending on their nature, the outputs of these meetings are presented to the BRC or the BAC. For further information on operational risk management, risk and control self- assessments and risk scenarios, please refer to the operational risk management section on pages 170 to 173 in Barclays PLC Pillar 3 Report 2017. ■■ tax risk: The risk of unexpected tax cost in relation to any tax for which Barclays is liable, or of reputational damage on tax matters with key stakeholders such as tax authorities, regulators, shareholders or the public. Tax cost includes tax, interest or penalties levied by a taxing authority ■■ technology risk: The risk that comes about due to dependency on technological solutions and is defined as failure to develop, deploy and maintain technology solutions that are stable, reliable and deliver what the business needs ■■ transaction operations risk: The risk of Customer/Client or Bank detriment due to unintentional error and/or failure in the end-to-end process of initiation, processing and fulfilment of an interaction between a Customer/Client and the Bank with an underlying financial instrument (e.g. mortgage, derivative product, trade product etc.). These risks may result in financial and/or non-financial impacts including legal/ regulatory breaches or reputational damages. Roles and responsibilities The prime responsibility for the management of operational risk and compliance with control requirements rests with the business and functional units where the risk arises. The operational risk profile and control environment is reviewed by business management through specific meetings which cover governance, risk and control. Businesses are required to report their operational risks on both a regular and an event-driven basis. The reports include a profile of the material risks that may threaten the achievement of their objectives and the effectiveness of key controls, operational risk events and a review of scenarios. home.barclays/annualreport Barclays PLC Annual Report 2017 133 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk review Principal Risk management Model risk management Model risk The risk of the potential adverse consequences from financial assessments or decisions based on incorrect or misused model outputs and reports. Overview Barclays uses models to support a broad range of activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures, conducting stress testing, assessing capital adequacy, managing client assets, and meeting reporting requirements. Since models are imperfect and incomplete representations of reality, they may be subject to errors affecting the accuracy of their output. Model errors can result in inappropriate business decisions being made, financial loss, regulatory risk, reputational risk and/or inadequate capital reporting. Models may also be misused, for instance applied to products that they were not intended for, or not adjusted, where fundamental changes to their environment would justify re-evaluating their core assumptions. Errors and misuse are the primary sources of model risk. Robust model risk management is crucial to assessing and managing model risk within a defined risk appetite. Strong model risk culture, appropriate technology environment, and adequate focus on understanding and resolving model limitations are crucial components. Organisation and structure Barclays allocates substantial resources to identify and record models and their usage, document and monitor the performance of models, validate models and adequately address model limitations. Barclays manages model risk as an enterprise level risk similar to other Principal Risks. Barclays has a dedicated Model Risk Management (MRM) function that consists of two main units: the Independent Validation Unit (IVU), responsible for model validation and approval, and Model Governance and Controls (MGC), covering model risk governance, controls and reporting, including ownership of model risk policy and the model inventory. The model risk management framework consists of the model risk policy and standards. The policy prescribes group-wide, end-to-end requirements for the identification, measurement and management of model risk, covering model documentation, development, implementation, monitoring, annual review, independent validation and approval, change and reporting processes. The policy is supported by global standards covering model inventory, documentation, validation, complexity and materiality, testing and monitoring, overlays, risk appetite, as well as vendor models and stress testing challenger models. Barclays is continuously enhancing model risk management. The function reports to the Group CRO and operates a global framework. Implementation of best practice standards is a central objective of the Group. Model risk reporting flows to senior management as depicted below. Roles and responsibilities The key model risk management activities include: ■■ Correctly identifying models across all relevant areas of the firm, and recording models in the Group Models Database (GMD), the Group-wide model inventory. The heads of the relevant model ownership areas (typically, the Business Chief Risk Officers, Business Chief Executive Officers, the Treasurer, the Chief Financial Officer, etc.) annually attest to the completeness and accuracy of the model inventory. MGC undertakes regular conformance reviews on the model inventory. ■■ Enforcing that every model has a model owner who is accountable for the model. The model owner must sign off models prior to submission to IVU for validation. The model owner works with the relevant technical teams (model developers, implementation, monitoring, data services, regulatory) to maintain that the model presented to IVU is and remains fit for purpose. ■■ Overseeing that every model is subject to validation and approval by IVU, prior to being implemented and on a continual basis. While all models are reviewed and re-approved for continued use each year, the validation frequency and the level of review and challenge applied by IVU is tailored to the materiality and complexity of each model. Validation includes a review of the model assumptions, conceptual soundness, data, design, performance testing, compliance with external requirements if applicable, as well as any limitations, proposed remediation and overlays with supporting rationale. Material model changes are subject to prioritised validation and approval. ■■ Defining model risk appetite in terms of risk tolerance, and qualitative metrics which are used to track and report model risk. ■■ Maintaining specific standards that cover model risk management activities relating to stress testing challenger models, model overlays, vendor models, and model complexity and materiality. Organisation and structure Board Risk Committee ■ reviews and recommends to the Board the Group’s risk appetite for model risk ■ reviews the effectiveness of the processes and policies by which Barclays identifies and manages model risk ■ assesses performance relative to model risk appetite Group Risk Committee ■ reviews risk appetite across model risk ■ monitors the Group risk profile for model risk, including emerging risks, against expected trends, and the utilisation of risk appetite Business Unit Risk Committees ■ review critical updates on model risk e.g. updates on Group-wide remediation plans ■ review targeted updates on progress toward meeting regulatory deliverables ■ review identified policy breaches 134 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewRisk review Principal Risk management Conduct risk management Conduct risk The risk of detriment to customers, clients, market integrity, competition or Barclays from the inappropriate supply of financial services, including instances of wilful or negligent misconduct. The Business Unit Risk Committees and the Financial Crime Business Oversight Committees are the primary Second Line governance forums for oversight of conduct risk profile and implementation of the CRMF. The responsibilities of the Business Unit Risk Committees include approval of the conduct risk tolerance and the business defined key indicators. Additional responsibilities include the identification and discussion of any emerging conduct risks exposures which have been identified. Overview The Group defines, manages and mitigates conduct risk with the goal of providing positive customer and client outcomes, protecting market integrity and promoting effective competition. This includes taking reasonable steps to assure the Group’s culture and strategy are appropriately aligned to these goals, products and services are reasonably designed and delivered to meet the needs of customers and clients, as well as promoting the fair and orderly operation of the markets in which the Group does business and that the Group does not commit or facilitate money laundering, terrorist financing, bribery and corruption or breaches of economic sanctions. Product Lifecycle, Culture and Strategy and Financial Crime are the risk categories under conduct risk. Organisation and structure The governance of conduct risk within Barclays is fulfilled through management Committees and forums operated by the First and Second Lines of Defence with clear escalation and reporting lines to the Board. The GRC is the most senior executive body responsible for reviewing and monitoring the effectiveness of Barclays’ management of conduct risk. Roles and responsibilities The Conduct Risk Management Framework (CRMF) comprises a number of elements that allow the Group to manage and measure its conduct risk profile. Senior Managers have ownership within their areas for managing conduct risk. These individuals have a Statement of Responsibilities identifying the activities and areas for which they are accountable. The primary responsibility for managing conduct risk and compliance with control requirements sits with the business where the risk arises. The First Line Business Control Committees provide oversight of controls relating to conduct risk. The Group Chief Compliance Officer is responsible for owning and maintaining an appropriate Group-wide CRMF for overseeing Group-wide conduct risk management. This includes defining and owning the relevant conduct risk policies and oversight of the implementation of controls to manage the risk. Businesses are required to report their conduct risks on both a quarterly and an event-driven basis. The quarterly reports detail conduct risks inherent within the business strategy and include forward-looking horizon scanning analysis as well as backward-looking evidence-based indicators from both internal and external sources. Organisation and structure Board Reputation Committee ■ reviews and recommends to the Board the Group’s risk appetite for conduct risk ■ reviews the effectiveness of the processes and policies by which Barclays identifies and manages conduct risk ■ monitors the conduct risk profile of the Group ■ monitors culture and cultural transformation Group Risk Committee ■ reviews and monitors the effectiveness of conduct risk management Business Unit Risk Committees and Financial Crime Business Oversight Committees ■ oversee the management of the Group’s conduct risk profile as the primary Second Line governance forum ■ oversee the implementation of the Conduct Risk Management Framework (CRMF) ■ oversee existing and emerging conduct risk exposures home.barclays/annualreport Barclays PLC Annual Report 2017 135 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk review Principal Risk management Reputation risk management Reputation risk The risk that an action, transaction, investment or event will reduce trust in the firm’s integrity and competence by clients, counterparties, investors, regulators, employees or the public. Overview A reduction of trust in Barclays’ integrity and competence may reduce the attractiveness of Barclays to stakeholders and could lead to negative publicity, loss of revenue, regulatory or legislative action, loss of existing and potential client business, reduced workforce morale and difficulties in recruiting talent. Ultimately it may destroy shareholder value. Organisation and structure The GRC is the most senior executive body responsible for reviewing and monitoring the effectiveness of Barclays’ management of reputation risk. Roles and responsibilities The Chief Compliance Officer is accountable for developing a reputation risk framework and policies including limits against which data is monitored, reported on and escalated, as required. Reputation risk is by nature pervasive and can be difficult to quantify, requiring more subjective judgement than many other risks. The Reputation Risk Framework sets out what is required to manage reputation risk effectively and consistently across the Bank. The primary responsibility for identifying and managing reputation risk and adherence to the control requirements sits with the business and support functions where the risk arises. Barclays International and Barclays UK are required to operate within established reputation risk appetite and their component businesses submit quarterly reports to the Group Reputation Management team, highlighting their most significant current and potential reputation risks and issues and how they are being managed. These reports are a key internal source of information for the quarterly reputation risk reports which are prepared for the GRC and RepCo. Organisation and structure Board Reputation Committee ■ reviews the effectiveness of the processes and policies by which Barclays identifies and manages reputation risk ■ considers and evaluates regular reports on Barclays’ reputation risk issues and exposures ■ considers whether significant business decisions will compromise Barclays’ ethical policies or core business beliefs and values Group Risk Committee ■ reviews the monitoring processes utilised by Compliance and Citizenship and Reputation for appropriateness given the level of risk identified in the businesses ■ reports reputation issues in accordance with Barclays’ Reputation Risk Framework for all material issues which may have the potential to incur reputation risk for Barclays Business Unit Risk Committees ■ review and escalate reputation risks in accordance with the Reputation Risk Framework 136 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewRisk review Principal Risk management Legal risk management Legal risk The risk of loss or imposition of penalties, damages or fines from the failure of the firm to meet its legal obligations including regulatory or contractual requirements. Overview The Legal Risk Management Framework (LRMF) prescribes Group-wide requirements for the identification, escalation, measurement and management of legal risk, covering assessment, risk tolerance, key indicators and governance. The LRMF is supported by Group-wide legal risk policies and associated standards aligned to the following legal risks: ■■ contractual arrangements – the Group’s rights and remedies in its relationships with other parties not being enforceable as intended due to the absence of appropriate contractual documentation or defects therein ■■ litigation management – failure to adequately manage litigation involving the Group ■■ intellectual property (IP) – failure to protect the Group’s IP assets or the Group infringing valid IP rights of third parties ■■ competition/anti-trust – failure to adequately manage competition/anti-trust issues or failure to manage relationships with competition/anti-trust authorities. ■■ use of law firms – failure to control instruction of external law firms ■■ contact with regulators – failure to manage interactions with regulators or failure to manage the receipt and handling of regulatory information from a regulatory or government agency appropriately. The LRMF requires businesses and functions to integrate the management of legal risk within their strategic planning and business decision-making, including adopting processes to identify legal risk exposures and managing adherence to the minimum control requirements. In addition to legal risk detailed above, legal outcomes, including losses or the imposition of penalties, damages, fines and sanctions, may arise because of past and future actions, behaviours and business decisions aligned to the Principal Risk which gave rise to the outcome, including but not limited to conduct and operational risk. Details of current contentious legal matters in relation to the Group are set out in Note 29. Organisation and structure Business/function risk forums have oversight of their legal risk profile and implementation of the LRMF. The Legal Executive Committee oversees, challenges and monitors legal risk across the Group. The GRC is the most senior executive body responsible for reviewing and monitoring the effectiveness of Barclays’ management of risk. Escalation paths from this forum exist to the BRC. Roles and responsibilities The primary responsibility for identifying and managing legal risk and adherence to the minimum control requirements sits with the businesses/functions where the risk resides. On behalf of the businesses/functions, the aligned General Counsel or members of Legal senior management provide oversight and challenge of the legal risk profile, for example by undertaking legal risk tolerance assessments, and providing advice on legal risk management. Legal risk tolerance assessments include both quantitative and qualitative criteria such as: ■■ risk and control self-assessment, lessons learned, testing and monitoring processes ■■ analysis of legal risk material control issues or weaknesses ■■ potential legal risks resulting from upcoming changes in the control environment, systems, or internal organisational structures ■■ potential implications on the Group of forthcoming changes in the external legal and regulatory environment and/or prevailing decisions from courts and enforcing authorities as they relate to defined legal risks. The Group General Counsel supported by the Global Head of Legal Risk, Governance and Control is responsible for maintaining an appropriate LRMF and for overseeing Group-wide legal risk management. Organisation and structure Board Risk Committee ■ approves risk tolerances ■ reviews risk profile and material risk issues ■ commissions, receives and considers reports on key risk issues Group Risk Committee ■ monitors risk profile with respect to non-financial risk tolerances ■ debates and agrees actions on the non-financial risk profile and risk strategy across the Group ■ considers escalated issues Legal Executive Committee ■ oversees, challenges and monitors legal risk across the Group ■ oversees and challenges effectiveness of the non-financial risk and control environment within the legal function ■ considers issues of significance relating to legal risk and control Business/Function Risk Forums and Committees ■ oversee the legal risk profile of the relevant business/function ■ review conclusions from risk and control assessments and emerging risk issues ■ oversee significant risk events and lessons learned assessments home.barclays/annualreport Barclays PLC Annual Report 2017 137 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk review Risk performance Credit risk Summary of contents Credit risk represents a significant risk to the Group and mainly arises from exposure to wholesale and retail loans and advances together with the counterparty credit risk arising from derivative contracts entered into with clients. This section provides a macro view of the Group’s credit exposures. The Group reviews and monitors risk concentrations in a variety of ways. This sections outlines performance against key concentration risks at a macro Group level. In addition to Group wide concentrations, credit risk monitors exposure performance across a range of specific portfolios. The Group monitors exposures to assets where there is a heightened likelihood of default and assets where an actual default has occurred. This section outlines the exposure to assets that have been classified as impaired analysing the exposures between business units and by key product types. The Group, from time to time, agrees to the suspension of certain aspects of customer/client credit agreements, generally during temporary periods of financial difficulties where the Group is confident that the customer/client will be able to remedy the suspension. This section outlines the Group’s current exposure to assets with this treatment. The Group holds impairment provisions on the balance sheet as a result of the raising of a charge against profit for incurred losses in the lending book. An impairment allowance may either be identified or unidentified and individual or collective. This section outlines the movements in allowance for impairment by asset class exposure, material management adjustments to model output, analysis of debt securities and derivatives. ■■ Credit risk overview and summary of performance ■■ The Group’s maximum exposure and collateral and other credit enhancements held ■■ The Group’s approach to management and representation of credit quality – Asset credit quality – Debt securities – Balance sheet credit quality ■■ Analysis of the concentration of credit risk – Geographic concentrations – Industrial concentrations ■■ Loans and advances to customers and banks ■■ Analysis of specific portfolios and asset types – Secured home loans – Credit cards and unsecured loans – Wholesale loans and advances at amortised cost ■■ Analysis of problem loans – Age analysis of loans and advances that are past due but not impaired – Analysis of loans and advances assessed as impaired – Potential credit risk loans and coverage ratios – Impaired loans – Forbearance ■■ Impairment – Impairment allowances – Management adjustments to models for impairment ■■ Analysis of debt securities ■■ Analysis of derivatives Page 139 139 142 142 142 142 144 144 145 147 148 148 149 150 151 151 151 152 153 153 156 156 156 157 157 138 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewCredit risk The risk of loss to the firm from the failure of clients, customers or counterparties, including sovereigns, to fully honour their obligations to the firm, including the whole and timely payment of principal, interest, collateral and other receivables. All disclosures in this section (pages 139 to 158) are unaudited unless otherwise stated. Key metrics Loan impairment charges in 2017 were 1% lower than 2016: Group -£19m Loan impairment reduced slightly reflecting lower charges in Barclays UK and in the Barclays International wholesale portfolios partially offset by an adjustment relating to an asset sale in US cards. Retail Overall the retail portfolios have remained stable and broadly within expectations. Notwithstanding this, impairment charges increased primarily due to an adjustment relating to an asset sale in US cards. Wholesale Impairment charges have decreased, despite a large single name impairment, driven by a range of releases and materially lower charges to the oil sector. +£42m -£61m Overview Credit risk represents a significant risk to the Group and mainly arises from exposure to wholesale and retail loans and advances together with the counterparty credit risk arising from derivative contracts entered into with clients. A summary of performance may be found below. This section provides an analysis of areas of particular interest or potentially of higher risk, including: i) balance sheet, including the maximum exposure, collateral, credit quality, and loans and advances; ii) areas of concentrations; iii) exposure to and performance metrics for specific portfolios and assets types, including home loans and credit cards; iv) problem loans, including credit risk loans (CRLs) and forbearance; and v) impairment, including impairment allowances and management adjustments to model outputs. Please see the credit risk management section on pages 127 to 128 for details of governance, policies and procedures. Summary of performance in the period Loan impairment charges decreased £19m to £2,333m. Total loans and advances net of impairment decreased by £34.1bn to £415.4bn driven by a net £12.7bn decrease in cash collateral and settlement balances and a £21.4bn decrease in other lending, primarily in Corporate and Investment Bank. Overall, this resulted in a 4bps increase in the LLR to 57bps. Credit risk loans (CRLs) decreased to £6.0bn (December 2016: £6.5bn) and the CRL coverage ratio increased to 78% (December 2016: 71%) mainly within retail portfolios. Analysis of the balance sheet Group’s maximum exposure and collateral and other credit enhancements held Basis of preparation The following tables present a reconciliation between the Group’s maximum exposure and its net exposure to credit risk; reflecting the financial effects of collateral, credit enhancements and other actions taken to mitigate the Group’s exposure. For financial assets recognised on the balance sheet, maximum exposure to credit risk represents the balance sheet carrying value after allowance for impairment. For off-balance sheet guarantees, the maximum exposure is the maximum amount that the Group would have to pay if the guarantees were to be called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities. home.barclays/annualreport Barclays PLC Annual Report 2017 139 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceThis and subsequent analyses of credit risk include only financial assets subject to credit risk. They exclude other financial assets not subject to credit risk, mainly equity securities held for trading, as available for sale or designated at fair value, and traded commodities. Assets designated at fair value in respect of linked liabilities to customers under investment contracts have also not been included as the Group is not exposed to credit risk on these assets. Credit losses in these portfolios, if any, would lead to a reduction in the linked liabilities and not result in a loss to the Group. For off-balance sheet exposures certain contingent liabilities not subject to credit risk such as performance guarantees are excluded. The Group mitigates the credit risk to which it is exposed through netting and set-off, collateral and risk transfer. Further detail on the Group’s policies to each of these forms of credit enhancement is presented on pages 146 to 149 of the Barclays PLC Pillar 3 Report 2017. Overview As at 31 December 2017, the Group’s net exposure to credit risk after taking into account netting and set-off, collateral and risk transfer increased 7% to £790.5bn. Overall, the extent to which the Group holds mitigation against its total exposure decreased to 43% (2016: 47%). Of the remaining exposure left unmitigated, a significant portion relates to cash held at central banks, financial investment debt securities issued by governments and cash collateral and settlement balances, all of which are considered to be lower risk. Increases in cash held at central banks and financial investment debt securities in the period have driven the increase in the Group’s net exposure to credit risk. Trading portfolio liability positions, which to a significant extent economically hedge trading portfolio assets but which are not held specifically for risk management purposes, are excluded from the analysis. The credit quality of counterparties to derivatives, financial investments and wholesale loan assets are predominantly investment grade. Further analysis on the credit quality of assets is presented on pages 142 to 143. Where collateral has been obtained in the event of default, the Group does not, as a rule, use such assets for its own operations and they are usually sold on a timely basis. The carrying value of assets held by the Group as at 31 December 2017, as a result of the enforcement of collateral, was £nil (2016: £16m). Maximum exposure and effects of collateral and other credit enhancements (audited) As at 31 December 2017 On-balance sheet: Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets: Debt securities Traded loans Total trading portfolio assets Financial assets designated at fair value: Loans and advances Debt securities Reverse repurchase agreements Other financial assets Total financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers: Home loans Credit cards, unsecured and other retail lending Corporate loans Total loans and advances to customers Reverse repurchase agreements and other similar secured lending Financial investments – debt securities Other assets Total on-balance sheet Off-balance sheet: Contingent liabilities Documentary credits and other short-term trade-related transactions Standby facilities, credit lines and other commitments Total off-balance sheet Maximum exposure £m Netting and set-off £m Collateral Cash £m Non-cash £m Risk transfer £m Net exposure £m 171,082 2,153 51,200 3,140 54,340 11,037 15 100,040 519 111,611 237,669 35,663 147,002 55,767 162,783 365,552 12,546 57,129 869 1,048,614 19,012 812 314,761 334,585 – – – – – – – – – – – – – (128) (128) – – – – – – – – – – (184,265) – – – (6,617) (6,617) – – – (190,882) (440) – (426) – (866) (33,092) (6) (158) (241) (224) (623) – – – (34,587) (5,497) – (99,428) – (104,925) (6,170) (583) (146,554) (3,995) (45,819) (196,368) (12,226) (463) – (320,863) (344) – – – (344) (5,885) (37) – (16) (4,341) (4,357) – (853) – (11,476) 171,082 2,153 51,200 3,012 54,212 4,756 15 186 519 5,476 8,257 35,037 290 51,515 105,782 157,587 320 55,813 869 490,806 – – – – (318) (27) (46) (391) (1,482) (11) (31,058) (32,551) (228) (4) (1,753) (1,985) 16,984 770 281,904 299,658 Total 1,383,199 (190,882) (34,978) (353,414) (13,461) 790,464 140 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewMaximum exposure and effects of collateral and other credit enhancements (audited) As at 31 December 2016 On-balance sheet: Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets: Debt securities Traded loans Total trading portfolio assets Financial assets designated at fair value: Loans and advances Debt securities Reverse repurchase agreements Other financial assets Total financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers: Home loans Credit cards, unsecured and other retail lending Corporate loans Total loans and advances to customers Reverse repurchase agreements and other similar secured lending Financial investments – debt securities Other assets Total on-balance sheet Off-balance sheet: Contingent liabilities Documentary credits and other short-term trade-related transactions Standby facilities, credit lines and other commitments Total off-balance sheet Maximum exposure £m Netting and set-off £m Collateral Cash £m Non-cash £m Risk transfer £m Net exposure £m 102,353 1,467 38,789 2,975 41,764 10,519 70 63,162 262 74,013 346,626 43,251 144,765 57,808 190,211 392,784 13,454 62,879 1,205 1,079,796 19,908 1,005 302,681 323,594 – – – – – – – – – – – – – (270) (270) – – – – – (273,602) – – – (8,622) (8,622) – – – (282,224) (17) – (688) – (705) (41,641) (4) (184) (235) (320) (739) (79) – – (43,168) (4,107) – (62,233) – (66,340) (8,282) (4,896) (143,912) (5,258) (52,029) (201,199) (13,242) (533) – (294,762) – – – – – (432) – – – (432) (5,205) (22) – (95) (5,087) (5,182) – (1,286) – (12,127) 102,353 1,467 38,789 2,705 41,494 5,963 70 241 262 6,536 17,896 38,329 669 52,220 124,153 177,042 133 61,060 1,205 447,515 – – – – (247) (24) (321) (592) (1,403) (18) (26,548) (27,969) (130) (3) (1,704) (1,837) 18,128 960 274,108 293,196 Total 1,403,390 (282,224) (43,760) (322,731) (13,964) 740,711 home.barclays/annualreport Barclays PLC Annual Report 2017 141 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceThe Group’s approach to management and representation of credit quality Asset credit quality All loans and advances are categorised as either ‘neither past due nor impaired’, ‘past due but not impaired’, or ‘past due and impaired’, which includes restructured loans. For the purposes of the disclosures in the balance sheet credit quality section below and the analysis of loans and advances and impairment section (page 156): ■■ loans neither past due nor impaired consist predominantly of wholesale and retail loans that are performing. These loans, although unimpaired may carry an unidentified impairment ■■ a loan is considered past due and classified as ‘Higher risk’ when the borrower has failed to make a payment when due under the terms of the loan contract ■■ loans on forbearance programmes, as defined on page 153, are categorised as ‘Higher risk’ ■■ the impairment allowance includes allowances against financial assets that have been individually impaired and those subject to collective impairment. The Group uses the following internal measures to determine credit quality for loans that are performing: Default Grade 1-3 4-5 6-8 9-11 12-14 15-19 20-21 Wholesale lending Probability of default 0.0-0.05% 0.05-0.15% 0.15-0.30% 0.30-0.60% 0.60-2.15% 2.15-11.35% 11.35%+ Credit Quality Description Strong Satisfactory Higher Risk For retail clients, a range of analytical tools is used to derive the probability of default of clients at inception and on an ongoing basis. For loans that are performing, these descriptions can be summarised as follows: Strong: there is a very high likelihood of the asset being recovered in full. Satisfactory: while there is a high likelihood that the asset will be recovered and therefore, of no cause for concern to the Group, the asset may not be collateralised, or may relate to unsecured retail facilities. At the lower end of this grade there are customers that are being more carefully monitored, for example, corporate customers which are indicating some evidence of deterioration, mortgages with a high loan to value, and unsecured retail loans operating outside normal product guidelines. Higher risk: there is concern over the obligor’s ability to make payments when due. However, these have not yet converted to actual delinquency. There may also be doubts over the value of collateral or security provided. However, the borrower or counterparty is continuing to make payments when due and is expected to settle all outstanding amounts of principal and interest. Loans that are past due are monitored closely, with impairment allowances raised as appropriate and in line with the Group’s impairment policies. These loans are all considered higher risk for the purpose of this analysis of credit quality. Debt securities For assets held at fair value, the carrying value on the balance sheet will include, among other things, the credit risk of the issuer. Most listed and some unlisted securities are rated by external rating agencies. The Group mainly uses external credit ratings provided by Standard & Poor’s, Fitch or Moody’s. Where such ratings are not available or are not current, the Group will use its own internal ratings for the securities. Balance sheet credit quality The following tables present the credit quality of Group assets exposed to credit risk. Overview As at 31 December 2017, the ratio of the Group’s assets classified as strong, remained broadly stable at 89% (2016: 86%) of total assets exposed to credit risk. Further analysis of debt securities by issuer and issuer type and netting and collateral arrangements on derivative financial instruments is presented on pages 157 and 158 respectively. 142 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk review Balance sheet credit quality (audited) As at 31 December 2017 Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets: Debt securities Traded loans Total trading portfolio assets Financial assets designated at fair value: Loans and advances Debt securities Reverse repurchase agreements Other financial assets Total financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers: Home loans Credit cards, unsecured and other retail lending Corporate loans Total loans and advances to customers Reverse repurchase agreements and other similar secured lending Financial investments – debt securities Other assets Total assets Balance sheet credit quality (audited) As at 31 December 2016 Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets: Debt securities Traded loans Total trading portfolio assets Financial assets designated at fair value: Loans and advances Debt securities Reverse repurchase agreements Other financial assets Total financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers: Home loans Credit cards, unsecured and other retail lending Corporate loans Total loans and advances to customers Reverse repurchase agreements and other similar secured lending Financial investments – debt securities Other assets Total assets 26,026 113,505 275,107 11,430 57,107 482 923,271 Strong (including investment grade) £m 102,353 Strong (including investment grade) £m 171,082 Satisfactory (BB+ to B) £m – Higher risk (B- and below) £m – Maximum exposure to credit risk £m 171,082 Strong (including investment grade) % 100 Satisfactory (BB+ to B) % – Higher risk (B- and below) % – Maximum exposure to credit risk % 100 2,088 56 9 2,153 48,489 1,432 49,921 9,457 – 82,263 482 92,202 229,262 34,590 2,085 1,189 3,274 817 15 17,692 37 18,561 7,863 926 626 519 1,145 51,200 3,140 54,340 763 – 85 – 848 544 147 11,037 15 100,040 519 111,611 237,669 35,663 135,576 5,781 5,645 147,002 24,801 36,786 67,368 1,101 18 355 99,522 4,940 12,492 23,077 55,767 162,783 365,552 15 4 32 12,546 57,129 869 25,821 1,048,614 97 95 45 92 86 – 82 93 82 96 97 92 47 70 76 91 100 55 89 3 4 38 6 7 100 18 7 17 4 3 4 44 22 18 9 – 41 9 – 100 1 17 2 7 – – – 1 – – 4 9 8 6 – – 4 2 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Satisfactory (BB+ to B) £m – Higher risk (B- and below) £m – Maximum exposure to credit risk £m 102,353 Strong (including investment grade) % 100 Satisfactory (BB+ to B) % – Higher risk (B- and below) % – Maximum exposure to credit risk % 100 1,328 130 9 1,467 37,037 594 37,631 9,692 59 53,151 244 63,146 330,737 39,159 1,344 1,977 3,321 533 11 9,999 18 10,561 14,963 3,830 408 404 812 294 – 12 – 306 926 262 38,789 2,975 41,764 10,519 70 63,162 262 74,013 346,626 43,251 136,922 2,589 5,254 144,765 5,343 140,414 282,679 9,364 62,842 1,085 930,324 50,685 37,170 90,444 4,090 30 117 127,486 1,780 12,627 19,661 57,808 190,211 392,784 – 7 3 13,454 62,879 1,205 21,986 1,079,796 91 96 20 90 92 84 84 93 85 95 91 95 9 74 72 70 100 90 86 9 3 66 8 5 16 16 7 14 5 9 1 88 19 23 30 – 10 12 – 1 14 2 3 – – – 1 – – 4 3 7 5 – – – 2 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 home.barclays/annualreport Barclays PLC Annual Report 2017 143 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceAnalysis of the concentration of credit risk A concentration of credit risk exists when a number of counterparties are located in a geographical region or are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Group implements limits on concentrations in order to mitigate the risk. The analyses of credit risk concentrations presented below are based on the location of the counterparty or customer or the industry in which they are engaged. Further detail on the Group’s policies with regard to managing concentration risk is presented on page 149 of Barclays PLC Pillar 3 Report 2017. Geographic concentrations As at 31 December 2017, the geographic concentration of the Group’s assets remained broadly consistent with 2016. Exposure is concentrated in the UK 42% (2016: 41%), in the Americas 33% (2016: 33%) and Europe 21% (2016: 21%). Credit risk concentrations by geography (audited) As at 31 December 2017 On-balance sheet: Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Financial investments – debt securities Other assets Total on-balance sheet United Kingdom £m 53,068 987 10,603 33,922 81,656 10,251 253,702 203 17,471 592 462,455 Europe £m Americas £m Africa and Middle East £m Asia £m Total £m 57,179 1,166 13,620 23,725 81,566 11,847 39,687 375 23,598 13 252,776 56,034 – 25,680 46,288 57,858 8,044 63,246 10,521 14,110 148 281,929 63 – 473 1,611 2,792 1,714 2,541 32 114 33 9,373 – 4,738 171,082 2,153 54,340 111,611 237,669 35,663 365,552 12,546 57,129 869 42,081 1,048,614 3,964 6,065 13,797 3,807 6,376 1,415 1,836 83 Off-balance sheet: Contingent liabilities Documentary credits and other short-term trade related transactions Standby facilities, credit lines and other commitments Total off-balance sheet Total 7,603 800 105,112 113,515 575,970 3,039 5 36,079 39,123 291,899 6,708 – 168,003 174,711 456,640 529 7 1,601 2,137 11,510 – 1,133 19,012 812 314,761 334,585 47,180 1,383,199 3,966 5,099 Credit risk concentrations by geography (audited) As at 31 December 2016 On-balance sheet: Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Financial investments – debt securities Other assets Total on-balance sheet Off-balance sheet: Contingent liabilities Documentary credits and other short-term trade related transactions Standby facilities, credit lines and other commitments Total off-balance sheet Total United Kingdom £m 30,485 969 8,981 25,821 108,559 7,458 253,752 218 18,126 987 455,356 8,268 915 106,427 115,610 570,966 Europe £m Americas £m Africa and Middle East £m 40,439 498 9,171 10,244 107,337 12,674 47,050 309 27,763 – 255,485 3,275 9 35,476 38,760 294,245 24,859 – 19,848 33,181 105,129 16,894 81,045 11,439 12,030 137 304,562 6,910 – 156,077 162,987 467,549 Asia £m Total £m 6,493 – 3,329 4,034 24,108 4,447 7,848 1,396 4,709 71 102,353 1,467 41,764 74,013 346,626 43,251 392,784 13,454 62,879 1,205 56,435 1,079,796 77 – 435 733 1,493 1,778 3,089 92 251 10 7,958 702 40 1,694 2,436 10,394 753 41 3,007 3,801 19,908 1,005 302,681 323,594 60,236 1,403,390 144 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewIndustry concentrations The concentration of the Group’s assets by industry remained broadly consistent year on year. As at 31 December 2017, total assets concentrated towards banks and other financial institutions was 36% (2016: 43%), predominantly within derivative financial instruments. The proportion of the overall balance concentrated towards governments and central banks increased to 20% (2016: 14%) and towards home loans remained stable at 11% (2016: 11%). Credit risk concentrations by industry (audited) Other financial insti- tutions £m Manu- facturing £m Const- ruction and property £m Govern- ment and central bank £m Banks £m Wholesale and retail distribu- tion and leisure £m Energy and water £m Business and other services £m Home loans £m Cards, unsecured loans and other personal lending £m Other £m Total £m 2 3 – – – – – – – – – – – – – – – – – – 38 28 598 888 128 – – 3,324 2,383 2,103 3,900 2,083 4,666 3,311 5,811 8,179 4,812 27,780 – 171,082 – 171,082 807 26,030 2,153 54,340 21,468 78,506 126,248 87,272 2,153 4,682 10,672 As at 31 December 2017 On-balance sheet: Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Financial investments 57,129 – 44,827 – debt securities Other assets 869 21 – Total on-balance sheet 199,865 258,297 14,981 31,435 270,206 18,288 13,627 29,537 147,158 54,205 11,015 1,048,614 Off-balance sheet: Contingent liabilities Documentary credits and other short-term trade related transactions Standby facilities, credit lines and other commitments Total off-balance sheet Total 314,761 334,585 202,987 293,280 56,322 45,066 270,598 52,595 29,103 68,899 157,947 180,763 25,639 1,383,199 384 31,702 14,436 34,392 10,785 126,169 13,571 392 34,307 15,476 39,362 10,789 126,558 14,624 1,026 31,427 37,913 12,956 3,122 34,983 41,341 13,631 6,104 12,450 20,483 147,002 54,205 10,146 147 9,249 23,706 1,379 701 – 74,923 365,552 237,669 111,611 12,546 19,012 35,663 1,051 4,947 7,997 2,972 2,605 1,572 3,236 9,433 7,241 2,125 7,883 4,844 3,556 – – – – – – – – – – 969 389 153 103 674 307 675 576 192 524 812 71 23 – – – – – – – – – – – – – – – – – – – – – – – – – 4 2 1 8 5 home.barclays/annualreport Barclays PLC Annual Report 2017 145 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceCredit risk concentrations by industry (audited) Other financial insti- tutions £m Banks £m – – – – 7,998 38,932 14,714 49,783 1,467 2,231 182,664 139,066 As at 31 December 2016 On-balance sheet: Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Financial investments 4,877 – debt securities Other assets 205 Total on-balance sheet 256,421 304,309 Off-balance sheet: Contingent liabilities Documentary credits and other short-term trade related transactions Standby facilities, credit lines and other commitments Total off-balance sheet Total 29,329 33,561 259,359 337,870 12,842 975 1,021 2,938 – 91,812 10,568 2,596 1,484 4,232 433 – Const- ruction and property £m Govern- ment and central bank £m Manu- facturing £m Wholesale and retail distribu- tion and leisure £m Energy and water £m Business and other services £m Home loans £m Cards, unsecured loans and other personal lending £m – – – 102,353 – – – – – – – – 1,625 565 21,047 3,733 324 2,972 – – 257 3 5,699 856 5 33 2,811 33 – – – 2 Other £m Total £m – 102,353 – 1,012 1,467 41,764 74 74,013 2,913 3,488 6,547 4,585 810 3,392 – – 4,319 – – – – – – 3,161 346,626 – – 43,251 12,337 24,200 12,028 7,384 12,967 21,838 144,765 56,730 8,723 392,784 – – – 16,878 38 252 – – 44,263 25 33,990 191,690 – – – – 43 – – 807 – – – – – – – 15,707 14,177 31,820 145,055 56,732 – 13,454 47 – 62,879 1,205 13,017 1,079,796 3,387 707 377 – 8 – 2,649 1,032 4,847 40 531 991 19,908 – 157 38 – – – 1,005 38,829 42,593 59,471 400 11,876 12,583 408 46,573 192,098 29,699 32,348 48,055 14,741 15,930 30,107 9,610 126,708 26,359 31,244 9,650 127,239 63,064 154,705 183,971 302,681 14,109 15,100 323,594 28,117 1,403,390 146 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewLoans and advances to customers and banks As the principal source of credit risk to the Group, loans and advances to customers and banks is analysed in detail below: Analysis of loans and advances and impairment to customers and banks As at 31 December 2017 Barclays UK Barclays International Head Office Barclays Non-Coreb Total Group retail Barclays UK Barclays International Head Office Barclays Non-Coreb Total Group wholesale Total loans and advances at amortised cost Traded loans Loans and advances designated at fair value Loans and advances held at fair value Total loans and advances As at 31 December 2016 Barclays UK Barclays International Barclays Non-Core Total Group retail Barclays UK Barclays International Head Office Barclays Non-Core Total Group wholesale Total loans and advances at amortised cost Traded loans Loans and advances designated at fair value Loans and advances held at fair value Total loans and advances Gross L&A £m 159,397 30,775 9,333 – 199,505 28,960 170,299 7,103 – 206,362 405,867 3,140 11,037 14,177 420,044 155,729 33,485 10,319 199,533 15,204 180,102 4,410 41,406 241,122 440,655 2,975 10,519 13,494 454,149 Impairment allowance £m 1,649 1,542 296 – 3,487 190 862 113 – 1,165 4,652 n/a n/a n/a 4,652 1,519 1,492 385 3,396 282 748 – 194 1,224 4,620 n/a n/a n/a 4,620 L&A net of impairment £m 157,748 29,233 9,037 – 196,018 28,770 169,437 6,990 – 205,197 401,215 3,140 11,037 14,177 415,392 154,210 31,993 9,934 196,137 14,922 179,354 4,410 41,212 239,898 436,035 2,975 10,519 13,494 449,529 Credit risk loans £m 1,950 1,275 710 – 3,935 432 1,421 206 – 2,059 5,994 n/a n/a n/a 5,994 2,044 1,249 838 4,131 591 1,470 – 299 2,360 6,491 n/a n/a n/a 6,491 CRLs % of gross L&A % 1.2 4.1 7.6 – 2.0 1.5 0.8 2.9 – 1.0 1.5 Loan impairment chargesa £m 764 1,285 16 30 2,095 19 219 1 (1) 238 2,333 Loan loss rates bps 48 418 17 – 105 7 13 1 – 12 57 1.3 3.7 8.1 2.1 3.9 0.8 – 0.7 1.0 1.5 866 1,085 102 2,053 30 258 – 11 299 2,352 56 324 99 103 20 14 – 3 12 53 Notes a Excluding impairment charges on available for sale investments and reverse repurchase agreements. b Barclays Non-Core represents charges for the six months ended 30 June 2017, primarily relating to Italian mortgages transferred into Head Office on 1 July 2017. Total loans and advances decreased by £34.1bn to £415.4bn, including a net £12.7bn decrease in cash collateral and settlement balances and a £21.4bn decrease in other lending, primarily in Corporate and Investment Bank. Credit risk loans (CRLs) decreased to £6.0bn (2016: £6.5bn) and the ratio of CRLs to gross loans and advances remained stable at 1.5% (2016: 1.5%). Loan impairment charges decreased £19m to £2,333m. Overall, this resulted in an increase of 4bps in the loan loss rate to 57bps. home.barclays/annualreport Barclays PLC Annual Report 2017 147 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceAnalysis of specific portfolios and asset types This section provides an analysis of principal portfolios and businesses in the retail segments. In particular, home loans, credit cards and unsecured loans. Secured home loans The UK home loans portfolio comprises first lien home loans and accounts for 90% (2016: 89%) of the Group’s total home loan balances. Home loans principal portfoliosa As at 31 December Gross loans and advances (£m) 90 day arrears rate, excluding recovery book (%) Non-performing proportion of outstanding balances (%) Annualised gross charge-off rates (%) Recovery book proportion of outstanding balances (%) Recovery book impairment coverage ratio (%) Barclays UK 2017 132,132 0.1 0.4 0.2 0.3 11.2 2016 129,136 0.2 0.6 0.3 0.4 9.1 Note a Gross loans and advances include loans and advances to customers and banks. Risk metrics based on exposures to customers only. Portfolio performance remained steady reflecting the continuing low base rate environment and stable economic conditions. The non-performing proportion of outstanding balances decreased due to an improved performance and a reduction in repossession stock. The recovery book impairment coverage ratio increased driven by a reduction in the number of customers entering recoveries, reflecting lower entries into collections and better customer payments rates from those in collections. Within the UK home loans portfolio: ■■ owner-occupied interest-only home loans comprised 28% (2016: 31%) of total balances. The decrease was driven by a greater attrition rate compared to new business flow. The average balance weighted LTV on these loans reduced to 39.7% (2016: 41.7%) primarily driven by increases in the House Price Index (HPI) across core regions and the 90 day arrears rate excluding recovery book remained steady at 0.3% (2016: 0.2%) ■■ buy-to-let home loans comprised 11% (2016: 9%) of total balances. The average balance weighted LTV increased to 53.7% (2016: 52.6%), and the 90 day arrears rate excluding recovery book remained steady at 0.1% (2016: 0.1%). Home loans principal portfolios – distribution of balances by LTVa Distribution of balances Impairment coverage ratio 2017 % 2016 % Non-performing proportion of outstanding balances 2016 % 2017 % Non-performing balances impairment coverage ratio 2017 % 2016 % Recovery book proportion of outstanding balances 2016 % 2017 % As at 31 December Barclays UK <=75% >75% and <=80% >80% and <=85% >85% and <=90% >90% and <=95% >95% and <=100% >100% 2017 % 91.1 4.1 2.6 1.2 0.6 0.2 0.2 2016 % 91.8 3.5 2.1 1.3 0.8 0.3 0.2 0.1 0.1 0.1 0.2 0.4 0.6 4.2 0.1 0.2 0.2 0.3 0.4 0.7 3.1 0.5 0.5 0.4 0.5 0.9 1.2 6.7 0.6 0.6 0.8 0.7 1.1 1.9 5.7 4.3 18.6 16.4 23.8 28.7 25.6 42.0 4.2 17.1 20.4 23.0 28.3 23.4 38.6 0.2 0.3 0.2 0.3 0.6 0.9 5.9 0.4 0.4 0.6 0.6 0.8 1.5 5.0 Recovery book impairment coverage ratio 2017 % 7.5 28.0 27.8 30.7 38.9 27.7 47.2 2016 % 5.9 22.1 25.0 25.4 33.7 27.0 40.9 Note a Portfolio marked to market based on the most updated valuation including recovery book balances. Updated valuations reflect the application of the latest HPI available as at 31 December 2017. Home loans principal portfolios – Average LTV As at 31 December Portfolio marked to market LTV (%): Balance weighted Valuation weighted Performing balances (%): Balance weighted Valuation weighted Non-performing balances (%): Balance weighted Valuation weighted For >100% LTVs: Balances (£m) Marked to market collateral (£m) Average LTV: balance weighted (%) Average LTV: valuation weighted (%) % of balances in recovery book Barclays UK 2017 2016 47.6 35.2 47.6 35.6 49.8 39.1 215 188 127.7 118.6 5.9 47.7 35.6 47.3 35.5 52.5 41.7 239 210 118.4 113.1 5.0 Balance pay down coupled with benefits from the HPI increase resulted in a 10% reduction in home loans that have LTV >100% to £215m (2016: £239m). 148 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewHome loans principal portfolios – new lending As at 31 December New bookings (£m) New mortgages proportion above 85% LTV (%) Average LTV on new mortgages: balance weighted (%) Average LTV on new mortgages: valuation weighted (%) Barclays UK 2017 22,665 6.0 63.8 56.0 2016 19,885 8.6 63.4 54.4 Barclays UK: New lending during 2017 increased by 14%, reflecting heightened market activity while maintaining a steady risk profile. Average balance weighted LTV on new lending remained broadly stable at 63.8% (2016: 63.4%). Head Office: Italian home loans of £9.2bn (2016: £10.0bn) are secured on residential property with an average balance weighted marked to market LTV of 61.0% (2016: 61.8%) and CRL coverage of 41% (2016: 36%). 90 day arrears and gross charge-off rates remained stable at 1.4% (2016: 1.2%) and 0.8% (2016: 0.8%) respectively while the CRL book coverage ratio increased, as a result of an update in the collateral valuation for accounts in the recovery book. Credit cards, unsecured loans and other retail lending The principal portfolios listed below accounted for 87% (2016: 88%) of the Group’s total credit cards, unsecured loans and other retail lending. Credit cards, unsecured loans and other retail lending principal portfolios As at 31 December 2017 Barclays UK UK cardsb UK personal loans Barclays International US cardsb Barclays Partner Finance Germany cards As at 31 December 2016 Barclays UK UK cardsb UK personal loans Barclays International US cardsb Barclays Partner Finance Germany cards Gross loans and advancesa £m 30 day arrears, excluding recovery book % 90 day arrears, excluding recovery book % Annualised gross charge-off rate % Recovery book proportion of outstanding balances % Recovery book impairment coverage ratio % 17,686 6,255 21,350 3,814 1,976 17,833 6,076 23,915 4,041 1,812 1.8 2.5 2.6 1.3 2.5 1.9 2.1 2.6 1.5 2.6 0.8 1.2 1.3 0.5 1.0 0.9 0.9 1.3 0.6 1.0 5.0 3.3 5.0 2.6 3.8 5.5 3.1 4.5 2.5 3.7 3.4 4.7 2.8 2.4 2.7 3.0 4.7 2.4 2.6 2.7 80.5 77.2 82.9 78.1 78.0 83.8 77.2 83.6 81.5 79.0 Notes a Gross loans and advances includes loans and advances to customers and banks. Risk metrics based on exposures to customers. b For UK and US cards, outstanding recovery book balances for acquired portfolios recognised at fair value (which have no related impairment allowance) have been excluded from the recovery book impairment coverage ratio. Losses have been recognised where related to additional spend from acquired accounts in the period post acquisition. UK cards: The annualised gross charge-off rate, which was higher in 2016 due to accelerated asset sales, normalised in 2017 to 5.0% (2016: 5.5%) in line with expectations. The recovery book proportion of outstanding balances increased, reflecting accelerated charge-off of non-compliant forbearance plans. However, the recovery book impairment coverage ratio decreased, reflecting the one time asset sale impact of accounts with lower recovery expectations. UK personal loans: The 30 day arrears rate increased to 2.5% (2016: 2.1%) and the 90 day arrears rate increased to 1.2% (2016: 0.9%) reflecting increased flow into delinquency from some 2016 bookings due to higher incidences of fraud and poorer performance on customers with multiple loans, coupled with a weaker performance in collections operations. Both the recovery book proportion of outstanding balances of 4.7% (2016: 4.7%) and the recovery book impairment coverage ratio of 77.2% (2016: 77.2%) remained stable. US cards: The annualised gross charge-off rate increased to 5.0% (2016: 4.5%) broadly in line with trends across the industry and also reflecting a one-off asset sale contributing to a drop in outstanding balances. As a result, recovery book proportion of outstanding balances increased to 2.8% (2016: 2.4%). Barclays Partner Finance: Portfolio arrears and the annualised gross charge-off rate remained broadly stable during 2017. Germany cards: 90 day arrears and the annualised gross charge-off rate remained stable, while the recovery book coverage ratio improved reflecting better recoveries. In addition, Germany consumer loans increased to £1.4bn (2016: £1.2bn). home.barclays/annualreport Barclays PLC Annual Report 2017 149 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceWholesale loans and advances at amortised cost Analysis of wholesale loans and advances at amortised cost Gross L&A £m Impairment allowance £m L&A net of impairment £m Credit risk loans £m CRLs % of gross L&A % Loan impairment charges £m Loan loss rates bps As at 31 December 2017 Banks Other financial institutions Manufacturing Construction Property Government and central bank Energy and water Wholesale and retail distribution and leisure Business and other services Home loansa Cards, unsecured loans and other personal lendinga Other Total wholesale loans and advances at amortised cost As at 31 December 2016 Banks Other financial institutions Manufacturing Construction Property Government and central bank Energy and water Wholesale and retail distribution and leisure Business and other services Home loansa Cards, unsecured loans and other personal lendinga Other Total wholesale loans and advances at amortised cost 27,520 73,849 9,193 3,180 20,353 16,403 6,214 12,497 20,147 5,598 4,452 6,956 206,362 35,979 91,673 12,373 3,418 20,541 15,847 7,569 12,995 21,210 5,497 5,329 8,691 241,122 – 20 64 34 61 1 124 217 505 48 33 58 1,165 – 14 130 40 137 – 181 169 284 48 129 92 1,224 27,520 73,829 9,129 3,146 20,292 16,402 6,090 12,280 19,642 5,550 4,419 6,898 205,197 35,979 91,659 12,243 3,378 20,404 15,847 7,388 12,826 20,926 5,449 5,200 8,599 239,898 – 108 162 21 256 35 235 253 361 268 272 88 2,059 – 89 226 58 464 – 348 258 331 190 207 189 2,360 – 0.1 1.8 0.7 1.3 0.2 3.8 2.0 1.8 4.8 6.1 1.3 1.0 – 0.1 1.8 1.7 2.3 – 4.6 2.0 1.6 3.5 3.9 2.2 1.0 – 2 (46) (6) (27) – (21) 53 264 11 (4) 12 238 – 6 37 5 27 – 102 38 54 9 6 15 299 – – (50) (19) (13) – (34) 42 131 20 (9) 17 12 – 1 30 15 13 – 135 29 25 16 11 17 12 Note a Included in the above analysis are Wealth and Private Banking exposures measured on an individual customer exposure basis. Wholesale loans and advances decreased £34.8bn to £206.4bn (2016: £241.1bn), including a net £12.7bn decrease in settlement and cash collateral balances and a £22.1bn decrease in other lending, mainly in the Corporate and Investment Bank. CRLs decreased £0.3bn to £2.1bn (2016: £2.4bn), primarily in the property and energy sectors, with fewer large name exposures arising this year compared to 2016. Loan impairment charges decreased to £238m (2016: £299m), reflecting the trend in CRLs. The loan loss rate remained stable at 12bps (2016: 12bps). 150 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewAnalysis of problem loans Loans that are past due or assessed as impaired within this section are reflected in the balance sheet credit quality tables on page 143 as being Higher risk. Age analysis of loans and advances that are past due but not impaired The following table presents an age analysis of gross loans and advances that are past due but not impaired. Loans that are past due but not impaired consist predominantly of wholesale loans that are past due but individually assessed as not being impaired. These loans although individually assessed as unimpaired may carry an unidentified impairment provision. Loans and advances past due but not impaired (audited) As at 31 December 2017 Loans and advances designated at fair value Home loans Credit cards, unsecured and other retail lending Corporate loans Total As at 31 December 2016 Loans and advances designated at fair value Home loans Credit cards, unsecured and other retail lending Corporate loans Total Past due up to 1 month £m Past due 1-2 months £m Past due 2-3 months £m Past due 3-6 months £m Past due 6 months and over £m 653 3 – 6,272 6,928 29 1 2 6,962 6,994 – 1 – 277 278 8 – – 1,235 1,243 20 – 12 129 161 18 – 2 149 169 – – 31 85 116 – 33 11 178 222 10 22 66 98 196 16 31 77 354 478 Total £m 683 26 109 6,861 7,679 71 65 92 8,878 9,106 Loans and advances past due but not impaired decreased by £1.4bn to £7.7bn, mainly due to fewer large corporate loans past due 1-2 months. Analysis of loans and advances assessed as impaired The following table presents an analysis of gross loans and advances into those collectively or individually assessed as impaired. The table includes an age analysis for loans and advances collectively assessed as impaired. Loans that are collectively assessed as impaired consist predominantly of retail loans that are one day or more past due for which a collective allowance is raised. Wholesale loans that are past due, individually assessed as unimpaired, but which carry an unidentified impairment provision, are excluded from this category. Loans that are individually assessed as impaired consist predominantly of wholesale loans that are past due and for which an individual allowance has been raised. Home loans, unsecured loans and credit card receivables that are subject to forbearance in the retail portfolios are included within the collectively assessed for impairment category. Where wholesale loans under forbearance have been impaired, these form part of individually assessed impaired loans. Loans and advances assessed as impaired (audited) As at 31 December 2017 Home loans Credit cards, unsecured and other retail lending Corporate loans Total As at 31 December 2016 Home loans Credit cards, unsecured and other retail lending Corporate loans Total Past due up to 1 month £m 2,622 989 546 4,157 2,866 1,135 288 4,289 Past due 1-2 months £m Past due 2-3 months £m Past due 3-6 months £m Past due 6 months and over £m Total collectively assessed £m Individually assessed for impairment £m Total £m 465 344 34 843 795 354 53 1,202 200 245 20 465 201 250 35 486 304 511 28 843 298 516 72 886 477 4,068 922 4,990 1,808 85 2,370 3,897 713 8,678 302 1,384 2,608 4,199 2,097 11,286 452 4,612 820 5,432 1,702 131 2,285 3,957 579 9,148 492 1,580 2,892 4,449 2,159 12,040 Loans and advances assessed as impaired decreased by £0.8bn to £11.3bn, reflecting a stable or generally improving trend in the ageing of impaired loans across the Group. home.barclays/annualreport Barclays PLC Annual Report 2017 151 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernancePotential credit risk loans (PCRLs) and coverage ratios The Group reports potentially and actually impaired loans as PCRLs. PCRLs comprise two categories of loans: credit risk loans (CRLs) and potential problem loans (PPLs). CRLs comprise three classes of loans: ■■ impaired loans: comprises loans where an individually identified impairment allowance has been raised. This category also includes all Retail loans that have been transferred to a recovery book. See page 153 for further analysis of impaired loans ■■ accruing past due 90 days or more: comprises loans that are 90 days or more past due with respect to principal or interest ■■ restructured loans: comprises loans not included above where, for economic or legal reasons related to the debtor’s financial difficulties, a concession has been granted to the debtor that would not otherwise be considered. For information on restructured loans refer to disclosures on forbearance on pages 153 to 156. PPLs are loans that are currently complying with repayment terms but where serious doubt exists as to the ability of the borrower to continue to comply with such terms in the near future. If the credit quality of a wholesale loan on a watch list deteriorates to the highest category, or a retail loan deteriorates to delinquency cycle 2 (typically when past due 60 to 90 days), consideration is given to including it within the PPL category. Potential credit risk loans and coverage ratios by business As at 31 December Barclays UK Barclays International Head Office Barclays Non-Core Total retail Barclays UK Barclays International Head Office Barclays Non-Core Total wholesale Group total As at 31 December Barclays UK Barclays International Head Office Barclays Non-Core Total retail Barclays UK Barclays International Head Office Barclays Non-Core Total wholesale Group total CRLs PPLs PCRLs 2017 £m 1,950 1,275 710 – 3,935 432 1,421 206 – 2,059 5,994 2016 £m 2,044 1,249 – 838 4,131 591 1,470 – 299 2,360 6,491 2017 £m 266 198 9 – 473 168 763 22 – 953 1,426 2016 £m 310 192 – 11 513 94 1,530 – 59 1,683 2,196 2017 £m 2,216 1,473 719 – 4,408 600 2,184 228 – 3,012 7,420 2016 £m 2,354 1,441 – 849 4,644 685 3,000 – 358 4,043 8,687 Impairment allowance 2017 £m 1,649 1,542 296 – 3,487 190 862 113 – 1,165 4,652 2016 £m 1,519 1,492 – 385 3,396 282 748 – 194 1,224 4,620 CRL coverage 2017 % 84.6 120.9 41.7 – 88.6 2016 % 74.3 119.5 – 45.9 82.2 PCRL coverage 2017 % 74.4 104.7 41.2 – 79.1 2016 % 64.5 103.5 – 45.3 73.1 44.0 60.7 54.9 – 56.6 77.6 47.7 50.9 – 64.9 51.9 71.2 31.7 39.5 49.6 – 38.7 62.7 41.2 24.9 – 54.2 30.3 53.2 CRLs decreased to £6.0bn (2016: £6.5bn) with the Group’s CRL coverage ratio increasing to 77.6% (2016: 71.2%) mainly within retail portfolios. The CRL coverage ratio for retail portfolios increased to 88.6% (2016: 82.2%) primarily due to movements in Barclays UK. PPLs decreased to £1.4bn (2016: £2.2bn) primarily within Barclays International. The decrease was driven by Corporate and Investment Bank where the volume of PPL cases has decreased significantly. 152 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewImpaired loans The following table represents an analysis of impaired loans in line with the disclosure recommended by the Enhanced Disclosure Taskforce. Impaired loans are a subcomponent of CRLs and comprise loans where an individually identified impairment allowance has been raised. This category also includes all retail loans that have been transferred to a recovery book. For the majority of products, transfer to a recovery unit occurs for loans that are past due over six months unless a forbearance agreement is agreed. Earlier transfer points may occur depending on specific circumstances. Impaired loans may include loans that are still performing, fully collateralised loans or where indebtedness has already been written down to the expected realisable value. Movement in impaired loans Classified as impaired during the year £m Transferred to not impaired during the year £m At beginning of year £m Repayments £m Amounts written off £m Acquisitions and disposals £m Exchange and other adjustments £m Balance at 31 December £m 2017 Home loans Credit cards, unsecured and other retail lending Corporate loans Total impaired loans 2016 Home loans Credit cards, unsecured and other retail lending Corporate loans Total impaired loans 1,140 1,704 1,770 4,614 1,337 2,200 2,098 5,635 247 1,878 1,065 3,190 308 1,761 984 3,053 (203) (66) (271) (540) (150) (17) (427) (594) (149) (214) (664) (1,027) (26) (1,467) (202) (1,695) – – – – (171) (136) (220) (527) (19) (1,605) (331) (1,955) – (92) (15) (107) 16 27 (181) (138) (165) (407) (319) (891) 1,025 1,862 1,517 4,404 1,140 1,704 1,770 4,614 Forbearance Forbearance measures consist of concessions towards a debtor that is experiencing or about to experience difficulties in meeting their financial commitments (‘financial difficulties’). Analysis of forbearance programmes As at 31 December Barclays UK Barclays International Head Office Barclays Non-Core Total retail Barclays UKa Barclays Internationala Barclays Non-Core Total wholesale Group totalb Balances Impairment allowance Impairment coverage 2017 £m 847 210 186 – 1,243 606 2,347 – 2,953 4,196 2016 £m 926 243 – 211 1,380 589 2,044 269 2,902 4,282 2017 £m 226 86 11 – 323 31 519 – 550 873 2016 £m 237 57 – 9 303 62 257 50 369 672 2017 % 26.7 41.0 5.9 – 26.0 5.1 22.1 – 18.6 20.8 2016 % 25.6 23.5 – 4.3 22.0 10.5 12.6 18.5 12.7 15.7 Notes a In 2017, certain ESHLA balances were reclassified from Barclays International to Barclays UK reflecting the management of the portfolio. b Barclays Non-Core retail balances of £186m were reclassified into Head Office and £158m wholesale balances were reclassified into Barclays International. Balances on forbearance programmes decreased 2% driven by better portfolio performance. Retail balances on forbearance reduced 10% to £1.2bn, reflecting an overall decrease in both Barclays UK and Barclays International portfolios. ■■ Barclays UK: Reduction was driven by UK cards portfolio, where balances on forbearance plans were lower due to an asset sale and application of tighter entry criteria. For the UK home loans portfolio the reduction was due to stable economic conditions and reduced forbearance entries. ■■ Barclays International: US cards forbearance balances decreased due to an asset sale of high risk accounts. The increase in impairment allowance was driven by updated modelling methodology. Wholesale balances on forbearance remained broadly stable at £3.0bn (2016: £2.9bn). Across the principal portfolios, the flow of new cases into forbearance during 2017 was offset by a range of repayments and credit improvements where clients returned to the performing book and a modest level of write-offs. home.barclays/annualreport Barclays PLC Annual Report 2017 153 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernance Retail forbearance programmes Forbearance on the Group’s principal retail portfolios in the US and UK is presented below. The principal portfolios account for 71% (2016: 73%) of total retail forbearance balances. Analysis of key portfolios in forbearance programmes Balances on forbearance programmes Of which: % of gross retail loans and advances % Past due of which: Up-to-date £m 1-90 days past due £m 91 or more days past due £m Marked to market LTV of forbearance balances: balance weighted % Marked to market LTV of forbearance balances: valuation weighted % Impairment allowances marked against balances on forbearance programmes £m Total balances on forbearance programmes coverage ratio % 0.3 1.7 1.2 0.7 0.3 1.9 1.5 0.8 237 153 48 107 188 255 58 139 79 98 21 30 149 59 26 35 39 51 8 11 53 23 10 12 43.2 n/a n/a n/a 44.7 n/a n/a n/a 31.0 n/a n/a n/a 31.3 n/a n/a n/a 4 179 30 58 3 185 38 38 1.1 59.3 39.0 39.2 0.8 54.9 40.4 20.4 Total £m 355 302 77 148 390 337 94 186 As at 31 December 2017 Barclays UK UK home loans UK cards UK personal loans Barclays International US cards As at 31 December 2016 Barclays UK UK home loans UK cards UK personal loans Barclays International US cards ■■ UK home loans: Improvement driven by stable economic conditions and a reduction in forbearance entries. ■■ UK cards: Balances on forbearance plans reduced due to an asset sale and tighter entry criteria. The forbearance impairment coverage ratio increased due to the inclusion of additional forbearance populations in 2017 which carry higher impairment provision rates. ■■ UK personal loans: Impairment allowance held against forbearance stock decreased in line with the overall forbearance balance and the coverage ratio remained relatively stable. ■■ US cards: Balances were lower due to asset sale of high risk accounts while impairment allowance increased due to a change in methodology. Forbearance by type As at 31 December Payment concession Interest-only conversion Term extension Fully amortising Repayment plana Interest rate concession Total UK home loans Barclays UK UK cards UK personal loans Barclays International US cards 2017 £m 94 75 184 – – 2 355 2016 £m 96 84 210 – – – 390 2017 £m 84 – – – 96 122 302 2016 £m 45 – – – 218 74 337 2017 £m – – 8 54 15 – 77 2016 £m – – 16 65 13 – 94 2017 £m – – – 135 13 – 148 2016 £m – – – 97 89 – 186 Note a Repayment plan represents a reduction to the minimum payment due requirements and interest rate. ■■ UK cards: The reduction in the Repayment Plan book was driven by a one-time accelerated charge-off of legacy accounts in addition to reduced inflow as a result of tighter entry criteria. This reduction was partially offset by the inclusion of new segments following a review of the forbearance population to better align with policy. 154 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewWholesale forbearance programmes The tables below detail balance information for wholesale forbearance cases. Analysis of wholesale balances in forbearance programmesa Balances on forbearance programmes Of which: % of gross wholesale loans and advances % Total balances £m Performing balances £m Impaired up-to-date balances £m Balances between 1 and 90 days past due £m Balances 91 days or more past due £m Impairment allowances marked against balances on forbearance programmes £m Total balances on forbearance programmes coverage ratio % As at 31 December 2017 Barclays UK Barclays International Total As at 31 December 2016 Barclays UK Barclays International Barclays Non-Core Total 606 2,347 2,953 589 2,044 269 2,902 2.1 1.4 1.4 3.9 1.1 0.6 1.2 378 1,587 1,965 187 1,285 57 1,529 8 300 308 93 567 44 704 89 57 146 78 33 25 136 131 403 534 231 159 143 533 31 519 550 62 257 50 369 Note a In 2017, certain ESHLA balances were reclassified from Barclays International to Barclays UK reflecting the management of the portfolio. Wholesale forbearance reporting split by exposure class As at 31 December 2017 Restructure: reduced contractual cash flows Restructure: maturity date extension Restructure: changed cash flow profile (other than extension) Restructure: payment other than cash Change in security Adjustments or non-enforcement of covenants Other (e.g. capital repayment holiday; restructure pending) Total As at 31 December 2016 Restructure: reduced contractual cash flows Restructure: maturity date extension Restructure: changed cash flow profile (other than extension) Restructure: payment other than cash Change in security Adjustments or non-enforcement of covenants Other (e.g. capital repayment holiday; restructure pending) Total Wholesale forbearance reporting split by business unit As at 31 December 2017 Restructure: reduced contractual cash flows Restructure: maturity date extension Restructure: changed cash flow profile (other than extension) Restructure: payment other than cash Change in security Adjustments or non-enforcements of covenants Other (e.g. capital repayment holiday; restructure pending) Total As at 31 December 2016 Restructure: reduced contractual cash flows Restructure: maturity date extension Restructure: changed cash flow profile (other than extension) Restructure: payment other than cash Change in security Adjustments or non-enforcements of covenants Other (e.g. capital repayment holiday; restructure pending) Total Corporate £m Personal and trusts £m Other £m 5 373 297 16 9 1,477 474 2,651 32 411 346 10 7 1,242 438 2,486 – 26 – – – 101 174 301 – 107 1 – – 155 153 416 – – – – – 1 – 1 – – – – – – – – Barclays UK £m Barclays International £m Barclays Non-Core £m 3 90 199 – – 223 91 606 3 114 180 – 1 132 159 589 2 309 98 16 9 1,356 557 2,347 29 316 164 10 6 1,212 307 2,044 – – – – – – – – – 88 3 – – 53 125 269 5.1 22.1 18.6 10.5 12.6 18.6 12.7 Total £m 5 399 297 16 9 1,579 648 2,953 32 518 347 10 7 1,397 591 2,902 Total £m 5 399 297 16 9 1,579 648 2,953 32 518 347 10 7 1,397 591 2,902 home.barclays/annualreport Barclays PLC Annual Report 2017 155 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceWholesale forbearance flows in 2017 As at 1 January 2017 Added to forbearance Removed from forbearance (credit improvement) Fully or partially repaid and other movements Written off/moved to recovery book As at 31 December 2017 £m 2,902 2,157 (632) (1,277) (197) 2,953 Impairment Impairment allowances Impairment allowances remained stable at £4,652m (2016: £4,620m) during the year. Movements in allowance for impairment by asset class (audited) 2017 Home loans Credit cards, unsecured and other retail lending Corporate loans Total impairment allowance 2016 Home loans Credit cards, unsecured and other retail lending Corporate loans Total impairment allowance At beginning of year £m Acquisitions and disposals £m Unwind of discount £m Exchange and other adjustments £m Amounts written off £m Recoveries £m Amounts charged to income statement £m Balance at 31 December £m 467 3,060 1,093 4,620 518 3,394 1,009 4,921 – – (5) (5) (3) (2) – (5) (5) (43) – (48) (4) (29) (223) (13) (240) (2,042) (258) (2,329) (5) (108) (23) (70) – (75) (709) 81 (736) (1,806) (364) (2,193) – 252 82 334 – 296 69 365 29 458 2,051 240 2,320 3,055 1,139 4,652 88 467 1,957 298 2,343 3,060 1,093 4,620 Management adjustments to models for impairment Management adjustments to models for impairment are applied in order to factor in certain conditions or changes in policy that are not incorporated into the relevant impairment models, or to reflect additionally known facts and circumstances at the period end. Adjustments typically increase the model derived impairment allowance. Where applicable, management adjustments are reviewed and incorporated into future model development. Management adjustments to models of more than £10m with respect to impairment allowance in our principal portfolios are presented below. Principal portfolios that have management adjustments greater than £10m As at 31 December Barclays UK UK cards UK home loans UK business lending Barclays International Corporate Banking Barclays Partner Finance 2017 2016 Total management adjustments to impairment allowances, including forbearance £m Total management adjustments to impairment allowances, including forbearance £m Proportion of total impairment allowances % Proportion of total impairment allowances % 49 71 70 68 37 5 72 31 11 24 312 70 69 71 59 34 69 33 14 37 UK cards: Adoption of new probability of default models resulted in a year on year release of post model adjustments. UK home loans: To capture the potential impact from an increase in the house price to earnings ratio, change in the impairment methodology and increased coverage on interest-only loans maturing in the next five years. UK business lending: To align to impairment policy requirements, potential impact from commercial property price deterioration and the susceptibility of minimum debt service customers to interest rate rises. Corporate Banking: Most material adjustment related to the risk associated with the potential of rate rises impacting low interest cover clients. Barclays Partner Finance: Adoption of new probability of default models resulted in a year on year release of post model adjustments. 156 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewAnalysis of debt securities Debt securities include government securities held as part of the Group’s treasury management portfolio for liquidity and regulatory purposes, and are for use on a continuing basis in the activities of the Group. The following tables provide an analysis of debt securities held by the Group for trading and investment purposes by issuer type, and where the Group held government securities exceeding 10% of shareholders’ equity. Further information on the credit quality of debt securities is presented on pages 142 to 143. Debt securities As at 31 December Of which issued by: Governments and other public bodies Corporate and other issuers US agency Mortgage and asset backed securities Bank and building society certificates of deposit Total Government securities As at 31 December United States United Kingdom 2017 £m 69,981 27,955 7,868 2,520 21 108,345 % 64.5 25.8 7.3 2.3 0.1 100.0 2016 £m 64,852 28,284 6,208 2,372 23 101,739 2017 Fair value £m 21,570 19,475 % 63.7 27.8 6.1 2.3 0.1 100.0 2016 Fair value £m 16,284 20,145 Analysis of derivatives The tables below set out the fair values of the derivative assets together with the value of those assets subject to enforceable counterparty netting arrangements for which the Group holds offsetting liabilities and eligible collateral. Derivative assets (audited) As at 31 December Foreign exchange Interest rate Credit derivatives Equity and stock index Commodity derivatives Total derivative assets Cash collateral held Net exposure less collateral 2017 Balance sheet assets £m 54,943 153,043 12,549 14,698 2,436 237,669 Counterparty netting £m 42,117 117,559 9,952 12,702 1,935 184,265 2016 Balance sheet assets £m 79,744 228,652 16,273 17,089 4,868 346,626 Counterparty netting £m 59,040 185,723 12,891 12,603 3,345 273,602 Net exposure £m 12,826 35,484 2,597 1,996 501 53,404 33,092 20,312 Net exposure £m 20,704 42,929 3,382 4,486 1,523 73,024 41,641 31,383 Derivative asset exposures would be £217bn (2016: £315bn) lower than reported under IFRS if netting were permitted for assets and liabilities with the same counterparty or for which the Group holds cash collateral. Similarly, derivative liabilities would be £217bn (2016: £317bn) lower reflecting counterparty netting and collateral placed. In addition, non-cash collateral of £6bn (2016: £8bn) was held in respect of derivative assets. The Group received collateral from clients in support of over the counter derivative transactions. These transactions are generally undertaken under International Swaps and Derivative Association (ISDA) agreements governed by either UK or New York law. home.barclays/annualreport Barclays PLC Annual Report 2017 157 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceThe table below sets out the fair value and notional amounts of OTC derivative instruments by type of collateral arrangement. Derivatives by collateral arrangement Unilateral in favour of Barclays Foreign exchange Interest rate Credit derivatives Equity and stock index Commodity derivatives Total unilateral in favour of Barclays Unilateral in favour of counterparty Foreign exchange Interest rate Credit derivatives Equity and stock index Commodity derivatives Total unilateral in favour of counterparty Bilateral arrangement Foreign exchange Interest rate Credit derivatives Equity and stock index Commodity derivatives Total bilateral arrangement Uncollateralised derivatives Foreign exchange Interest rate Credit derivatives Equity and stock index Commodity derivatives Total uncollateralised derivatives Total OTC derivative assets/(liabilities) Notional contract amount £m 18,280 5,495 – 6 243 24,024 21,052 74,412 283 1,030 515 97,292 2017 Fair value Assets £m Liabilities £m 484 868 – 3 – 1,355 720 8,458 6 432 4 9,620 (345) (26) – – (9) (380) (1,851) (9,934) (3) (53) (6) (11,847) Notional contract amount £m 17,713 6,666 174 390 753 25,696 20,837 108,915 152 1,121 1,231 132,256 4,318,754 8,060,574 404,069 144,255 11,801 12,939,453 380,823 202,053 6,808 16,448 4,661 610,793 13,671,562 48,660 135,465 7,337 6,178 630 198,270 4,442 4,215 252 884 60 9,853 219,098 (46,403) 3,772,477 (131,334) 7,335,641 608,859 192,448 11,766 (193,314) 11,921,191 (5,903) (9,099) (575) (4,256) (1,715) (327) (5,917) (266) (12,481) 363,921 184,362 5,872 13,706 16,389 584,250 (218,022) 12,663,393 2016 Fair value Assets £m Liabilities £m 607 1,017 3 3 33 1,663 786 3,795 3 312 67 4,963 70,464 187,155 11,422 6,146 1,318 276,505 7,490 5,723 383 2,558 504 16,658 299,789 (274) (60) (2) (147) (26) (509) (2,549) (5,979) (7) (49) (66) (8,650) (68,788) (179,650) (9,994) (9,692) (1,442) (269,566) (6,287) (2,459) (510) (3,385) (748) (13,389) (292,114) 158 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceCredit riskRisk reviewRisk review Risk performance Market risk Summary of contents Outlines key measures used to summarise the market risk profile of the bank such as value at risk (VaR). A distinction is made between management and regulatory measures. Provides a Group-wide overview of where assets and liabilities on the Group’s balance sheet are managed within regulatory traded and non-traded books. The Group discloses details on management measures of market risk. Total management VaR includes all trading positions and is presented on a diversified basis by risk factor. This section also outlines the macroeconomic conditions modelled as part of the Group’s risk management framework. The Group’s regulatory measures of market risk under the approved internal models approach are also disclosed. ■■ Market risk overview and summary of performance ■■ Balance sheet view of trading and banking books ■■ Traded market risk ■■ Review of management measures – The daily average, maximum and minimum values of management VaR – Business scenario stresses ■■ Review of regulatory measures – Analysis of regulatory VaR, SVaR, IRC and Comprehensive Risk Measure – Breakdown of the major regulatory risk measures by portfolio Page 160 161 162 162 162 162 163 163 163 home.barclays/annualreport Barclays PLC Annual Report 2017 159 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceMarket risk The risk of loss arising from potential adverse changes in the value of the firm’s assets and liabilities from fluctuation in market variables including, but not limited to, interest rates, foreign exchange, equity prices, commodity prices, credit spreads, implied volatilities and asset correlations. All disclosures in this section (pages 160 to 163) are unaudited unless otherwise stated. Key metrics Average Management value at risk in 2017 at £19m (2016: £21m) remained relatively stable. This small reduction was driven by a 25% decrease in average credit risk VaR, primarily due to tighter credit spreads. -10% Overview of market risk This section contains key statistics describing the market risk profile of the bank. A distinction is made between regulatory and management measures within the section. The market risk management section on pages 150 to 157 of the Barclays PLC Pillar 3 Report 2017 provides descriptions of these metrics: ■■ page 161 provides a view of market risk in the context of the Group’s balance sheet ■■ page 129 covers the management of market risk. Management measures are shown on page 162 and regulatory equivalent measures are shown on page 163. Measures of market risk in the Group and accounting measures Traded market risk measures such as VaR and balance sheet exposure measures have fundamental differences: ■■ balance sheet measures show accruals- based balances or marked to market values as at the reporting date ■■ VaR measures also take account of current marked to market values, but in addition hedging effects between positions are considered ■■ market risk measures are expressed in terms of changes in value or volatilities as opposed to static values. For these reasons, it is not possible to present direct reconciliations of traded market risk and accounting measures. The table ‘Balance sheet split by trading and banking books’, on page 161, helps the reader understand the main categories of assets and liabilities subject to regulatory market risk measures. Summary of performance in the period Overall, the Group has maintained a steady risk profile: ■■ measures of traded market risk have been relatively stable over 2017, characterised by a low volatility environment. 160 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceMarket riskRisk reviewBalance sheet view of trading and banking books As defined by regulatory rules, a trading book consists of positions held for trading intent or to hedge elements of the trading book. Trading intent must be evidenced in the basis of the strategies, policies and procedures set up by the firm to manage the position or portfolio. The table below provides a Group-wide overview of where assets and liabilities on the Group’s balance sheet are managed within regulatory traded and non-traded books. The balance sheet split by trading book and banking books is shown on an IFRS accounting scope of consolidation. The reconciliation between the accounting and regulatory scope of consolidation is shown in table 1 of the Barclays PLC Pillar 3 Report 2017. Balance sheet split by trading and banking books As at 31 December 2017 Cash and balances at central banks Items in course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Financial investments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Prepayments, accrued income and other assets Investments in associates and joint ventures Property, plant and equipment Goodwill and intangible assets Current tax assets Deferred tax assets Retirement benefit assets Assets included in disposal groups classified as held for sale Total assets Deposits from banks Items in course of collection due to other banks Customer accounts Repurchase agreements and other similar secured borrowing Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issue Subordinated liabilities Accruals, deferred income and other liabilities Provisions Current tax liabilities Deferred tax liabilities Retirement benefit liabilities Liabilities included in disposal groups classified as held for sale Total liabilities Banking booka £m 171,082 2,153 1,555 7,874 924 58,916 32,464 343,771 12,546 2,389 718 2,572 7,849 482 3,457 966 1,193 650,911 35,337 446 415,783 40,338 – 4,368 389 73,314 23,826 8,565 3,543 586 44 312 – 606,851 Trading book £m – – 112,205 108,407 236,745 – 3,199 21,781 – – – – – – – – – Total £m 171,082 2,153 113,760 116,281 237,669 58,916 35,663 365,552 12,546 2,389 718 2,572 7,849 482 3,457 966 1,193 482,337 1,133,248 2,386 – 13,338 – 37,351 169,350 237,956 – – – – – – – – 37,723 446 429,121 40,338 37,351 173,718 238,345 73,314 23,826 8,565 3,543 586 44 312 – 460,381 1,067,232 Note a The primary risk factors for banking book assets and liabilities are interest rates and to a lesser extent, foreign exchange rates. Credit spreads and equity prices will also be factors where the Group holds debt and equity securities respectively, either as financial assets designated at fair value (see Note 14) or as available for sale (see Note 16) of the financial statements. Included within the trading book are assets and liabilities which are included in the market risk regulatory measures. For more information on these measures (VaR, SVaR, IRC and CRM) see the risk management section on page 154 of the Barclays PLC Pillar 3 Report 2017. home.barclays/annualreport Barclays PLC Annual Report 2017 161 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceTraded market risk review Review of management measures The following disclosures provide details on management measures of market risk. See the risk management section on pages 152 to 153 of the Barclays PLC Pillar 3 Report 2017 for more detail on management measures and the differences when compared to regulatory measures. The table below shows the total Management VaR on a diversified basis by risk factor. Total Management VaR includes all trading positions in CIB and Head Office. Limits are applied against each risk factor VaR as well as total Management VaR, which are then cascaded further by risk managers to each business. The daily average, maximum and minimum values of management VaRa Management VaR (95%, one day) (audited) For the year ended 31 Decembera Credit risk Interest rate risk Equity risk Basis risk Spread risk Foreign exchange risk Commodity risk Inflation risk Diversification effectb Total management VaR 2017 2016 Average £m 12 8 8 5 5 3 2 2 (26) 19 Highb £m 18 15 14 6 8 7 3 4 n/a 26 Lowb £m 8 4 4 3 3 2 1 1 n/a 14 Average £m 16 7 7 5 3 3 2 2 (24) 21 Highb £m 24 13 11 9 5 5 4 3 n/a 29 Lowb £m 9 4 4 3 2 2 1 2 n/a 13 Notes a Includes BAGL. b Diversification effects recognise that forecast losses from different assets or businesses are unlikely to occur concurrently, hence the expected aggregate loss is lower than the sum of the expected losses from each area. Historic correlations between losses are taken into account in making these assessments. The high and low VaR figures reported for each category did not necessarily occur on the same day as the high and low VaR reported as a whole. Consequently a diversification effect balance for the high and low VaR figures would not be meaningful and is therefore omitted from the above table. Management VaR remained relatively stable year on year characterised by a low volatility environment. The year on year reduction in credit risk VaR was driven primarily by tighter credit spreads. Group Management VaRa (£m) 40 Jan 2016 Jan 2017 Dec 2017 Note a Includes BAGL. Business scenario stresses As part of the Group’s risk management framework, on a regular basis the performance of the trading business in hypothetical scenarios characterised by severe macroeconomic conditions is modelled. Up to seven global scenarios are modelled on a regular basis, for example, a sharp deterioration in liquidity, a slowdown in the global economy, global recession, and a sharp increase in economic growth. In 2017, the scenario analyses showed that the largest market risk related impacts would be due to a severe deterioration in financial liquidity and global recession. 162 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceMarket riskRisk reviewReview of regulatory measures The following disclosures provide details on regulatory measures of market risk. See page 154 of the Barclays PLC Pillar 3 Report 2017 for more detail on regulatory measures and the differences when compared to management measures. The Group’s market risk capital requirement comprises of two elements: ■■ the market risk of trading book positions booked to legal entities are measured under a PRA approved internal models approach, including Regulatory VaR, Stressed Value at Risk (SVaR), Incremental Risk Charge (IRC) and Comprehensive Risk Measure (CRM) as required ■■ the trading book positions that do not meet the conditions for inclusion within the approved internal models approach are calculated using standardised rules. The table below summarises the regulatory market risk measures, under the internal models approach. See Table 76: Market risk own fund requirements, on page 97 of the Barclays PLC Pillar 3 Report 2017 for a breakdown of capital requirements by approach. Analysis of Regulatory VaR, SVaR, IRC and Comprehensive Risk Measurea As at 31 December 2017 Regulatory VaR (1-day) Regulatory VaR (10-day)b SVaR (1-day) SVaR (10-day)b IRC CRM As at 31 December 2016 Regulatory VaR (1-day) Regulatory VaR (10-day)b SVaR (1-day) SVaR (10-day)b IRC CRM Year-end £m 28 90 59 186 188 – 33 105 65 205 154 2 Avg. £m 27 85 63 200 202 1 26 84 56 178 155 5 Max £m 39 123 105 331 326 2 34 108 75 236 238 12 Min £m 19 60 41 130 142 – 18 57 34 109 112 2 Notes a Includes BAGL. b The 10 day VaR is based on scaling of 1 day VaR model output since VaR is currently not modelled for a 10 day holding period. More information about Regulatory and Stressed VaR methodology is available on page 154 of the Barclays PLC Pillar 3 Report 2017. Overall, there was an increase in IRC in 2017, with no significant movements in other internal model components: ■■ Regulatory VaR/SVaR: Average VaR/SVaR was broadly unchanged compared to the previous year. ■■ IRC: Increase was mainly driven by positional increases. ■■ CRM: Reduced to zero as the final positions matured in a specific legacy portfolio. Breakdown of the major regulatory risk measures by portfolioa As at 31 December 2017 Regulatory VaR (1-day) Regulatory VaR (10-day) SVaR (1-day) SVaR (10-day) IRC CRM Macro £m 13 42 23 72 203 – Equities £m 6 20 11 35 5 – Breakdown of the major regulatory risk measures by portfolioa As at 31 December 2016 Regulatory VaR (1-day) Regulatory VaR (10-day) SVaR (1-day) SVaR (10-day) IRC CRM Macro £m 14 44 22 69 220 – Equities £m 12 38 43 137 8 – Barclays International Treasury £m – – – 1 – – Credit £m 19 59 41 130 270 – Barclays International Treasury £m 14 45 30 95 196 – Credit £m 6 20 7 24 146 – Group Treasury £m 6 18 11 35 10 – Group Treasury £m 5 15 9 30 10 – Barclays Non-Core £m – – – – – – Financial Resource Managementb £m 8 25 20 64 65 – Barclays Non-Core £m 6 21 22 69 18 2 Financial Resource Managementb £m – – – – – – Banking £m 5 16 10 30 1 – Banking £m 12 40 18 58 25 – Note a Excludes BAGL. b The movement from Barclays International Treasury to Financial Resource Management was due to changes in the hierarchy. The table above shows the primary portfolios which are driving the trading businesses’ modelled capital requirement as at 2017 year end. The standalone portfolio results diversify at the total level and are not additive. Regulatory VaR, SVaR, IRC and CRM in the prior table show the diversified results at a group level. home.barclays/annualreport Barclays PLC Annual Report 2017 163 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk review Risk performance Treasury and capital risk Summary of contents Liquidity risk performance The risk that the firm, although solvent, either does not have sufficient financial resources available to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost. This section provides an overview of the Group’s liquidity risk. The liquidity pool is held unencumbered and is not used to support payment or clearing requirements. The liquidity pool is intended to offset stress outflows, and comprises cash and unencumbered assets. The basis for sound liquidity risk management is a solid funding structure that reduces the probability of a liquidity stress leading to an inability to meet funding obligations as they fall due. Asset encumbrance arises from collateral pledged against secured funding and other collateralised obligations. Barclays funds a portion of trading portfolio assets and other securities via repurchase agreements and other similar borrowing, and pledges a portion of customer loans and advances as collateral in securitisation, covered bond and other similar secured structures. In addition to monitoring and managing key metrics related to the financial strength of the Group, Barclays solicits independent credit ratings. These ratings assess the creditworthiness of the Group, its subsidiaries and branches and are based on reviews of a broad range of business and financial attributes including risk management processes and procedures, capital strength, earnings, funding, asset quality, liquidity, accounting and governance. Provides details on the contractual maturity of all financial instruments and other assets and liabilities. ■■ Liquidity overview and summary of performance ■■ Liquidity risk stress testing – Liquidity Risk Appetite – Liquidity regulation – Internal and regulatory stress tests ■■ Liquidity pool – Composition of the liquidity pool – Liquidity pool by currency – Management of the Group liquidity pool – Contingent liquidity ■■ Funding structure and funding relationships – Deposit funding – Behavioural maturity profile – Wholesale funding ■■ Encumbrance – On-balance sheet – Off-balance sheet – Repurchase agreements and reverse repurchase agreements ■■ Credit ratings Page 166 166 167 167 167 168 168 168 168 169 169 169 170 170 171 172 172 173 174 ■■ Contractual maturity of financial assets and liabilities 175 164 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewCapital risk performance Capital risk is the risk that the firm has an insufficient level or composition of capital to support its normal business activities and to meet its regulatory capital requirements under normal operating environments or stressed conditions (both actual and as defined for internal planning or regulatory testing purposes). This also includes the risk from the firm’s pension plans. This section details Barclays’ capital position providing information on both capital resources and capital requirements. It also provides details of the leverage ratios and exposures. This section outlines the Group’s capital ratios, capital composition, and provides information on significant movements in CET1 capital during the year. This section outlines risk weighted assets by risk type, business and macro drivers. This section outlines the Group’s leverage ratios, leverage exposure composition, and provides information on significant movements in the IFRS and leverage balance sheet. The Group discloses the two sources of foreign exchange risk that it is exposed to. ■■ Capital risk overview and summary of performance ■■ Regulatory minimum capital and leverage requirements – Capital – Leverage ■■ Analysis of capital resources – Capital ratios – Capital resources – Movement in CET1 capital ■■ Analysis of risk weighted assets – Risk weighted assets by risk type and business – Movement analysis of risk weighted assets ■■ Analysis of leverage ratios and exposures – Leverage ratios and exposures ■■ Foreign exchange risk – Transactional foreign currency exposure – Translational foreign exchange exposure – Functional currency of operations A review focusing on the UK retirement fund, which represents the majority of the Group’s total retirement benefit obligation. ■■ Pension risk review – Assets and liabilities – IAS19 position – Risk measurement This section outlines the Group’s Minimum Requirement for own funds and Eligible Liabilities (MREL) position and ratios. ■■ Minimum Requirement for own funds and Eligible Liabilities Interest rate risk in the banking book performance A description of the non-traded market risk framework is provided. ■■ Interest rate risk in the banking book overview and summary of performance ■■ Net interest income sensitivity – by business unit – by currency ■■ Economic capital by business unit ■■ Analysis of equity sensitivity ■■ Volatility of the available for sale portfolio in the liquidity pool The Group discloses a sensitivity analysis on pre-tax net interest income for non-trading financial assets and liabilities. The analysis is carried out by business unit and currency. The Group measures some non-traded market risks, in particular prepayment, recruitment, and residual risk using an economic capital methodology. Page 179 180 180 180 181 181 181 182 183 183 183 184 184 185 185 185 185 186 186 186 187 187 188 189 189 189 189 190 190 The Group discloses the overall impact of a parallel shift in interest rates on available for sale and cash flow hedges. The Group measures the volatility of the value of the available for sale instruments in the liquidity pool through non-traded market risk VaR. home.barclays/annualreport Barclays PLC Annual Report 2017 165 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceLiquidity risk The risk that the firm is unable to meet its contractual or contingent obligations or that it does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets. All disclosures in this section (pages 166 to 178) are unaudited and exclude BAGL unless otherwise stated. Key metrics LCR The Group strengthened its liquidity position during the year, increasing its surplus to internal and regulatory requirements. Term issuance The Group maintains access to stable and diverse sources of funding across customer deposits and wholesale debt. 154% £12bn Overview The Group has a comprehensive key risk control framework for managing the Group’s liquidity risk. The Liquidity Framework meets the PRA’s standards and is designed to maintain that the Group’s liquidity resources are sufficient in amount and quality, and a funding profile that is appropriate to meet the liquidity risk appetite. The Liquidity Framework is delivered via a combination of policy formation, review and governance, analysis, stress testing, limit setting and monitoring. This section provides an analysis of the Group’s: (i) summary of performance, (ii) liquidity risk stress testing, (iii) liquidity pool, (iv) funding structure and funding relationships, (v) encumbrance, (vi) credit ratings, and (vii) contractual maturity of financial assets and liabilities. For further detail on liquidity risk governance and framework see page 163 to 165 of the Barclays PLC Pillar 3 Report 2017. Summary of performance in the period The Group continued to maintain surpluses to its internal and regulatory requirements. The liquidity pool increased to £220bn (December 2016: £165bn) reflecting the approach of holding a conservative liquidity position and through net deposit growth, the unwind of legacy Non-Core portfolios, money market borrowing and drawdown from the Bank of England Term Funding Scheme. The Liquidity Coverage Ratio (LCR) increased to 154% (December 2016: 131%), equivalent to a surplus of £75bn (December 2016: £39bn) to 100%. Wholesale funding outstanding excluding repurchase agreements was £157bn (December 2016: £158bn). The Group issued £11.5bn equivalent of capital and senior unsecured debt from Barclays PLC (the Parent company) of which £6.1bn was in public senior unsecured debt, and £5.4bn in capital instruments. In the same period £6.1bn of Barclays Bank PLC capital and senior public term instruments either matured or were redeemed, including the $1.375bn 7.1% Series 3 USD Preference Shares. Liquidity risk stress testing Under the Liquidity Framework, the Group has established a Liquidity Risk Appetite (LRA) together with the appropriate limits for the management of the liquidity risk. This is the level of liquidity risk the Group chooses to take in pursuit of its business objectives and in meeting its regulatory obligations. The key expression of the liquidity risk is through internal stress tests. It is measured with reference to the liquidity pool compared to anticipated net stressed outflows for specific scenarios. 166 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – LiquidityRisk reviewLiquidity risk appetite As part of the LRA, the Group runs three short-term liquidity stress scenarios, aligned to the PRA’s prescribed stresses: ■■ 90-day market-wide stress event ■■ 30-day Barclays specific stress event ■■ combined 30-day market-wide and Barclays specific stress event. Under normal market conditions, the liquidity pool is managed to be at a target of at least 100% of anticipated outflows under each of these stress scenarios. The 30-day combined stress scenario, results in the greatest net outflows of each of the liquidity stress tests. The combined LRA scenario has been enhanced and improved to capture a Barclays specific stress coinciding with a market stress over the full stress horizon. As part of the LRA, Barclays also establishes the minimum LCR limit. Barclays also evaluates its long-term LRA, one year stress test based on prolonged closure of capital markets. Key LRA assumptions include: For the year ended 31 December 2017 Drivers of Liquidity Risk Wholesale Secured and Unsecured Funding Risk Retail and Corporate Funding Risk LRA Combined stress – key assumptions ■■ Zero rollover of maturing wholesale unsecured funding ■■ Loss of repo capacity on non-extremely liquid repos at contractual maturity date ■■ Roll of repo for extremely liquid repo at wider haircut at contractual maturity date ■■ Withdrawal of contractual buyback obligations, excess client futures margin, Prime Brokerage client cash and overlifts ■■ Haircuts applied to the market value of marketable assets held in the liquidity buffer ■■ Retail and Corporate deposit outflows as counterparties seek to diversify their deposit balances Intra-day Liquidity Risk ■■ Liquidity held against intraday requirements for the settlement of cash and securities under a stress Intra-Group Liquidity Risk Cross-Currency Liquidity Risk Off-balance Sheet Liquidity Risk Franchise-Viability Risk Funding Concentration Risk ■■ Liquidity support for material subsidiaries. Surplus liquidity held within certain subsidiaries is not taken as a benefit to the wider Group ■■ Currency liquidity cash flows at contractual maturity for physically settled FX forwards and cross currency swaps ■■ Drawdown on committed facilities based on facility and counterparty type ■■ Collateral outflows due to a 2 notch credit rating downgrade ■■ Increase in the Group’s initial margin requirement across all major exchanges ■■ Variation margin outflows from collateralised risk positions ■■ Outflow of collateral owing but not called ■■ Loss of internal sources of funding within the PB synthetics business ■■ Liquidity held in order to meet outflows that are non-contractual in nature, but are necessary in order to support the firm’s ongoing franchise (e.g. debt buybacks) ■■ Liquidity held against largest wholesale funding counterparty refusing to roll Liquidity regulation The Group monitors its position against the CRD IV Delegated Act Liquidity Coverage Ratio (LCR) and the Basel III Net Stable Funding Ratio (NSFR). The LCR is designed to promote short-term resilience of a bank’s liquidity risk profile by holding sufficient High Quality Liquid Assets to survive an acute stress scenario lasting for 30 days. The NSFR has a time horizon of 12 months and has been developed to promote a sustainable maturity structure of assets and liabilities. The CRD IV LCR became effective on 1 October 2015, with a minimum ratio requirement in the UK of 80% as at 31 December 2016; this increased to 90% on 1 January 2017 and then to 100% on 1 January 2018. As of 31 December 2017, the Group reported a CRD IV LCR of 154% (2016: 131%). In October 2014, the BCBS published a standard for the NSFR with the minimum requirement. On 23 November 2016, the European Commission published draft amendments to the CRR including its proposed implementation of NSFR in the EU. This proposal made a number of changes from the Basel NSFR, particularly in the treatment of derivative and secured financing transactions. In October 2017, the BCBS agreed to allow national discretion for the NSFR’s treatment of derivative liabilities. Barclays continues to assess the impact of these changes on its NSFR ratio, and notes that NSFR is not proposed to be a binding regulation in the EU until two years after the European legislation is finalised. We remain above 100% well ahead of implementation timelines, based on a conservative interpretation of the Basel rules. Internal and regulatory liquidity stress tests The LRA short-term stress scenarios and the CRD IV LCR are comparable, in the sense that adequacy of defined liquidity resources is assessed against net stressed outflows over a short-term stress horizon. The CRD IV LCR stress tests provide an independent assessment of the Group’s liquidity risk profile. Stress test Time Horizon Calculation Barclays short term LRA 30 – 90 days Liquid assets to net cash outflows CRD IV LCR 30 days Liquid assets to net cash outflows As at December 2017, the Group held eligible liquid assets well in excess of 100% of net stress outflows for both the 30-day combined market- wide and Barclays specific LRA scenario and the LCR. home.barclays/annualreport Barclays PLC Annual Report 2017 167 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceCompliance with internal and regulatory stress tests As at 31 December 2017 Eligible liquidity buffer Net stress outflows Surplus Liquidity pool as a percentage of anticipated net outflows as at 31 December 2017 Liquidity pool as a percentage of anticipated net outflows as at 31 December 2016 Barclays’ Short Term LRA (30 day combined stress requirement)a, b £bn 220 (175) 45 126% 120% CRD IV LCRb £bn 215 (140) 75 154% 131% Notes a Of the three stress scenarios monitored as part of the short-term LRA, the 30-day combined stress scenario results in the lowest ratio at 126% (2016: 144%). This compares to 139% (2016: 134%) under the 90-day market-wide scenario and 131% (2016: 120%) under the 30-day Barclays specific scenario. b 31 December 2016 reflects the Barclays specific scenario results of 120% being the lowest ratio of the three scenarios. LCR and LRA includes BAGL in 2016. The Group plans to maintain its surplus to the internal and regulatory stress requirements at an efficient level, while considering risks to market funding conditions and its liquidity position. The continuous reassessment of these risks may lead to appropriate actions being taken with respect to sizing of the liquidity pool. Liquidity pool The Group liquidity pool as at 31 December 2017 was £220bn (2016: £165bn). During 2017, the month-end liquidity pool ranged from £165bn to £232bn (2016: £132bn to £175bn), and the month-end average balance was £202bn (2016: £153bn). The liquidity pool is held unencumbered and is not used to support payment or clearing requirements. Such requirements are treated as part of our regular business funding. The liquidity pool is intended to offset stress outflows, and comprises the following cash and unencumbered assets. Composition of the Group liquidity pool as at 31 December 2017 Cash and deposits with central banksa Government bondsb AAA to AA- BBB+ to BBB- Other LCR Ineligible Government bonds Total government bonds Other Government Guaranteed Issuers, PSEs and GSEs International Organisations and MDBs Covered bonds Other Total other Total as at 31 December 2017 Total as at 31 December 2016 Liquidity pool of which CRD IV LCR eligible Liquidity pool £bn 173 Cash £bn 169 Level 1 £bn – Level 2A £bn – 2016 Liquidity pool £bn 103 31 2 1 34 6 4 2 1 13 220 165 – – – – – – – – – 169 101 29 2 – 31 5 4 2 1 12 43 55 – – – – 2 – – – 2 2 3 39 23 Notes a Of which over 99% (2016: over 98%) was placed with the Bank of England, US Federal Reserve, European Central Bank, Bank of Japan and Swiss National Bank. b Of which over 84% (2016: over 90%) are comprised of UK, US, Japanese, French, German, Danish, Swiss and Dutch securities. The Group liquidity pool is well diversified by major currency and the Group monitors LRA stress scenarios for major currencies. Liquidity pool by currency Liquidity pool as at 31 December 2017 Liquidity pool as at 31 December 2016 USD £bn 70 44 EUR £bn 55 36 GBP £bn 71 49 Other £bn 24 36 Total £bn 220 165 Management of the Group liquidity pool The composition of the liquidity pool is subject to limits set by the Board and the independent liquidity risk, credit risk and market risk functions. In addition, the investment of the liquidity pool is monitored for concentration risk by issuer, currency and asset type. Given the incremental returns generated by these highly liquid assets, the risk and reward profile is continuously managed. As at 31 December 2017, 93% (2016: 91%) of the liquidity pool was located in Barclays Bank PLC and was available to meet liquidity needs across the Group. The residual liquidity pool is held predominantly within Barclays Capital Inc. (BCI), a subsidiary of Barclays Bank PLC. The portion of the liquidity pool outside of Barclays Bank PLC is held against entity-specific stressed outflows and regulatory requirements. To the extent the use of this portion of the liquidity pool is restricted due to regulatory requirements, it is assumed to be unavailable to the rest of the Group. 168 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – LiquidityRisk reviewContingent liquidity In addition to the Group liquidity pool, the Group has access to other unencumbered assets which provide a source of contingent liquidity. While these are not relied on in the Group’s LRA, a portion of these assets may be monetised in a stress to generate liquidity through use as collateral for secured funding or through outright sale. In a Barclays specific, market-wide or combined liquidity stress, liquidity available via market sources could be severely disrupted. In circumstances where market liquidity is unavailable or available only at heavily discounted prices, the Group could generate liquidity via central bank facilities. The Group maintains a significant amount of collateral pre-positioned at central banks and available to raise funding. For more detail on the Group’s other unencumbered assets see pages 171 to 173. Funding structure and funding relationships The basis for sound liquidity risk management is a solid funding structure that reduces the probability of a liquidity stress leading to an inability to meet funding obligations as they fall due. The Group’s overall funding strategy is to develop a diversified funding base (geographically, by type and by counterparty) and maintain access to a variety of alternative funding sources, to provide protection against unexpected fluctuations, while minimising the cost of funding. Within this, the Group aims to align the sources and uses of funding. As such, retail and corporate loans and advances are largely funded by customer deposits, with the surplus primarily funding the liquidity pool. Other assets, together with other loans and advances to customers and unencumbered assets are funded by wholesale debt and equity. The majority of reverse repurchase agreements are matched by repurchase agreements. Derivative liabilities and assets are largely matched. A substantial proportion of balance sheet derivative positions qualify for counterparty netting and the remaining portions are largely offset once netted against cash collateral received and paid. These funding relationships are summarised below: Assets Loans and advances to customersa Group liquidity pool Other assetsb Reverse repurchase agreements, trading portfolio assets, cash collateral and settlement balancesc Derivative financial instruments Total assets Deposit funding (audited) Funding of loans and advances to customers As at 31 December 2017 Barclays UK Barclays International Total retail and corporate fundingd Barclays International and Head Office Total Barclays Group 2017 £bn 313 220 89 2016 £bn 326 165 185 273 238 1,133 190 347 1,213 Liabilities Customer accountsa < 1 Year wholesale funding > 1 Year wholesale funding Equity and other liabilities Repurchase agreements, trading portfolio liabilities, cash collateral and settlement balances Derivative financial instruments Total liabilities 2017 £bn 387 57 100 78 2016 £bn 374 70 88 151 273 238 1,133 190 340 1,213 Loans and advances to customers £bn 184 101 285 2017 Customer deposits £bn 193 162 355 2016 Loan to deposit ratio % Loan to deposit ratio % 80% 89% 81 366 74 429 85% 93% Notes a Excludes cash collateral and settlement balances. b Other assets include trading portfolio assets that are not part of repurchase agreements, loans and advances to banks and other asset categories. c Includes reverse repurchase agreements and other similar secured lending and trading portfolio assets that are part of repurchase agreements. d Excludes investment banking balances other than interest earning lending. Comparatives have been restated to include interest earning lending balances within the investment banking business. As at 31 December 2017, £153bn (2016: £139bn) of total customer deposits were insured through the UK Financial Services Compensation Scheme (FSCS) and other similar schemes. In addition to these customer deposits £4bn (2016: £4bn) of other liabilities are insured by governments. home.barclays/annualreport Barclays PLC Annual Report 2017 169 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceAlthough contractually current accounts are repayable on demand and savings accounts at short notice, the Group’s broad base of customers, numerically and by depositor type, helps protect against unexpected fluctuations in balances. Such accounts form a stable funding base for the Group’s operations and liquidity needs. The Group assesses the behavioural maturity of both customer assets and liabilities to identify structural balance sheet funding gaps. Customer behaviour is determined by quantitative modelling combined with qualitative assessment taking into account historical experience, current customer composition, and macroeconomic projections. These behavioural profiles represent our forward looking expectation of the run-off profile. Behavioural maturity profile As at 31 December 2017 Barclays UK Barclays Internationala Total As at 31 December 2016 Barclays UK Barclays Internationala Barclays Non-Core Total Behavioural maturity profile cash outflow/(inflow) Loans and advances to customers £bn Customer deposits £bn Customer funding surplus/ (deficit) £bn Not more than one year £bn Over one year but not more than five years £bn More than five years £bn 184 101 285 166 118 19 303 193 162 355 189 152 – 341 9 61 70 23 34 (19) 38 1 6 7 (2) (6) (1) (9) (19) 19 – (19) 7 (6) (18) 27 36 63 44 33 (12) 65 Note a Excludes investment banking balances other than interest earning lending. Comparatives have been restated to include interest earning lending balances within the investment banking business. Wholesale fundingb The Group maintains access to a variety of sources of wholesale funds in major currencies, including those available from term investors across a variety of distribution channels and geographies, money markets, and repo markets. The Group has direct access to US, European and Asian capital markets through its global investment banking operations and long-term investors through its clients worldwide, and is an active participant in money markets. As a result, wholesale funding is well diversified by product, maturity, geography and major currency. As at 31 December 2017, the Group’s total wholesale funding outstanding (excluding repurchase agreements) was £157.4bn (2016: £157.8bn), of which £20.4bn (2016: £25.8bn) was secured funding and £137.0bn (2016: £132.0bn) unsecured funding. Unsecured funding includes £44.8bn (2016: £37.6bn) of privately placed senior unsecured notes issued through a variety of distribution channels including intermediaries and private banks. During the year, the Group issued £11.5bn equivalent of capital and senior unsecured debt from Barclays PLC (the Parent company), of which £6.1bn was in public senior unsecured debt and £5.4bn in capital instruments. In the same period, £6.1bn of Barclays Bank PLC capital and senior public term instruments either matured or were redeemed, including the $1.375bn 7.1% Series 3 USD preference shares. As at 31 December 2017, wholesale funding of £57.2bn (2016: £70.3bn) matures in less than one year, of which £13.8bnc (2016: £21.5bn) relates to term funding. Although not a requirement, the liquidity pool exceeded the wholesale funding maturing in less than one year by £163bn (2016: £95bn). The Group expects to continue issuing public wholesale debt in 2018 from Barclays PLC (the Parent company), in order to maintain compliance with indicative MREL requirements and maintain a stable and diverse funding base by type, currency and market. Notes b The composition of wholesale funds comprises the balance sheet reported deposits from banks, financial liabilities at fair value, debt securities in issue and subordinated liabilities, excluding cash collateral and settlement balances and collateral swaps. It does not include participation in central bank facilities reported within repurchase agreements and other similar secured borrowing. c Term funding comprises public benchmark and privately placed senior unsecured notes, covered bonds, asset backed securities (ABS) and subordinated debt where the original maturity of the instrument was more than one year. 170 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – LiquidityRisk reviewMaturity profile of wholesale fundinga Barclays PLC (the Parent company) Senior unsecured (Public benchmark) Senior unsecured (Privately placed) Subordinated liabilities Barclays Bank PLC (including subsidiaries) Deposits from banks Certificates of deposit and commercial paper Asset backed commercial paper Senior unsecured (Public benchmark) Senior unsecured (Privately placed)b Covered bonds Asset backed securities Subordinated liabilities Otherc Total as at 31 December 2017 Of which secured Of which unsecured Total as at 31 December 2016 Of which secured Of which unsecured <1 month £bn 1-3 months £bn 3-6 months £bn 6-12 months £bn <1 year £bn 1-2 years £bn 2-3 years £bn 3-4 years £bn 4-5 years £bn >5 years £bn – – – 5.4 2.4 1.9 – 0.5 – – 2.3 0.5 13.0 1.9 11.1 16.6 3.7 12.9 0.7 – – 4.7 8.1 4.1 – 0.9 1.0 – 0.1 – 19.6 5.1 14.5 17.3 5.6 11.7 – – – 0.7 7.1 0.4 – 3.6 – 0.6 0.8 0.1 13.3 1.1 12.2 16.4 3.4 13.0 0.1 0.1 – 0.6 7.0 – – 2.9 – 0.2 – 0.4 11.3 0.2 11.1 20.0 2.3 17.7 0.8 0.1 – 11.4 24.6 6.4 – 7.9 1.0 0.8 3.2 1.0 57.2 8.3 48.9 70.3 15.0 55.3 1.5 – – 0.1 1.2 – 2.5 9.9 1.8 1.7 0.1 0.2 19.0 3.5 15.5 14.3 1.8 12.5 1.0 – 1.1 0.1 0.8 – 0.6 6.7 1.0 1.0 0.8 0.2 13.3 2.0 11.3 14.4 3.2 11.2 4.2 0.2 – 0.3 0.6 – 0.6 1.8 1.0 – 5.2 0.3 14.2 1.0 13.2 8.6 0.4 8.2 4.0 – – – 0.4 – – 3.1 2.4 0.1 3.5 – 13.5 2.5 11.0 14.1 1.0 13.1 Total £bn 21.1 0.8 6.5 9.6 0.5 5.4 – 11.9 0.1 – 1.1 14.6 1.3 1.8 4.5 1.3 40.2 3.1 37.1 36.1 4.4 31.7 27.7 6.4 4.8 44.0 8.5 5.4 17.3 3.0 157.4 20.4 137.0 157.8 25.8 132.0 Notes a Term funding comprises public benchmark and privately placed senior unsecured notes, covered bonds, asset backed securities (ABS) and subordinated debt where the original maturity of the instrument was more than one year. b Includes structured notes of £33.4bn, £7.2bn of which matures within one year. c Primarily comprised of fair value deposits of £1.7bn. Currency composition of wholesale debt As at 31 December 2017, the proportion of wholesale funding by major currencies was as follows: Currency composition of wholesale funding Deposits from banks Certificates of deposits and commercial paper Asset backed commercial paper Senior unsecured (public benchmark) Senior unsecured (Privately placed) Covered bonds/ABS Subordinated liabilities Total as at 31 December 2017 Total as at 31 December 2016 USD % 48 50 85 59 46 30 40 50 48 EUR % 21 40 10 23 28 42 30 28 32 GBP % 27 9 5 12 10 28 29 10 16 Other % 4 1 – 6 16 – 1 12 4 To manage cross-currency refinancing risk, the Group manages to foreign exchange cash flow limits, which limit risk at specific maturities. Encumbrance Asset encumbrance arises from collateral pledged against secured funding and other collateralised obligations. Barclays funds a portion of trading portfolio assets and other securities via repurchase agreements and other similar borrowing, and pledges a portion of customer loans and advances as collateral in securitisation, covered bond and other similar secured structures. Barclays monitors the mix of secured and unsecured funding sources within the Group’s funding plan and seeks to efficiently utilise available collateral to raise secured funding and meet other collateral requirements. Encumbered assets have been defined consistently with the Group’s reporting requirements under Article 100 of the CRR. Securities and commodities assets are considered encumbered when they have been pledged or used to secure, collateralise or credit enhance a transaction which impacts their transferability and free use. This includes external repurchase or other similar agreements with market counterparts. Excluding assets positioned at central banks, as at 31 December 2017, £193bn (2016: £168bn) of the Group’s assets were encumbered, primarily due to cash collateral posted, firm financing of trading portfolio assets and other securities and funding secured against loans and advances to customers. home.barclays/annualreport Barclays PLC Annual Report 2017 171 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernance Assets may also be encumbered under secured funding arrangements with central banks. In advance of such encumbrance, assets are often positioned with central banks to facilitate efficient future draw down. £70bn (2016: £63bn) of on-balance sheet assets were positioned at the central banks, consisting of encumbered assets and collateral pre-positioned and available for use in secured financing transactions. £342bn (2016: £277bn) of on- and off-balance sheet assets not positioned at the central bank were identified as readily available for use in secured financing transactions. Additionally, they include cash and securities held in the Group liquidity pool as well as unencumbered assets which provide a source of contingent liquidity. While these additional assets are not relied upon in the Group’s LRA, a portion of these assets may be monetised to generate liquidity through use as collateral for secured funding or through outright sale. Loans and advances to customers are only classified as readily available if they are already in a form, such that, they can be used to raise funding without further management actions. This includes excess collateral already in secured funding vehicles. £198bn (2016: £231bn) of assets not positioned at the central bank were identified as available as collateral. These assets are not subject to any restrictions on their ability to secure funding, to be offered as collateral, or to be sold to reduce potential future funding requirements, but are not immediately available in the normal course of business in their current form. They primarily consist of loans and advances which would be suitable for use in secured funding structures but are conservatively classified as not readily available because they are not in transferable form. Not available as collateral consists of assets that cannot be pledged or used as security for funding due to restrictions that prevent their pledge or use as security for funding in the normal course of business. Derivatives and reverse repo assets relate specifically to derivatives, reverse repurchase agreements and other similar secured lending. These are shown separately as these on-balance sheet assets cannot be pledged. However, these assets can give rise to the receipt of non-cash assets which are held off-balance sheet, and can be used to raise secured funding or meet additional funding requirements. In addition, £548bn (2016: £406bn) of the total £608bn (2016: £466bn) securities accepted as collateral, and held off-balance sheet, were on-pledged, the significant majority of which related to matched-book activity where reverse repurchase agreements are matched by repurchase agreements entered into to facilitate client activity. The remainder relates primarily to reverse repurchase agreements used to settle trading portfolio liabilities as well as collateral posted against derivatives margin requirements. Asset encumbrance On-balance sheet As at 31 December 2017 Cash and balances at central banks Trading portfolio assets Financial assets at fair value Derivative financial instruments Loans and advances – banksa Loans and advances – customersa Cash collateral Settlement balances Financial investments Reverse repurchase agreements Non-current assets held for sale Other financial assets Total on-balance sheet Assets £bn 171.1 113.8 116.3 237.7 11.1 312.9 58.6 18.6 58.9 12.5 1.2 20.5 1,133.2 Off-balance sheet Fair value of securities accepted as collateral Total unencumbered collateral Assets encumbered as a result of transactions with counterparties other than central banks As a result of covered bonds £bn – – – – – 11.2 – – – – – – 11.2 As a result of securiti- sations £bn – – – – – 18.4 – – – – – – 18.4 Other £bn – 73.9 4.8 – – 13.0 56.4 – 15.5 – – – 163.6 Total £bn – 73.9 4.8 – – 42.6 56.4 – 15.5 – – – 193.2 Other assets (comprising assets encumbered at the central bank and unencumbered assets) Assets not positioned at the central bank Assets positioned at the central banksb £bn – – – – – 70.0 – – – – – – Readily available assets £bn 171.1 39.9 1.5 – 3.2 20.9 2.2 – 43.0 – – – Available as collateral £bn – – 10.0 – 7.0 179.4 – – 0.4 – 1.2 – 70.0 281.8 198.0 Not available as collateral £bn – – – – 0.9 – – 18.6 – – – 20.5 40.0 Derivatives and Reverse repos £bn – – 100.0 237.7 – – – – – 12.5 – – 350.2 Total £bn 171.1 39.9 111.5 237.7 11.1 270.3 2.2 18.6 43.4 12.5 1.2 20.5 940.0 Collateral received of which on- pledged £bn 547.6 – Readily available assets £bn 60.1 341.9 Available as collateral £bn – 198.0 Not available as collateral £bn 0.7 40.7 Collateral received £bn 608.4 – Notes a Excluding cash collateral and settlement balances. b Includes both encumbered and unencumbered assets. Assets within this category that have been encumbered are disclosed as assets pledged in Note 40 to the financial statements page 312. 172 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – LiquidityRisk reviewAsset encumbrance On-balance sheet As at 31 December 2016 Cash and balances at central banks Trading portfolio assets Financial assets at fair value Derivative financial instruments Loans and advances – banksa Loans and advances – customersa Cash collateral Settlement balances Financial investments Reverse repurchase agreements Non current assets held for sale Other financial assets Total on-balance sheet Assets £bn 102.4 80.2 78.6 346.6 20.2 325.7 68.8 21.3 63.3 13.5 6.4 21.0 1,148.0 Off-balance sheet Fair value of securities accepted as collateral Total unencumbered collateral Assets encumbered as a result of transactions with counterparties other than central banks As a result of covered bonds £bn – – – – – 16.5 – – – – – – 16.5 As a result of securitis- ations £bn – – – – – 6.2 – – – – – – 6.2 Other £bn – 51.2 3.2 – – 8.0 68.8 – 13.6 – – – 144.8 Total £bn – 51.2 3.2 – – 30.7 68.8 – 13.6 – – – 167.5 Assets positioned at the central banksb £bn – – – – – 63.0 – – – – – – 63.0 Other assets (comprising assets encumbered at the central bank and unencumbered assets) Assets not positioned at the central bank Readily available assets £bn 102.4 29.0 1.5 – 10.1 23.8 – – 49.3 – 1.2 – 217.3 Available as collateral £bn – – 10.7 – 9.0 208.2 – – 0.4 – 3.1 – 231.4 Not available as collateral £bn – – – – 1.1 – – 21.3 – – 2.1 21.0 45.5 Derivatives and Reverse repos £bn – – 63.2 346.6 – – – – – 13.5 – – 423.3 Total £bn 102.4 29.0 75.4 346.6 20.2 295.0 – 21.3 49.7 13.5 6.4 21.0 980.5 Collateral received of which on- pledged £bn 405.5 – Readily available assets £bn 59.7 277.0 Available as collateral £bn – 231.4 Not available as collateral £bn 1.0 46.5 Collateral received £bn 466.2 – Notes a Excluding cash collateral and settlement balances. b Includes both encumbered and unencumbered assets. Assets within this category that have been encumbered are disclosed as assets pledged in Note 40 to the financial statements page 312. Repurchase agreements and reverse repurchase agreements Barclays enters into repurchase and other similar secured borrowing agreements to finance its trading portfolio assets. The majority of reverse repurchase agreements are matched by offsetting repurchase agreements entered into to facilitate client activity. The remainder are used to settle trading portfolio liabilities. Due to the high quality of collateral provided against secured financing transactions, the liquidity risk associated with this activity is significantly lower than unsecured financing transactions. Nonetheless, Barclays manages to gross and net secured mismatch limits to limit refinancing risk under a severe stress scenario and a portion of the Group’s liquidity pool is held against stress outflows on these positions. The Group secured mismatch limits are calibrated based on market capacity, liquidity characteristics of the collateral and risk appetite of the Group. The cash value of repurchase and reverse repurchase transactions will typically differ from the market value of the collateral against which these transactions are secured by an amount referred to as a haircut (or over-collateralisation). Typical haircut levels vary depending on the quality of the collateral that underlies these transactions. For transactions secured against extremely liquid fixed income collateral, lenders demand relatively small haircuts (typically ranging from 0-2%). For transactions secured against less liquid collateral, haircuts vary by asset class (typically ranging from 5-10% for corporate bonds and other less liquid collateral). As at 31 December 2017, the significant majority of repurchase activity related to matched-book activity. The Group may face refinancing risk on the net maturity mismatch for matched-book activity. Net matched-book activitya,b,c Negative number represents net repurchase agreement (net liability) As at 31 December 2017 Extremely liquid fixed incomed Liquid fixed income Equities Less liquid fixed income Total As at 31 December 2016 Extremely liquid fixed income Liquid fixed income Equities Less liquid fixed income Total Less than one month £bn One month to three months £bn Over three months £bn (36.4) (0.9) 9.7 1.7 (25.9) (21.8) (0.4) 6.1 0.6 (15.5) 18.1 1.5 (5.6) (0.7) 13.3 11.6 0.8 (0.5) (0.2) 11.7 16.1 (1.4) (8.8) (2.2) 3.7 10.7 (0.7) (9.6) (1.3) (0.9) Notes a Includes collateral swaps. b Includes financing positions for prime brokerage clients which are reported as customer payables or receivables on balance sheet. c Values are reported on a cash value basis. d Extremely liquid fixed income is defined as very highly rated sovereigns and agencies, typically rated AA+ or better. It excludes liquid fixed income, equities and other less liquid collateral. home.barclays/annualreport Barclays PLC Annual Report 2017 173 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceThe residual repurchase agreement activity is the firm-financing component and reflects Barclays funding of a portion of its trading portfolio assets. The primary risk related to firm-financing activity is the inability to roll-over transactions as they mature. Firm financing repurchase agreementsa,b,c As at 31 December 2017 Extremely liquid fixed incomed Liquid fixed income Equities Less liquid fixed income Total As at 31 December 2016 Extremely liquid fixed income Liquid fixed income Equities Less liquid fixed income Total Less than one month £bn One month to three months £bn Over three months £bn 37.2 4.1 17.4 2.1 60.8 28.3 2.8 13.2 1.9 46.2 10.3 1.5 21.4 1.9 35.1 7.1 0.8 8.9 0.8 17.6 1.4 2.5 15.7 12.6 32.2 1.1 1.2 14.0 2.6 18.9 Total £bn 48.9 8.1 54.5 16.6 128.1 36.5 4.8 36.1 5.3 82.7 Notes a Includes collateral swaps. b Includes financing positions for prime brokerage clients which are reported as customer payables or receivables on-balance sheet. c Values are reported on a cash value basis. d Extremely liquid fixed income is defined as very highly rated sovereigns and agencies, typically rated AA+ or better. It excludes liquid fixed income, equities and other less liquid collateral. Credit ratings In addition to monitoring and managing key metrics related to the financial strength of the Group, Barclays also solicits independent credit ratings from Standard & Poor’s Global (S&P), Moody’s, Fitch and Rating and Investment Information (R&I). These ratings assess the creditworthiness of the Group, its subsidiaries and branches and are based on reviews of a broad range of business and financial attributes including capital strength, profitability, funding, liquidity, asset quality, strategy and governance. Credit ratings As at 31 December 2017 Barclays Bank PLC Long-term Short-term Outlook Barclays Bank UK PLC Long-term Short-term Outlook Barclays PLC Long-term Short-term Outlook Standard & Poor’s A A-1 Stable A (prelim) A-1 (prelim) Stable BBB A-2 Stable Moody’s A1 P-1 Negative (P) A1 (P) P-1 Unassigned Baa2 P-3 Negative Fitch A F1 Rating Watch Positive A+ (EXP) F1 (EXP) Stable A F1 Stable All credit rating agencies took rating actions this year to assign initial ratings to Barclays Bank UK PLC in anticipation of the establishment of this entity as the UK ring-fenced bank in April 2018. There were also rating actions on the existing entities of Barclays Bank PLC and Barclays PLC by some of the credit rating agencies as detailed below. In September 2017, Fitch assigned an expected rating to Barclays Bank UK PLC of A+, reflecting a one notch uplift from the expected standalone rating of A. This is due to the sufficient amount of junior debt they expect to be outstanding in Barclays Bank UK PLC, referred to as qualifying junior debt (QJD). In the same rating action, Fitch revised the outlook of Barclays Bank PLC from stable to rating watch positive in anticipation of assigning QJD uplift of one notch during 2018. In October 2017, S&P upgraded long- and short-term ratings of Barclays Bank PLC by one notch to A/A-1 from A-/A-2 as S&P finalised their view of the status of Barclays Bank PLC. They determined that Barclays Bank PLC would remain core to the Group revising their previous expectation of a highly strategic status. Simultaneously, Barclays Bank UK PLC was assigned a preliminary rating of A in anticipation that it too would be core to the Group. In November 2017, S&P also revised their view of UK economic risk for the UK banking sector, which led to outlooks for Barclays PLC, Barclays Bank PLC and Barclays Bank UK PLC being revised from negative to stable. Moody’s assigned a provisional rating to Barclays Bank UK PLC in October 2017 of (P)A1. The negative outlooks for Barclays PLC and Barclays Bank PLC have remained in place since the outcome of the EU referendum in June 2016. Since October 2017, the implementation of ring-fencing has been included in the rationale for the maintenance Barclays Bank PLC’s negative outlook. Barclays also solicits issuer ratings from R&I and the ratings of A- for Barclays PLC and A for Barclays Bank PLC were affirmed in July 2017 with stable outlooks. A credit rating downgrade could result in outflows to meet collateral requirements on existing contracts. Outflows related to credit rating downgrades are included in the LRA stress scenarios and a portion of the liquidity pool is held against this risk. Credit ratings downgrades could also result in reduced funding capacity and increased funding costs. 174 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – LiquidityRisk reviewThe contractual collateral requirement following one- and two-notch long-term and associated short-term downgrades across all credit rating agencies, would result in outflows of £4bn and £6bn respectively, and are fully reserved for in the liquidity pool. These numbers do not assume any management or restructuring actions that could be taken to reduce posting requirements. These outflows do not include the potential liquidity impact from loss of unsecured funding, such as from money market funds, or loss of secured funding capacity. However, unsecured and secured funding stresses are included in the LRA stress scenarios and a portion of the liquidity pool is held against these risks. Contractual maturity of financial assets and liabilities The table below provides detail on the contractual maturity of all financial instruments and other assets and liabilities. Derivatives (other than those designated in a hedging relationship) and trading portfolio assets and liabilities are included in the ‘on demand’ column at their fair value. Liquidity risk on these items is not managed on the basis of contractual maturity since they are not held for settlement according to such maturity and will frequently be settled before contractual maturity at fair value. Derivatives designated in a hedging relationship are included according to their contractual maturity. Financial assets designated at fair value in respect of linked liabilities to customers under investment contracts have been included in other assets and other liabilities as the Group is not exposed to liquidity risk arising from them; any request for funds from creditors would be met by simultaneously liquidating or transferring the related investment. Contractual maturity of financial assets and liabilities (audited) Over three months but not more than six months £m Over six months but not more than nine months £m Over nine months but not more than one year £m Over one year but not more than two years £m Over two years but not more than three years £m Over three years but not more than five years £m Over five years but not more than ten years £m On demand £m Not more than three months £m Over ten years £m Total £m 170,236 846 2,153 113,760 – – – – – – – – – – – – – – – – – – – – – – – – – – 171,082 2,153 113,760 14,800 77,288 8,828 4,570 1,252 2,095 160 196 557 6,535 116,281 237,504 30 3,439 41 2,378 30,227 – 2,717 1,256 – 97 77 – 504 125 71 5,675 247 22 15 15 3,928 16,162 17,059 10,366 188 93 11 1 – 237,669 58,916 35,663 12,022 70,816 8,511 5,519 7,622 35,969 26,151 39,435 48,382 111,125 365,552 7,522 – 4,446 759 561,466 186,801 578 – 21,890 – – 10,263 – – 9,503 – 110 44,167 – – – – – – 12,546 869 30,354 55,819 65,999 128,229 1,114,491 18,757 1,133,248 – – 4,967 30,826 718 438 214 74 446 334,961 – 74,812 – 7,381 – 3,386 – 3,628 – 2,684 135 – 500 316 – 882 3,550 37,351 17,841 – 4,516 – 2,136 – 1,396 – 310 – 93 10,006 – – 35 – 231 490 – – 37,723 – 656 446 429,121 – – 40,338 37,351 13,298 102,860 10,570 5,918 3,139 10,515 7,281 5,879 4,923 9,335 173,718 237,235 907 – – 10 17,120 2,402 3,793 632,715 249,664 3 8,395 791 – 32,374 – 5,107 7 – 16,992 – 1,562 23 – 9,962 10 8,136 57 781 22,567 4 5 1,037 4,402 4,370 – 41 3,883 12,819 10,983 5,466 8,751 1,959 – – – 238,345 73,314 23,826 4,574 13,856 38,657 22,169 19,800 1,058,756 8,476 1,067,232 66,016 As at 31 December 2017 Assets Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Financial investments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Other financial assets Total financial assets Other assetsa Total assets Liabilities Deposits from banks Items in the course of collection due to other banks Customer accounts Repurchase agreements and other similar secured borrowing Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issue Subordinated liabilities Other financial liabilities Total financial liabilities Other liabilitiesa Total liabilities Cumulative liquidity gap (71,249) (134,112) (144,596) (151,325) (151,784) (130,184) (113,686) (96,524) (52,694) 55,735 Note a As at 31 December 2017, other assets includes balances of £1,193m (2016: £71,454m) and other liabilities includes balances of £nil (2016: £65,292m) relating to amounts held for sale. Please refer to Note 43 for details. home.barclays/annualreport Barclays PLC Annual Report 2017 175 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceContractual maturity of financial assets and liabilities (audited) On demand £m Not more than three months £m Over three months but not more than six months £m Over six months but not more than nine months £m Over nine months but not more than one year £m Over one year but not more than two years £m Over two years but not more than three years £m Over three years but not more than five years £m Over five years but not more than ten years £m Over ten years £m Total £m 102,031 322 1,467 80,240 – – – – – – – – – – – – – – – – – – – – – – – – 102,353 – – 1,467 80,240 15,558 43,270 5,518 2,376 2,081 686 90 129 771 8,129 78,608 345,625 40 4,858 5 1,015 34,346 400 3,064 2,753 5 741 480 2 2,666 133 14 10,127 412 168 9,031 236 175 15,148 20 123 12,768 13 109 8,717 – 346,626 63,317 43,251 26,929 85,993 7,522 6,310 8,245 29,326 25,602 44,776 48,233 109,848 392,784 7,043 – 3,678 1,128 583,791 169,757 892 – 20,149 144 – 10,056 905 – 14,032 792 77 41,434 – – 35,127 – – 60,248 – – – – 13,454 1,205 61,908 126,803 1,123,305 89,821 1,213,126 5,906 39,610 1,120 672 351 193 13 328 21 – 48,214 636 317,963 – 86,081 – 5,305 – 3,023 – 4,528 – 2,836 – 1,262 – 1,043 5,480 34,687 9,235 – 1,934 – 917 – 1,326 – 311 – – – 83 – – 441 474 – – 696 636 423,178 – – 19,760 34,687 15,285 41,583 3,970 4,112 1,827 7,540 5,762 5,773 3,588 6,591 96,031 339,646 27 – – 4 16,731 8 3,198 719,630 196,450 – 11,713 – – 24,042 – 5,902 – – 14,626 2 6,867 1,317 – 16,218 10 3,166 3,230 1,189 18,475 34 8,069 56 – 15,196 46 9,186 7,487 – 23,946 75 10,152 6,575 – 21,326 670 4,119 4,710 – 340,487 75,932 23,383 4,387 16,786 1,066,695 75,066 1,141,761 71,365 As at 31 December 2016 Assets Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Financial investments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Other financial assets Total financial assets Other assetsa Total assets Liabilities Deposits from banks Items in the course of collection due to other banks Customer accounts Repurchase agreements and other similar secured borrowing Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issue Subordinated liabilities Other financial liabilities Total financial liabilities Other liabilitiesa Total liabilities Cumulative liquidity gap (135,839) (162,532) (166,425) (170,995) (173,181) (150,222) (130,291) (93,989) (53,407) 56,610 Note a As at 31 December 2017, other assets includes balances of £1,193m (2016: £71,454m) and other liabilities includes balances of £nil (2016: £65,292m) relating to amounts held for sale. Please refer to Note 43 for details. Expected maturity dates do not differ significantly from the contract dates, except for: ■■ trading portfolio assets and liabilities and derivative financial instruments, which may not be held to maturity as part of the Group’s trading strategies ■■ retail deposits, which are included within customer accounts, are repayable on demand or at short notice on a contractual basis. In practice, these instruments form a stable base for the Group’s operations and liquidity needs because of the broad base of customers – both numerically and by depositor type (see Behavioural maturity profile on page 170) ■■ financial assets designated at fair value held in respect of linked liabilities, which are managed with the associated liabilities. 176 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – LiquidityRisk reviewContractual maturity of financial liabilities on an undiscounted basis The table below presents the cash flows payable by the Group under financial liabilities by remaining contractual maturities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows of all financial liabilities (i.e. nominal values). The balances in the below table do not agree directly to the balances in the consolidated balance sheet as the table incorporates all cash flows, on an undiscounted basis, related to both principal as well as those associated with all future coupon payments. Derivative financial instruments held for trading and trading portfolio liabilities are included in the on demand column at their fair value. Financial liabilities designated at fair value in respect of linked liabilities under investment contracts have been excluded from this analysis as the Group is not exposed to liquidity risk arising from them. Contractual maturity of financial liabilities – undiscounted (audited) Over three months but not more than six months £m Not more than three months £m On demand £m Over six months but not more than one year £m Over one year but not more than three years £m Over three years but not more than five years £m Over five years but not more than ten years £m As at 31 December 2017 Deposits from banks Items in the course of collection due to other banks Customer accounts Repurchase agreements and other similar secured lending Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issue Subordinated liabilities Other financial liabilities Total financial liabilities As at 31 December 2016 Deposits from banks Items in the course of collection due to other banks Customer accounts Repurchase agreements and other similar secured lending Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issue Subordinated liabilities Other financial liabilities Total financial liabilities 4,967 30,831 720 654 213 446 334,961 3,550 37,351 13,298 237,235 907 – – 632,715 – 74,830 17,847 – 102,983 9 17,614 2,822 3,793 250,729 – 7,383 4,526 – 10,609 3 8,565 1,816 – 33,622 – 7,020 3,557 – 9,118 – 7,025 685 – 28,059 – 3,197 410 – 18,142 15 13,786 5,501 781 42,045 316 – 884 10,259 – 6,177 5 13,928 10,232 – 41,801 Over ten years £m Total £m – 37,737 – 725 446 429,231 – – 40,639 37,351 36 – 231 490 – 5,490 48 12,687 6,243 – 25,225 12,834 1,755 6,734 6,231 – 178,651 239,070 81,246 33,530 4,574 28,279 1,082,475 5,906 39,617 1,122 1,025 207 328 21 – 48,226 636 317,963 – 86,101 5,480 34,687 9,249 – 15,285 339,646 27 – – 719,630 41,599 4 17,126 398 3,198 197,292 – 5,325 1,939 – 3,986 – 11,894 680 – 24,946 – 7,565 2,253 – 5,979 2 13,285 3,117 – 33,226 – 4,266 312 – 13,445 44 12,915 7,089 1,189 39,467 – 1,120 83 – 5,899 48 10,505 9,324 – 27,307 – 1,403 474 – 3,900 84 12,282 7,842 – 26,006 – 1,013 636 424,756 – – 19,790 34,687 8,443 1,086 6,054 4,866 – 98,536 340,914 84,088 33,316 4,387 21,462 1,089,336 home.barclays/annualreport Barclays PLC Annual Report 2017 177 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceMaturity of off-balance sheet commitments received and given The table below presents the maturity split of the Group’s off-balance sheet commitments received and given at the balance sheet date. The amounts disclosed in the table are the undiscounted cash flows (i.e. nominal values) on the basis of earliest opportunity at which they are available. Maturity analysis of off-balance sheet commitments received (audited) Over three months but not more than six months £m Over six months but not more than nine months £m Over nine months but not more than one year £m Over one year but not more than two years £m Over two years but not more than three years £m Over three years but not more than five years £m Over five years but not more than ten years £m On demand £m Not more than three months £m Over ten years £m Total £m 6,373 – 6,373 6,044 102 6,146 5 29 34 18 246 264 2 – 2 1 – 1 3 – 3 410 1 411 1 – 1 2 – 2 8 – 8 23 – 23 7 – 7 1 18 19 5 – 5 3 – 3 3 – 3 – – – 4 – 4 – – – 6,411 29 6,440 6,502 367 6,869 As at 31 December 2017 Guarantees, letters of credit and credit insurance Forward starting repurchase agreements Total off-balance sheet commitments received As at 31 December 2016 Guarantees, letters of credit and credit insurance Forward starting repurchase agreements Total off-balance sheet commitments received Maturity analysis of off-balance sheet commitments given (audited) Over three months but not more than six months £m Over six months but not more than nine months £m Over nine months but not more than one year £m Over one year but not more than two years £m Over two years but not more than three years £m Over three years but not more than five years £m Over five years but not more than ten years £m Over ten years £m Total £m On demand £m Not more than three months £m 16,047 1,085 34 593 311,481 1,144 As at 31 December 2017 Contingent liabilities Documentary credits and other short-term trade related transactions Standby facilities, credit lines and other commitments Total off-balance sheet commitments given As at 31 December 2016 Contingent liabilities Documentary credits and other short-term trade related transactions Standby facilities, credit lines and other commitments Total off-balance sheet commitments given 560 147 883 92 26 77 242 346 6 778 5 44 80 1 47 327,562 2,822 1,590 195 1,026 395 128 17,111 425 845 233 285 355 187 987 10 8 – – 300,043 479 415 604 818 – 55 – 47 318,141 914 1,268 837 1,103 410 234 59 – 259 318 88 – 150 238 245 256 19,012 – 2 – 812 46 314,761 247 302 334,585 259 151 19,939 – – – 1,005 70 302,681 259 221 323,625 178 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – LiquidityRisk reviewRisk review Risk performance Treasury and capital risk – Capital Capital risk The risk that the firm has an insufficient level or composition of capital to support its normal business activities and to meet its regulatory capital requirements under normal operating environments or stressed conditions (both actual and as defined for internal planning or regulatory testing purposes). This includes the risk from the firm’s pension plans. All disclosures in this section (pages 179 to 187) are unaudited unless otherwise stated. Key metrics Fully loaded Common Equity Tier 1 ratio Average UK leverage ratio 13.3% 4.9% Overview The fully loaded CRD IV CET1 ratio, among other metrics, is a measure of the capital strength and resilience of Barclays. Maintenance of our capital is vital in order to meet the minimum capital requirements, and to cover the Group’s current and forecast business needs, and associated risks in order to provide a viable and sustainable business offering. This section provides an overview of the Group’s: (i) regulatory minimum capital and leverage requirements; (ii) capital resources; (iii) risk weighted assets (RWAs); and (iv) leverage ratios and exposures. More details on monitoring and managing capital risk may be found in the Risk Management sections on pages 166 to 167 of the Barclays PLC Pillar 3 Report 2017. Summary of performance in the period Barclays continues to be in excess of minimum transitional and end point capital requirements, and regulatory minimum leverage requirements. The fully loaded CET1 ratio increased to 13.3% (December 2016: 12.4%) principally due to a reduction in risk weighted assets (RWAs) of £52.6bn to £313.0bn. CET1 capital decreased £3.6bn to £41.6bn. The sell down of Barclays’ holding in BAGL to 14.9%, resulting in regulatory proportional consolidation, increased the CET1 ratio by c60bps with a £31.1bn reduction in RWAs offset by £1.8bn reduction due to BAGL minority interests no longer being included in CET1 capital. Losses in respect of the discontinued operation due to the impairment of Barclays’ holding in BAGL allocated to goodwill, and the recycling of the BAGL currency translation reserve losses to the income statement, had no impact on CET1. The CET1 ratio increased by a further c50bps as a result of other RWA reductions, excluding the impact of foreign currency movements, including reductions in Non-Core. Excluding the impacts of BAGL and foreign currency movements, CET1 capital decreased further as profits relating to continuing operations, after absorbing the impact of the US DTA remeasurement, were offset by the redemption of US Dollar preference shares and the payment of pension deficit reduction contributions in the year. The average UK leverage ratio increased to 4.9% (December 2016: 4.5%) primarily driven by the issuance of Additional Tier 1 capital (AT1) securities, the reduction in Non-Core related exposures and due to BAGL’s regulatory proportional consolidation. home.barclays/annualreport Barclays PLC Annual Report 2017 179 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRegulatory minimum capital and leverage requirements Capital Barclays’ end point CET1 regulatory requirement is expected to be 11.4% comprising of a 4.5% Pillar 1 minimum, a 2.5% Capital Conservation Buffer (CCB), a 1.5% Global Systemically Important Institution (G-SII) buffer, a 2.4% Pillar 2A requirement, and an expected 0.5% Countercyclical Capital Buffer (CCyB). The CCB and the G-SII buffer, determined by the PRA in line with guidance from the Financial Stability Board (FSB), are subject to phased implementation at 25% per annum from 2016 with full effect from 2019. The CCB has been set at 2.5% with 1.25% applicable for 2017. The G-SII buffer for 2017 was set at 2% with 1% applicable for 2017. On 21 November 2016, the FSB confirmed that the G-SII buffer for 2018 has been set at 1.5% with 1.1% applicable for 2018. On 21 November 2017, the FSB confirmed that the G-SII buffer will remain at 1.5% applicable for 2019. On 25 September 2017, the Financial Policy Committee (FPC) reaffirmed that it expects to increase the UK CCyB rate from 0% to 0.5% applicable from 27 June 2018 and to 1% applicable from 28 November 2018. Based on current UK exposures, Barclays’ CCyB is expected to be approximately 0.5% from November 2018. Other national authorities also determine the appropriate CCyBs that should be applied to exposures in their jurisdiction, however, based on current exposures, these are not material. Barclays’ Pillar 2A requirement as per the PRA’s Individual Capital Guidance (ICG) for Q417 and 2018 is 4.3% of which at least 56.25% needs to be met in CET1 form, equating to approximately 2.4% of RWAs. Certain elements of the Pillar 2A requirement are a fixed quantum while others are a proportion of RWAs and are based on a point in time assessment. The Pillar 2A requirement is subject to at least annual review. For regulatory reporting purposes, BAGL is treated on a proportional consolidation basis based on Barclays’ holding in BAGL of 14.9%. The CRD IV CET1 transitional minimum capital requirement for 2017 is 9.2% which comprised of a 4.5% Pillar 1 minimum, a 2.4% Pillar 2A requirement, a 1.25% CCB, a 1% G-SII buffer and a 0% CCyB. Leverage In October 2017, following the FPC recommendation, the PRA increased the minimum requirement for the UK leverage ratio from 3% to 3.25%. Barclays is subject to a leverage ratio requirement that is implemented on a phased basis, with a transitional requirement of 3.6% as at 31 December 2017; this comprises the 3.25% minimum requirement, a transitional G-SII additional leverage ratio buffer (G-SII ALRB) of 0.35% and a countercyclical leverage ratio buffer (CCLB) which is currently nil. Although the leverage ratio is expressed in terms of tier 1 capital, 75% of the minimum requirement, equating to 2.4375%, needs to be met with CET1 capital. In addition, the G-SII ALRB and CCLB must be covered solely with CET1 capital. The CET1 capital held against the 0.35% transitional G-SII ALRB was £3.4bn. The fully loaded expected end point UK leverage requirement is 4.0%. 180 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – CapitalRisk reviewCapital resources The CRR and Capital Requirements Directive (CRD) implemented Basel III within the EU (collectively known as CRD IV) on 1 January 2014. The rules are supplemented by Regulatory Technical Standards and the PRA’s rulebook, including the implementation of transitional rules. However, rules and guidance are still subject to change as certain aspects of CRD IV are dependent on final technical standards and clarifications to be issued by the EBA and adopted by the European Commission and the PRA. Capital ratios As at 31 December Fully loaded CET1a,b PRA transitional Tier 1c,d PRA transitional total capitalc,d Capital resources (audited) As at 31 December Total equity (excluding non-controlling interests) per the balance sheet Less: other equity instruments (recognised as AT1 capital) Adjustment to retained earnings for foreseeable dividends Minority interests (amount allowed in consolidated CET1) Other regulatory adjustments and deductions Additional value adjustments (PVA) Goodwill and intangible assets Deferred tax assets that rely on future profitability excluding temporary differences Fair value reserves related to gains or losses on cash flow hedges Excess of expected losses over impairment Gains or losses on liabilities at fair value resulting from own credit Defined-benefit pension fund assets Direct and indirect holdings by an institution of own CET1 instruments Deferred tax assets arising from temporary differences (amount above 10% threshold) Other regulatory adjustments Fully loaded CET1 capital Additional Tier 1 (AT1) capital Capital instruments and the related share premium accounts Qualifying AT1 capital (including minority interests) issued by subsidiaries Other regulatory adjustments and deductions Transitional AT1 capitale PRA transitional Tier 1 capital Tier 2 (T2) capital Capital instruments and the related share premium accounts Qualifying T2 capital (including minority interests) issued by subsidiaries Other regulatory adjustments and deductions PRA transitional total regulatory capital 2017 13.3% 17.2% 21.5% 2016 12.4% 15.6% 19.6% 2017 £m 63,905 (8,941) (392) 2016 £m 64,873 (6,449) (388) – 1,825 (1,385) (7,908) (593) (1,161) (1,239) 83 (732) (50) – (22) 41,565 8,941 3,538 (130) 12,349 53,914 (1,571) (9,054) (494) (2,104) (1,294) 86 (38) (50) (183) 45 45,204 6,449 5,445 (130) 11,764 56,968 6,472 7,040 (251) 67,175 3,769 11,366 (257) 71,846 Notes a The transitional regulatory adjustments to CET1 capital are no longer applicable resulting in CET1 capital on a fully loaded basis being equal to that on a transitional basis. b The CRD IV CET1 ratio (FSA October 2012 transitional statement) as applicable to Barclays’ Tier 2 Contingent Capital Notes was 13.9% based on £43.5bn of transitional CRD IV CET1 capital and £313bn RWAs. c The PRA transitional capital is based on the PRA Rulebook and accompanying supervisory statements. d As at 31 December 2017, Barclays’ fully loaded Tier 1 capital was £50,376m, and the fully loaded Tier 1 ratio was 16.1%. Fully loaded total regulatory capital was £64,646m and the fully loaded total capital ratio was 20.7%. The fully loaded Tier 1 capital and total capital measures are calculated without applying the transitional provisions set out in CRD IV and assessing compliance of AT1 and T2 instruments against the relevant criteria in CRD IV. e Of the £12.3bn transitional AT1 capital, fully loaded AT1 capital comprises the £8.9bn of contingent convertible instruments issued by Barclays PLC (the holding company) and related share premium accounts, and £0.1bn capital deductions. It excludes £3.5bn legacy Tier 1 capital instruments issued by subsidiaries that are subject to grandfathering. For the leverage ratio, only the AT1 capital on a fully loaded basis is applicable. home.barclays/annualreport Barclays PLC Annual Report 2017 181 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceMovement in CET1 capital Opening balance as at 1 January Loss for the period attributable to equity holders Own credit relating to derivative liabilities Dividends paid and foreseen Decrease in retained regulatory capital generated from earnings Net impact of share schemes Available for sale reserve Currency translation reserve Other reserves Decrease in other qualifying reserves Pensions remeasurements within reserves Defined-benefit pension fund asset deduction Net impact of pensions Minority interests Additional value adjustments (PVA) Goodwill and intangible assets Deferred tax assets that rely on future profitability excluding those arising from temporary differences Excess of expected loss over impairment Deferred tax assets arising from temporary differences (amount above 10% threshold) Other regulatory adjustments Decrease in regulatory capital due to adjustments and deductions Closing balance as at 31 December 2017 £m 45,204 (1,283) 78 (978) (2,183) 86 438 3 (920) (393) 53 (694) (641) (1,825) 186 1,146 (99) 55 183 (68) (422) 41,565 CET1 capital decreased to £41.6bn (December 2016: £45.2bn) due to the following: ■■ a £1.3bn loss for the period attributable to equity holders reflecting profit after tax of £1.1bn, including the net tax charge of £0.9bn due to the remeasurement of US DTAs in Q417 offset by £2.3bn of losses in respect of the discontinued operation. The discontinued operation losses, resulting from the impairment of Barclays’ holding in BAGL allocated to goodwill and the recycling of BAGL currency translation reserve losses to the income statement, had no impact on CET1 capital with offsetting movements in the goodwill and intangible assets deduction and other qualifying reserves ■■ a £1.0bn decrease for dividends paid and foreseen ■■ a £0.4bn increase in the available for sale reserve primarily due to gains from changes in fair value on BAGL’s remaining shares held as available for sale ■■ The currency translation reserve remained flat in the year largely due to the £1.4bn recycling of BAGL losses to the income statement which were offset by a £1.3bn decrease driven by the depreciation of period end USD against GBP ■■ a £0.9bn decrease in other reserves which included a £0.5bn decrease as a result of USD preference share redemptions and £0.4bn of separation payments in relation to the sale of Barclays’ holding in BAGL ■■ a £0.6bn decrease net of tax as a result of movements relating to pensions. The pension asset capital deduction increase relates to the UK Retirement Fund, which is the Group’s main pension scheme, moving from a small deficit in December 2016 to a £1.0bn surplus largely due to payment deficit contributions ■■ a £1.8bn decrease due to BAGL minority interests which are no longer eligible as a result of proportional consolidation of BAGL ■■ a £1.1bn increase due to a reduced goodwill and intangible assets deduction largely as a result of the impairment of Barclays’ holding in BAGL allocated to goodwill. 182 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – CapitalRisk reviewRisk weighted assets Risk weighted assets (RWAs) by risk type and business As at 31 December 2017 Barclays UK Barclays International Head Officeb Barclays Group As at 31 December 2016 Barclays UK Barclays International Head Officeb Barclays Non-Core Barclays Group Credit risk Std £m 3,811 49,058 2,907 55,776 IRB £m 54,955 69,520 9,766 134,241 5,592 53,201 9,048 4,714 72,555 49,591 82,327 27,122 9,945 168,985 Counterparty credit riska Settlement Risk £m – 101 – 101 IRB £m – 17,243 633 17,876 – 13,706 1,157 6,081 20,944 – 30 – 37 67 Std £m – 17,000 65 17,065 47 13,515 77 1,043 14,682 Movement analysis of risk weighted assets Risk weighted assets As at 31 December 2016 Book size Acquisitions and disposals Book quality Model updates Methodology and policy Foreign exchange movementc As at 31 December 2017 Market risk Operational risk Total RWAs CVA £m – 2,776 225 3,001 – 3,581 927 2,235 6,743 Std £m – 13,313 88 13,401 – 9,343 482 477 10,302 IMA £m – 13,547 1,365 14,912 – 9,460 2,323 2,928 14,711 £m 12,167 27,708 16,785 56,660 £m 70,933 210,266 31,834 313,033 12,293 27,538 12,156 4,673 56,660 67,523 212,701 53,292 32,133 365,649 Credit risk £bn 241.5 (11.0) (31.7) (3.5) (1.4) 0.6 (4.5) 190.0 Counterparty credit riska £bn 42.4 (1.2) (1.5) 0.5 – (2.2) – 38.0 Market risk £bn 25.0 5.4 (1.6) 0.1 – (0.6) – 28.3 Operational risk £bn 56.7 – – – – – – 56.7 Total RWAs £bn 365.6 (6.8) (34.8) (2.9) (1.4) (2.2) (4.5) 313.0 Notes a RWAs in relation to default fund contributions are included in counterparty credit risk. b Includes Africa Banking RWAs. c Foreign exchange movement does not include FX for modelled counterparty risk or modelled market risk. RWAs decreased £52.6bn to £313.0bn: ■■ book size decreased RWAs by £6.8bn primarily due to portfolio rundowns related to Barclays Non-Core, the remeasurement of US DTAs as a result of the US Tax Cuts and Jobs Act and securitisation transactions, partially offset by increased trading activity in investment bank businesses ■■ acquisitions and disposals decreased RWAs £34.8bn primarily as a result of the proportional consolidation of BAGL ■■ book quality decreased RWAs £2.9bn primarily due to changes in risk profile in CIB ■■ model updates decreased RWAs £1.4bn primarily due to model changes in Africa Banking prior to the sell down of Barclays holding in BAGL ■■ methodology and policy decreased RWAs £2.2bn primarily due to a revised calculation basis for modelled derivative exposures ■■ foreign exchange movements decreased RWAs £4.5bn primarily due to the depreciation of period end USD against GBP. home.barclays/annualreport Barclays PLC Annual Report 2017 183 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceLeverage ratios and exposures Barclays is required to disclose an average UK leverage ratio which is based on capital and exposure measures on the last day of each month in the quarter; as well as a UK leverage ratio which is based on the last day of the quarter. Both approaches exclude qualifying claims on central banks from the leverage exposures. Barclays is also required to disclose a Capital Requirements Regulation (CRR) leverage ratio, which is based on the end point CRR definition of Tier 1 capital and the CRR definition of leverage exposure. Leverage exposure Leverage ratios Average UK leverage exposure Average fully loaded Tier 1 capital Average UK leverage ratio UK leverage ratio CRR leverage ratio UK leverage exposure Accounting assets Derivative financial instruments Cash collateral Reverse repurchase agreements and other similar secured lending Financial assets designated at fair valuea Loans and advances and other assets Total IFRS assets Regulatory consolidation adjustments Derivatives adjustments Derivatives netting Adjustments to cash collateral Net written credit protection Potential Future Exposure (PFE) on derivatives Total derivatives adjustments Securities financing transactions (SFTs) adjustments Regulatory deductions and other adjustments Weighted off-balance sheet commitments CRR leverage exposure Qualifying central bank claims UK leverage exposure Fully loaded CET1 capital Fully loaded AT1 capital Fully loaded tier 1 capital As at 31.12.17 £bn 1,045 51.2 4.9% 5.1% 4.5% 238 53 12 116 714 1,133 As at 31.12.16 £bn 1,137 51.6 4.5% 5.0% 4.6% 347 67 13 79 707 1,213 8 (6) (217) (42) 14 120 (125) (313) (50) 12 136 (215) 19 29 (13) 103 1,125 (140) 985 41.6 8.8 50.4 (15) 119 1,125 (75) 1,050 45.2 6.8 52.0 Note a Included within financial assets designated at fair value are reverse repurchase agreements designated at fair value of £100bn (December 2016: £63bn). The average UK leverage ratio increased to 4.9% (December 2016: 4.5%) primarily driven by the issuance of AT1 securities, the reduction in Non-Core related exposures and due to BAGL’s regulatory proportional consolidation. The CRR leverage ratio decreased to 4.5% (December 2016: 4.6%). The difference between the average UK leverage ratio and the CRR leverage ratio movement is primarily driven by an increase in cash at central banks, which are excluded from the UK leverage ratio calculation. Additionally, the year end fully loaded Tier 1 capital is lower than the average due to the remeasurement of US DTAs as a result of the US Tax Cuts and Jobs Act in December: ■■ loans and advances and other assets increased by £7bn to £714bn. This was primarily due to a £69bn increase in cash and balances at central banks largely driven by an increase in the cash contribution to the Group liquidity pool mainly exempt under UK leverage rules, and a £70bn decrease in assets held for sale driven by the sell down of Barclays’ holding in BAGL ■■ reverse repurchase agreements increased £36bn to £112bn, primarily due to an increase in matched book trading ■■ net derivative leverage exposures decreased £33bn to £166bn due to a reduction in interest rate and foreign exchange derivatives, the rundown of Non-Core related assets, a decrease in cash collateral and the depreciation of period end USD and JPY against GBP ■■ regulatory consolidation adjustments increased £14bn to £8bn primarily due to the proportional consolidation of BAGL following the sell down of Barclays’ holding ■■ weighted off-balance sheet commitments decreased £16bn to £103bn primarily due to the proportional consolidation of BAGL following the sell down of Barclays’ holding. Additional Barclays regulatory disclosures are prepared in accordance with the EBA Guidelines on disclosure requirements under Part Eight of Regulation (EU) No 575/2013 (see Barclays PLC Pillar 3 Report 2017) and will be disclosed on 22 February 2018, available at home.barclays/results. 184 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – CapitalRisk reviewForeign exchange risk (audited) The Group is exposed to two sources of foreign exchange risk. a) Transactional foreign currency exposure Transactional foreign currency exposures represent exposure on banking assets and liabilities, denominated in currencies other than the functional currency of the transacting entity. The Group’s risk management policies prohibit the holding of significant open positions in foreign currencies outside the trading portfolio managed by Barclays International which is monitored through VaR. Banking book transactional foreign exchange risk outside of Barclays International is monitored on a daily basis by the market risk function and minimised by the businesses. b) Translational foreign exchange exposure The Group’s investments in overseas subsidiaries and branches create capital resources denominated in foreign currencies, principally USD and EUR. Changes in the GBP value of the net investments due to foreign currency movements are captured in the currency translation reserve, resulting in a movement in CET1 capital. The Group’s strategy is to minimise the volatility of the capital ratios caused by foreign exchange movements, by matching the CET1 capital movements to the revaluation of the Group’s foreign currency RWA exposures. Functional currency of operations Functional currency of operations (audited) As at 31 December 2017 USD EUR ZAR JPY Other Total As at 31 December 2016 USD EUR ZAR JPY Other Total Foreign currency net investments £m Borrowings which hedge the net investments £m Derivatives which hedge the net investments £m 27,848 2,489 8 467 2,475 33,287 29,460 2,121 3,679 438 2,793 38,491 (12,404) (3) – (152) – (12,559) (12,769) (363) – (209) – (13,341) (540) – – (301) (1,299) (2,140) – – (2,571) (224) (1,318) (4,113) Structural currency exposures pre- economic hedges £m 14,904 2,486 8 14 1,176 18,588 16,691 1,758 1,108 5 1,475 21,037 Remaining structural currency exposures £m 8,751 359 8 14 1,176 10,308 8,793 (295) 1,108 5 1,475 11,086 Economic hedges £m (6,153) (2,127) – – – (8,280) (7,898) (2,053) – – – (9,951) The economic hedges primarily represent the USD and EUR preference shares and Additional Tier 1 (AT1) instruments that are held as equity. These are accounted for at historic cost under IFRS and do not qualify as hedges for accounting purposes. During 2017, total structural currency exposure net of hedging instruments decreased by £0.8bn to £10.3bn (2016: £11.1bn). Foreign currency net investments decreased by £5.2bn to £33.3bn (2016: £38.5bn) driven predominantly by the decrease in ZAR investments following the partial disposal of the Group’s investment in BAGL and accounting deconsolidation of the remaining holding. The hedges associated with these investments decreased by £2.8bn to £14.7bn (2016: £17.5bn). home.barclays/annualreport Barclays PLC Annual Report 2017 185 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernancePension risk review The UK Retirement Fund (UKRF) represents approximately 96% (2016: 96%) of the Group’s total retirement benefit obligations globally. As such this risk review section focuses exclusively on the UKRF. The UKRF is closed to new entrants and there is no new final salary benefit being accrued. Existing active members accrue a combination of a cash balance benefit and a defined contribution element. Pension risk arises as the market value of the pension fund assets may decline, investment returns may reduce or the estimated value of the pension liabilities may increase. See page 167 of the Barclays PLC Pillar 3 Report 2017 for more information on how pension risk is managed. Assets The Trustee Board of the UKRF defines its overall long-term investment strategy with investments across a broad range of asset classes. This results in an appropriate mix of return seeking assets as well as liability matching assets to better match future pension obligations. The main market risks within the asset portfolio are against interest rates and equities. The split of scheme assets is shown within Note 35. The fair value of the UKRF assets was £30.1bn as at 31 December 2017 (2016: £31.8bn). Liabilities The UKRF retirement benefit obligations are a series of future cash flows with relatively long duration. On an IAS 19 basis these cash flows are sensitive to changes in the expected long-term price inflation rate (RPI) and the discount rate (AA corporate bond yield curve): ■■ an increase in long-term expected inflation corresponds to an increase in liabilities ■■ a decrease in the discount rate corresponds to an increase in liabilities. Pension risk is generated through the Group’s defined benefit schemes and this risk is set to reduce over time as the main defined benefit scheme is closed to new entrants. The chart below outlines the shape of the UKRF’s liability cash flow profile as at 31 December 2017 that takes account of the future inflation indexing of payments to beneficiaries. The majority of the cash flows (approximately 88%) fall between 0 and 40 years, peaking between 11 and 20 years and reducing thereafter. The shape may vary depending on changes to inflation and longevity expectations and any members who elect to transfer out. Transfers out will bring forward the liability cash flows. For more detail on the UKRF’s financial and demographic assumptions see Note 35 to the financial statements. Proportion of liability cash flows IAS 19 pension position in 2017 2 UKRF surplus/deficit (£bn) 0-10 years 11-20 years 21-30 years 31-40 years 41-50 years 51 years + 9.1% 3.0% 19.4% 16.8% 26.4% 25.3% -2 Q4 2015 Q4 2016 Q4 2017 The graph above shows the UKRF’s net IAS 19 pension position for each quarter-end for the past two years. The volatility shown by the fluctuation in the net IAS 19 pension position is reflective of the movements observed in the market. In Q2 2016, the UKRF IAS 19 position deteriorated as the AA discount rate moved lower, driven by both a decrease in long-dated government bond yields as well as a tightening in credit spreads. During H2 2016, this trend continued driven by the outcome of the EU Referendum in June as well as the Bank of England’s announcement on quantitative easing in August. These events drove significant market moves adversely affecting the UKRF AA discount rate. For example the market index IBOXX £-Corp AA yield was 53bps lower between June and September. Gilt yields reverted higher in the months following September 2016 which was also reflected in a higher AA discount rate. As a result the net IAS 19 position ended 2016 close to zero. During 2017, the net improvement in the IAS 19 position was largely driven by bank contributions. Changes to market levels, in particular equity prices and interest rates, largely offset each other over the year. Please see Note 35 for the sensitivity of the UKRF to changes in key assumptions. 186 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – CapitalRisk reviewRisk measurement In line with Barclays’ risk management framework the assets and liabilities of the UKRF are modelled within a VaR framework to show the volatility of the pension positions on a total portfolio level. This enables the risks, diversification and liability matching characteristics of the UKRF obligations and investments to be adequately captured. VaR is measured and monitored on a monthly basis. Risks are reviewed and reported regularly at forums including the Board Risk Committee, the Group Risk Committee, the Pensions Management Group and the Pension Executive Board. The VaR model takes into account the valuation of the liabilities based on an IAS 19 basis (see Note 35). The Trustee receives quarterly VaR measures on a funding basis. The pension liability is also sensitive to post-retirement mortality assumptions which are reviewed regularly. See Note 35 for more details. In addition the impact of pension risk to the Group is taken into account as part of the stress testing process. Stress testing is performed internally on at least an annual basis. The UKRF exposure is also included as part of regulatory stress tests. Barclays defined benefit pension schemes affects capital in two ways: ■■ An IAS 19 deficit is treated as a liability on the Group’s balance sheet. Movement in a deficit due to remeasurements, including actuarial losses, are recognised immediately through Other Comprehensive Income and as such reduces shareholders’ equity and CET1 capital. An IAS 19 surplus is treated as an asset on the balance sheet and increases shareholders’ equity; however, it is deducted for the purposes of determining CET1 capital. ■■ In the Group’s statutory balance sheet an IAS 19 surplus or deficit is partially offset by a deferred tax liability or asset respectively. These may or may not be recognised for calculating CET1 capital depending on the overall deferred tax position of the Group at the particular time. Pension risk is taken into account in the Pillar 2A capital assessment undertaken by the PRA at least annually. The Pillar 2A requirement forms part of the Group’s overall regulatory minimum requirement for CET1 capital, Tier 1 capital and total capital. More detail on minimum regulatory requirements can be found in the capital risk management section on page 166 of the Barclays PLC Pillar 3 Report 2017. Minimum Requirement for own funds and Eligible Liabilities (MREL) Under the Bank of England’s statement of policy on MREL, the BoE will set MREL for UK globally systemically important banks (G-SIBs) as necessary to implement the total loss absorbing capacity (TLAC) standard and institution or group-specific MREL requirements will depend on the preferred resolution strategy for that institution or group. The MREL requirements will be phased in from 1 January 2019 and will be fully implemented by 1 January 2022, at which time G-SIBs with resolution entities incorporated in the UK, including Barclays, will be required to meet an MREL equivalent to the higher of (i) two times the sum of its Pillar 1 and Pillar 2A requirements or (ii) the higher of two times its leverage ratio or 6.75% of leverage exposures. However, the PRA will review the MREL calibration by the end of 2020, including assessing the proposal for Pillar 2A recapitalisation which may drive a different 1 January 2022 MREL requirement than currently proposed. In addition, it is proposed that CET1 capital cannot be counted towards both MREL and the combined buffer requirement (CBR), meaning that the CBR will effectively be applied above both the Pillar 1 and Pillar 2A requirements relating to own funds and MREL. Barclays’ indicative MREL requirement is currently expected to be 29.1% of RWAs from 1 January 2022 consisting of the following components: ■■ Loss absorption and recapitalisation amounts consisting of 8% Pillar 1 and 4.3% Pillar 2A buffers respectively. ■■ Regulatory buffers including a 1.5% G-SII buffer, 2.5% Capital Conservation Buffer and 0.5% from the planned introduction of a 1% Countercyclical Capital Buffer for the UKa. MREL position and ratios MREL ratios Fully loaded CET1 capital Additional Tier 1 (AT1) capital instruments and related share premium accounts Tier 2 (T2) capital instruments and related share premium accounts Term senior unsecured funding Total Barclays PLC (the Parent company) MREL ratio Qualifying AT1 capital (including minority interests) issued by subsidiariesb Qualifying T2 capital (including minority interests) issued by subsidiariesb Total MREL ratio on a transitional basis, including eligible Barclays Bank PLC instruments MREL position Fully loaded CET1 capital AT1 capital instruments and related share premium accounts T2 capital instruments and related share premium accounts Term senior unsecured funding Total Barclays PLC (the Parent company) MREL position Qualifying AT1 capital (including minority interests) issued by subsidiariesb Qualifying T2 capital (including minority interests) issued by subsidiariesb Total MREL position on a transitional basis, including eligible Barclays Bank PLC instruments 2017 13.3% 2.9% 2.1% 6.8% 25.0% 1.1% 2.2% 28.2% £m 41,565 8,941 6,472 21,166 78,144 3,408 6,789 88,341 2016 12.4% 1.8% 1.0% 4.6% 19.8% 1.5% 3.0% 24.2% £m 45,204 6,449 3,769 16,785 72,207 5,315 11,109 88,631 Total RWAs 313,033 365,649 Notes a 2022 requirements subject to Bank of England review by the end of 2020. b Includes other AT1 capital regulatory adjustments and deductions of £130m (December 2016: £130m) and other T2 capital regulatory adjustments and deductions of £251m (December 2016: £257m). home.barclays/annualreport Barclays PLC Annual Report 2017 187 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceInterest rate risk in the banking book The risk that the firm is exposed to capital or income volatility because of a mismatch between the interest rate exposures of its (non-traded) assets and liabilities. All disclosures in this section (pages 188 to 190) are unaudited and exclude BAGL unless otherwise stated. Key metrics AEaR across the Group from a positive 100bps shock in interest rates. The Group maintains access to stable and diverse sources of funding across customer deposits and wholesale debt. Overview The non-traded market risk framework covers exposures in the banking book, mostly relating to accrual accounted and available for sale instruments. The potential volatility of net interest income is measured by an Annual Earnings at Risk (AEaR) metric which is monitored regularly and reported to Senior Management and the BRC as part of the limit monitoring framework. +£76m For further detail on interest rate risk in the banking book governance and framework see pages 168 to 169 of the Barclays PLC Pillar 3 Report 2017. Summary of performance in the period Annual Earnings at Risk (AEaR), is a key measure of interest rate risk in the banking book (IRRBB). The additional sensitivity measure of a positive 100bps shock was added for 2017, driven by the rise in GBP base rate in November 2017. 188 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – Interest rate risk in the banking bookRisk reviewInterest rate risk in the banking book Net interest income sensitivity The table below shows a sensitivity analysis on pre-tax net interest income for non-trading financial assets and financial liabilities, including the effect of any hedging. The sensitivity has been measured using the Annual Earnings at Risk (AEaR) methodology as described on page 168 of the Barclays PLC Pillar 3 Report 2017. Note that this metric assumes an instantaneous parallel change to interest rate forward curves. The model floors shocked market rates at zero; changes in Net Interest Income (NII) sensitivity are only observed where forward rates are greater than zero. The main model assumptions are: (i) one year time horizon; (ii) balance sheet is held constant; (iii) balances are adjusted for assumed behavioural profiles (e.g. considers that customers may remortgage before the contractual maturity); and (iv) behavioural assumptions are kept unchanged in all rate scenarios. Net interest income sensitivity (AEaR) by business unita,b,c (audited) As at 31 December 2017 +100bps +25bps -25bps As at 31 December 2016 +100bps +25bps -25bps Barclays UK £m Barclays International £m Barclays Non-Core £m 45 11 (61) 19 5 (130) 31 9 (22) 46 16 (90) – – – 6 1 – Total £m 76 20 (83) 71 22 (220) Notes a Excludes investment banking business. b Excludes Treasury operations, which are driven by the firm’s investments in the liquidity pool, which are risk managed using value-based risk measures described on page 163 to 165 of the Barclays PLC Pillar 3 Report 2017. Treasury’s NII (AEaR) sensitivity to a +25/-25bps move is £13m/£(2)m respectively. c Expected fixed rate mortgage pipeline completions in Barclays UK assumed to be consistent with level and timing of pipeline hedging. NII asymmetry arises due to the current low level of interest rates. Modelled NII sensitivity to a -25bp shock to rates has however reduced year on year as a result of the change in UK base rate increasing from 0.25% to 0.5% in November 2017. Both Barclays UK and Barclays International exposures to falling rates have reduced as a result of the higher base rate environment and the movement of customer savings rates away from the implicit customer savings market 0% floor. Net interest income sensitivity (AEaR) by currencya As at 31 December 2017 GBP USD EUR Other currencies Total As percentage of net interest income 2017 2016 +25 basis points £m 12 1 4 3 20 0.20% -25 basis points £m (76) (1) (1) (5) (83) (0.84%) +25 basis points £m 9 3 7 3 22 0.21% -25 basis points £m (215) (5) 1 (1) (220) (2.09%) Note a Barclays UK and Barclays International sensitivity (excluding Investment Banking business and Treasury). Economic Capital by business unit Barclays measures some non-traded market risks using an Economic Capital (EC) methodology. EC is predominantly calculated using a VaR model using a 99% confidence interval aligning to other regulatory submissions. For more information on definitions of prepayment, recruitment and residual risk, and on how EC is used to manage non-traded market risk, see the treasury and capital risk management section on pages 168 to 169 of the Barclays PLC Pillar 3 Report 2017. Economic Capital by business unit As at 31 December 2017 Prepayment risk Recruitment risk Residual risk Total As at 31 December 2016 Prepayment risk Recruitment risk Residual risk Total Barclays UK £m Barclays Internationala £m 20 64 3 87 27 18 1 46 13 1 3 17 8 2 35 45 Total £m 33 65 6 104 35 20 36 91 Note a Only retail exposures within Barclays International are captured in the measure. Recruitment risk in Barclays UK has increased by £46m due to higher volumes of pipeline hedging, as a result of increased customer appetite for fixed rate mortgages. home.barclays/annualreport Barclays PLC Annual Report 2017 189 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceAnalysis of equity sensitivity Equity sensitivity table measures the overall impact of a +/- 25bps movement in interest rates on retained earnings, available for sale and cash flow hedge reserves. This data is captured using DV01 metric which is an indicator of the shift in value for a 1 basis point in the yield curve. Analysis of equity sensitivity (audited) As at 31 December Net interest income Taxation effects on the above Effect on profit for the year As percentage of net profit after tax Effect on profit for the year (per above) Available for sale reserve Cash flow hedge reserve Taxation effects on the above Effect on equity As percentage of equity 2017 2016 +25 basis points £m 20 (6) 14 (1.57%) 14 (164) (616) 195 (571) (0.87%) -25 basis points £m (83) 25 (58) 6.52% (58) 219 598 (204) 555 0.84% +25 basis points £m 22 (7) 15 0.54% 15 (154) (732) 222 (649) (0.91%) -25 basis points £m (220) 66 (154) (5.45%) (154) 114 692 (202) 450 0.63% As indicated in relation to the net interest income sensitivity table on page 189, the impact of a 25bps movement in rates is largely driven by Barclays UK. The year on year movement in cash flow hedge reserve sensitivities was driven by structural changes in business activities and related hedging. Movements in the available for sale reserve would impact CRD IV fully loaded CET1 capital, however the movement in the cash flow hedge reserve would not impact CET1 capital. Volatility of the available for sale portfolio in the liquidity pool Changes in value of available for sale exposures flow directly through capital via the available for sale reserve. The volatility of the value of the available for sale investments in the liquidity pool is captured and managed through a value measure rather than an earning measure, i.e. the Non-Traded Market Risk VaR. Although the underlying methodology to calculate the non-traded VaR is identical to the one used in Traded Management VaR, the two measures are not directly comparable. The Non-Traded VaR represents the volatility to capital driven by the available for sale exposures. These exposures are in the banking book and do not meet the criteria for trading book treatment. Non-traded value at risk (£m) 60 Value of risk (£m) Jan 2017 Dec 2017 Analysis of volatility of the available for sale portfolio in the liquidity pool For the year ended 31 December Non-Traded Market Value at Risk (daily, 95%) Average £m 36 2017 High £m 50 Low £m 27 Average £m 40 2016 High £m 46 Low £m 32 Non-traded VaR shown was mainly driven by volatility of interest rates in developed markets. The increases in late Spring and early Autumn were driven primarily by additional outright interest rate risk exposure taken in the liquidity pool at those times. 190 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceTreasury and capital risk – Interest rate risk in the banking bookRisk reviewRisk review Risk performance Operational risk Operational risk The risk of loss to the firm from inadequate or failed processes or systems, human factors or due to external events (for example, fraud) where the root cause is not due to credit or market risks. All disclosures in this section are unaudited unless otherwise stated. Key metrics of the Group’s net reportable operational risk events had a loss value of £50k or less. 87% of events by number are due to external fraud. 75% Overview Operational risks are inherent in the Group’s business activities and it is not always cost effective or possible to attempt to eliminate all operational risks. The operational risk management framework is therefore focused on identifying operational risks and confirming that they are assessed and managed within the Group’s approved risk appetite. More material losses are less frequent and the Group seeks to reduce the likelihood and impact of these in accordance with its risk appetite. The Operational Principal Risk comprises the following risks: data management and information, financial reporting, fraud, payments process, people, premises and security, supplier, tax, technology and transaction operations. For definitions of these risks see pages 132 and 133. In order to provide complete coverage of the potential adverse impacts on the Group arising from operational risk, the operational risk taxonomy extends beyond the operational risks listed above to cover areas included within conduct, legal and model risks. This section provides an analysis of the Group’s operational risk profile, including events above the Bank’s reportable threshold, which have had a financial impact in 2017. For information on conduct risk events please see page 194. Summary of performance in the period During 2017, total operational risk losses increased to £309m (2016: £209m) while the number of recorded events for 2017 decreased to 2,949 from 3,414 events recorded during the prior year. The loss for the year was primarily driven by events falling within the execution, delivery and process management and external fraud categories, with a limited number of high impact events. home.barclays/annualreport Barclays PLC Annual Report 2017 191 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernance Operational risk profile Within operational risk, a high proportion of risk events have a low financial cost while a very small proportion of operational risk events will have a material impact on the financial results of the Group. In 2017, 87% of the Group’s net reportable operational risk events by volume had a value of less than £50,000 (2016: 86%), although this type of event accounted for only 16% (2016: 22%) of the Group’s total net operational risk losses. The analysis below presents the Group’s operational risk events by Basel event category: ■■ Execution, delivery and process management impacts increased to £222m (2016: £165m) and accounted for 72% (2016: 69%) of overall operational risk losses. The events in this category are typical of the banking industry as a whole where high volumes of transactions are processed on a daily basis. The increase in impact was largely driven by a limited number of events with higher loss values. ■■ External fraud is the category with the highest frequency of events (75% of total events in 2017, up from 71% in prior year) where high volume, low value events are driven by debit and credit card fraud. These accounted for 20% of overall operational risk losses in 2017, slightly down compared to 25% for prior year. ■■ Business disruption impacts increased to £24m, accounting for 8% of total operational risk losses in 2017, mainly driven by a few events with significant impacts. Overall the volume of events in this category remained low and decreased from 2016. The Group’s operational risk profile is informed by bottom-up risk assessments undertaken by each business unit and top-down qualitative review from the Operational Risk Management for each risk type. External Fraud and Technology are highlighted as key operational risk exposures. The operational risk profile is also informed by a number of risk themes: execution, resilience, cyber and data. These represent threats to the Group but have scope which extends across multiple risk types, and therefore require a risk management approach which is integrated within relevant risk and control frameworks. Investment continues to be made in new and enhanced fraud prevention systems and tools to combat the increasing level of fraud attempts being made and to minimise any disruption to genuine transactions. Fraud remains an industry-wide threat and the Group continues to work closely with external partners on various prevention initiatives. Technology, resilience and cyber security risks evolve rapidly so the Group maintains continued focus and investment in the control environment to manage these risks, and actively partners with peers and relevant organisations to understand and disrupt threats originating outside of the Group. For further information, see operational risk management section (pages 132 and 133). Operational risk events by risk category % of total risk events by count Internal fraud 2017 0.5 2016 0.4 External fraud 75.2 71.2 Execution, delivery and process management 21.5 24.4 Employment practices and workplace safety 0.4 0.6 Damage to physical assets 0.2 1.2 Clients, products and business practices 0.0 0.1 Business disruption and system failures 2.2 2.0 Operational risk events by risk category % of total risk events by value Internal fraud 2017 0.3 2016 0.4 External fraud 19.5 24.8 Execution, delivery and process management 72.2 69.2 Employment practices and workplace safety 0.3 3.4 Damage to physical assets 0.1 0.7 Clients, products and business practices 0 0.1 Business disruption and system failures 7.6 1.4 Note a The data disclosed includes operational risk losses for reportable events (excluding BAGL) having an impact of ≥ £10,000 and excludes events that are conduct or legal risk, aggregate and boundary events. A boundary event is an operational risk event that results in a credit risk impact. Due to the nature of risk events that continue to evolve, prior year losses are updated. 192 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk performanceOperational riskRisk reviewRisk review Risk performance Model risk Model risk The risk of the potential adverse consequences from financial assessments or decisions based on incorrect or misused model outputs and reports. All disclosures in this section are unaudited unless otherwise stated. ■■ enhancement of model development and model identification processes, with the areas of model ownership throughout the firm establishing their own model control functions. In addition to the governance outlined above, which details how new models are validated and existing models are internally controlled and assessed, models have been classified based on their materiality (the level of reliance placed on the model output for decision making or reporting), and their complexity. A strengthened programme of review and validation for such material models commenced during 2017. In 2018, model risk governance will be broadened beyond the quantitative models of the firm to include ‘non-modelled methods’ covering certain material decision making and capital planning functions of the firm, such as the primary stress testing programmes and impairment estimations. Overview Model risk is a focal area of management and the Board. It is an important component of regulators’ assessment of Barclays’ risk management capabilities. Models are used to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risks, valuing exposures, conducting stress testing, assessing capital adequacy, supporting new business acceptance and risk/reward evaluation, managing client assets, or meeting reporting requirements. Summary of performance in the period The Principal Risk framework for model risk was established in 2016. In 2017, the framework was enhanced and embedded further in the organisation by: ■■ strengthening of the Group-wide Model Risk Management (MRM) framework, policy and associated standards, validation templates and procedures ■■ enhancement of Board oversight of model risk, through the establishment of a model risk tolerance framework and periodic updates to the Board on the progress of the MRM implementation ■■ improved collection and attestation of the Group’s global inventory of models ■■ reporting metrics on policy adherence and breaches home.barclays/annualreport Barclays PLC Annual Report 2017 193 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk performance Conduct risk Conduct risk The risk of detriment to customers, clients, market integrity, competition or Barclays from the inappropriate supply of financial services, including instances of wilful or negligent misconduct. All disclosures in this section are unaudited unless otherwise stated. Throughout 2017, conduct risks were raised by businesses for consideration by the Board Reputation Committee (RepCo). RepCo reviewed the risks raised and whether management’s proposed actions were appropriate to mitigate the risks effectively. RepCo received regular updates with regards to key risks and issues including those relating to structural reform and regulatory change. The Group continued to incur significant costs in relation to litigation and conduct matters, please refer to Note 29 Legal, competition and regulatory matters and Note 27 Provisions, for further details. Costs include customer redress and remediation, as well as fines and settlements. Resolution of these matters remains a necessary and important part of delivering the Group’s strategy and an ongoing commitment to improve oversight of culture and conduct. The Board and Senior Management received Group Dashboards setting out key indicators in relation to conduct, culture, citizenship and complaints. These continue to be evolved and enhanced to allow effective oversight and decision-making. Barclays has operated at the overall set tolerance for conduct risk throughout 2017. The tolerance is assessed by the business through Key Indicators which are aggregated and provide an overall rating which is reported to the RepCo as part of the Conduct Dashboard. Barclays remained focused on the continuous improvements being made to manage risk effectively, with an emphasis on enhancing governance and management information to help identify risks at earlier stages. For further details on the non-financial performance measures, please refer to page 15 of the Strategic Report. Overview Barclays strives to create and maintain mutually beneficial long-term relationships with its customers and clients. This means taking personal accountability for understanding their needs and providing them with products and services that meet those needs appropriately and help them manage their financial affairs. As a transatlantic consumer, corporate and investment bank, Barclays also plays a critical role in promoting fair, open and transparent markets, as well as fostering shared growth for all. This means abiding by standards that in many cases are higher than those set by the laws and regulations that apply to the Group. In 2017, aligned with the revised Enterprise Risk Management Framework (ERMF), the oversight of financial crime was transferred to conduct risk from operational risk. Summary of performance in the period Barclays is committed to continuing to drive the right culture throughout all levels of the organisation. Barclays will continue to enhance effective management of conduct risk and appropriately consider the relevant tools, governance and management information in decision-making processes. Focus on management of conduct risk is ongoing and the Group Dashboards are a key component of this. The Group continues to review the role and impact of conduct issues in the remuneration process at both the individual and business level. Businesses have continued to assess the potential customer, client and market impacts of strategic change and structural reform. As part of the 2017 Medium-Term Planning Process, material conduct risks associated with strategic and financial plans were assessed. 194 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewRisk review Risk performance Reputation risk Reputation risk The risk that an action, transaction, investment or event will reduce trust in the firm’s integrity and competence by clients, counterparties, investors, regulators, employees or the public. All disclosures in this section are unaudited unless otherwise stated. Overview Reputation risk was re-designated as a Principal Risk under Barclays’ Enterprise Risk Management Framework with effect from January 2017. Reputation risk may arise from any business decision or activity. It may also arise as a result of issues and incidents relevant to other Principal Risks, in particular other non-financial risks e.g. conduct or operational risk. Reputation risks and issues are identified via regular information gathering from within the business and from external stakeholders. Some risks and issues are specific to Barclays, while others are also relevant to the banking sector more generally. Barclays has set tolerances for reputation risk, which take into account the risks arising from specific events or decisions and longer-term strategic themes. The primary responsibility for managing reputation risk lies with each business and function, where there are processes in place to identify, assess and manage reputation risks and issues. There are circumstances, however, where it is necessary to escalate to Group level the evaluation of the reputation risk associated with particular decisions beyond an individual, business or function. The GRC is the most senior executive body responsible for reviewing and monitoring the effectiveness of Barclays’ management of reputation risk. Summary of performance in the period Barclays is committed to identifying reputation risks and issues as early as possible and managing them appropriately. Throughout 2017, reputation risks and issues were overseen by the Board Reputation Committee (RepCo), which reviews the processes and policies by which Barclays identifies and manages reputation risk. RepCo reviewed risks raised by the businesses and considered whether management’s proposed actions, for example attaching conditions to proposed client transactions or increased engagement with impacted stakeholders, were appropriate to mitigate the risks effectively. RepCo also received regular updates with regard to key reputation risks and issues, including: legacy conduct issues; Barclays’ association with sensitive sectors; cyber and data security; fraud and scams that could impact Barclays customers and the resilience of key Barclays systems and processes. In 2017, the central reputation management team received 581 referrals from across the businesses (625 referrals in 2016) for consideration. These referrals covered a variety of sectors including, but not limited to, defence, fossil fuels and mining. As part of Barclays 2017 Medium Term Planning process, material reputation risks associated with strategic and financial plans were also assessed. The effectiveness of the supporting governance arrangements and management information, including the impact of other Principal Risks on Barclays’ reputation, were reviewed by the Board and senior management during 2017. Following this, RepCo requested certain refinements to reputation risk reporting and processes, which are in progress. home.barclays/annualreport Barclays PLC Annual Report 2017 195 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceRisk performance Legal risk Legal risk The risk of loss or imposition of penalties, damages or fines from the failure of the firm to meet its legal obligations including regulatory or contractual requirements. All disclosures in this section are unaudited unless otherwise stated. Business and functions have progressed implementing the requirements outlined in the LRMF within their areas, including strengthening evaluation and monitoring of their legal risk profile. Mandatory training in relation to legal risk was rolled out across the Group in Q4 2017. The Legal Function organisation and coverage model aligns expertise to businesses, functions, products, activities and geographic locations. It continues to provide legal support, oversight and challenge across the organisation, including advising on appropriate identification, management and escalation of legal risk and potential legal outcomes aligned to other Principal Risks. A legal risk oversight committee, as part of the Legal Executive Committee, meets on a quarterly basis to oversee, challenge and monitor legal risk across the Group. Overall, in 2017 significant progress has been made to implement legal risk as a new Principal Risk across the Group. As the LRMF matures, Barclays will continue to strengthen and embed consistent Group-wide processes to support management and monitoring of legal risk as well as drive continued education to support proactive identification and escalation of legal risk issues. Overview The Group conducts diverse activities in a highly regulated global market and therefore is exposed to the risk of loss or imposition of penalties, damages, fines, sanctions and other legal outcomes relating to a failure to meet its legal obligations in the conduct of its business. Legal risk encompasses the failure of the Group to appropriately escalate or manage contractual arrangements, litigation, intellectual property, competition/anti-trust issues, use of law firms and its contact with regulators. The multitude of laws and regulations pertaining to the Group’s activities across the globe are by nature dynamic resulting in a level of legal risk that cannot be avoided. A Legal Risk Management Framework (LRMF) prescribes the requirements for identification, escalation, measurement and management of legal risk to support effective risk management across the Group. Summary of performance in the period In 2017, Barclays remained focused on continuous improvements to manage legal risk effectively, with an emphasis on enhancing governance to help identify risks at earlier stages and escalate as appropriate. This is supported by the LRMF which includes legal risk tolerances, key indicators and governance. The LRMF is supported by legal risk policies and associated standards covering six areas of identified legal risk and mandatory minimum control requirements. For further information, see legal risk management on page 137. Legal risk policies and tolerances were reviewed and enhanced during 2017 to reflect the LRMF. 196 Barclays PLC Annual Report 2017 home.barclays/annualreport Risk reviewRisk review Supervision and regulation Supervision of the Group The Group’s operations, including its overseas branches, subsidiaries and associates, are subject to a large number of rules and regulations that are a condition for authorisations to conduct banking and financial services business in each of the jurisdictions in which the Group operates. These apply to business operations, impact financial returns and include capital, leverage and liquidity requirements, authorisation, registration and reporting requirements, restrictions on certain activities, conduct of business regulations and many others. These requirements are set in legislation and by the relevant central banks and regulatory authorities that authorise, regulate and supervise the Group in the jurisdictions in which it operates. Often, the requirements may reflect global standards developed by international bodies such as the G20, the Basel Committee on Banking Supervision (BCBS), the International Organisation of Securities Commissions (lOSCO) and the Financial Stability Board (FSB). Various bodies, such as central banks and self-regulatory organisations, also create voluntary Codes of Conduct which affect the way the Group does business. Regulatory developments impact the Group globally. We focus particularly on EU, UK and US regulation due to the location of Barclays’ principal areas of business. Regulations elsewhere may also have a significant impact on Barclays due to the location of its branches, subsidiaries and, in some cases, clients. For more information on the risks related to supervision and regulation of the Group, including regulatory change, please see the Risk Factor entitled ‘Regulatory Change agenda and impact on Business Model’ on page 122. Supervision in the EU Financial regulation in the UK is to a significant degree shaped and influenced by EU legislation. This provides the structure of the European Single Market, an important feature of which is the framework for the regulation of authorised firms in the EU. This framework is designed to enable a credit institution or investment firm authorised in one EU member state to conduct banking or investment business in another member state through the establishment of branches or by the provision of services on a cross-border basis without the need for local authorisation. Barclays’ operations in Europe are authorised and regulated by a combination of both home and host regulators. The impact of the UK’s departure from the EU in this respect and, more broadly, its impact on the UK domestic regulatory framework, is yet to be determined. In the UK, the Bank of England (BoE) has responsibility for monitoring the UK financial system as a whole, including by way of conducting annual stress tests on UK banks. The day-to-day regulation and supervision of the Group is divided between the Prudential Regulation Authority (PRA) (a division of the BoE) and the Financial Conduct Authority (FCA). In addition, the Financial Policy Committee (FPC) of the BoE has influence on the prudential requirements that may be imposed on the banking system through its powers of direction and recommendation. Barclays Bank PLC and Barclays Bank UK PLC are authorised and subject to solo prudential supervision by the PRA and subject to conduct regulation and supervision by the FCA. Barclays is also subject to prudential supervision by the PRA on a Group consolidated basis. Barclays Bank UK PLC’s authorisation is subject to restrictions on activities expected to be lifted prior to April 2018. Barclays Services Limited is an appointed representative of Barclays Bank PLC and Clydesdale Financial Services Limited (the principals). This status enables Barclays Services Limited to undertake activities which would otherwise require authorisation, with the principals assuming regulatory responsibility for the conduct of Barclays Services Limited as their appointed representative. Barclays Bank PLC’s German, French and Italian branches are also subject to direct supervision by the European Central Bank (ECB). Barclays Bank Ireland PLC, which is licensed as a credit institution by the Central Bank of Ireland, has submitted an application for an extension of its current licence to support the Group’s ability to provide services to EU clients after Brexit. In its role as supervisor, the PRA seeks to maintain the safety and soundness of financial institutions with the aim of strengthening, but not guaranteeing, the protection of customers and the financial system. The PRA’s continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of prudential returns, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management, conduct, culture and strategy. The regulation and supervision of market conduct matters is the responsibility of the FCA. The FCA’s regulation of the UK firms in the Group is carried out through a combination of continuous assessment, regular thematic work and project work based on the FCA’s sector assessments, which analyse the different areas of the market and the risks that may lie ahead. Both the PRA and the FCA have continued to develop and apply a more assertive approach to supervision and the application of existing standards. This may include application of standards that either anticipate or go beyond requirements established by global or EU standards, whether in relation to capital, leverage and liquidity, resolvability and resolution or matters of conduct. The FCA has retained an approach to enforcement based on credible deterrence that has seen significant growth in the size of regulatory fines. The approach appears to be trending towards a more US model of enforcement including vigorous enforcement of criminal and regulatory breaches, heightened fines and proposed measures related to increased corporate criminal liability. The FCA has focused strongly on conduct risk and on customer outcomes and will continue to do so. This has included a focus on the design and operation of products, the behaviour of customers and the operation of markets. This may affect both the incidence of conduct costs and increase the cost of remediation. The FCA and the PRA have also increasingly focused on individual accountability within firms. This focus is reflected in the Senior Managers and Certification Regime (the SMCR) which came into force in 2016. The SMCR, which implements the recommendations in the final report of the Parliamentary Commission on Banking Standards relating to individual accountability in banks, imposes a regulatory approval, accountability and fitness and propriety framework in respect of senior or key individuals within relevant firms. The UK Serious Fraud Office (SFO) has played an active role in recent years in investigating and prosecuting complex fraud, bribery and corruption. If, as a result of an investigation, the SFO determines that it has sufficient evidence to support a realistic prospect of conviction, and to prosecute would be in the public interest, the SFO may bring forward a prosecution. Alternatively, the SFO may consider using a Deferred Prosecution Agreement (DPA). DPAs, which were introduced in February 2014, are judicially supervised agreements between the SFO and organisations that could be prosecuted whereby the SFO suspends prosecution while the organisation in question complies with conditions imposed on it by the DPA, such as the payment of fines. home.barclays/annualreport Barclays PLC Annual Report 2017 197 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceIn addition to umbrella oversight by the FRB (and applicable Federal Reserve Banks), certain of Barclays’ branches and subsidiaries are regulated by additional authorities based on the location or activities of those entities. The New York and Florida branches of Barclays Bank PLC are subject to extensive supervision and regulation by, as applicable, the New York State Department of Financial Services (NYSDFS) and the Florida Office of Financial Regulation. Barclays Bank Delaware, a Delaware chartered commercial bank, is subject to supervision and regulation by the Delaware Office of the State Bank Commissioner. The deposits of Barclays Bank Delaware are insured by the Federal Deposit Insurance Corporation (FDIC) pursuant to the Federal Deposit Insurance Act, which also provides for FDIC supervisory authority over Barclays Bank Delaware and requires that Barclays PLC, Barclays Bank PLC and BUSL act as a source of strength for the insured bank. This could, among other things, require these entities to inject capital into Barclays Bank Delaware if it fails to meet applicable regulatory capital requirements. Barclays’ US securities broker/dealer and investment banking operations, primarily conducted through Barclays Capital Inc., are also subject to ongoing supervision and regulation by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and other government agencies and self-regulatory organisations (SROs) as part of a comprehensive scheme of regulation of all aspects of the securities and commodities business under US federal and state securities laws. Similarly, Barclays’ US commodity futures, commodity options and swaps-related and client clearing operations are subject to ongoing supervision and regulation by the Commodity Futures Trading Commission (CFTC), the National Futures Association and other SROs. Barclays Bank PLC is also prudentially regulated as a swaps dealer so is subject to the FRB swaps rules with respect to margin and capital requirements. Barclays’ US retail and consumer activities, including the US credit card operations of Barclays Bank Delaware, are subject to direct supervision and regulation by the Consumer Financial Protection Bureau (CFPB). The CFPB has the authority to examine and take enforcement action related to compliance with federal laws and regulations regarding the provision of consumer financial services and the prohibition of ‘unfair, deceptive or abusive acts and practices’. Supervision in the US Barclays’ US activities and operations are subject to umbrella supervision by the Board of Governors of the Federal Reserve System (FRB), as well as additional supervision, requirements and restrictions imposed by other federal and state regulators. Barclays PLC, Barclays Bank PLC and their US branches and subsidiaries are subject to a comprehensive regulatory framework involving numerous statutes, rules and regulations, including the International Banking Act of 1978, the Bank Holding Company Act of 1956 (BHC Act), the USA PATRIOT Act of 2001, the Commodity Exchange Act, the federal securities laws, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA), which comprehensively amended the regulation of financial institutions in the US in response to the financial crisis, including by amending the other aforementioned statutes. ln some cases, US requirements may impose restrictions on Barclays’ global activities in addition to its activities in the US. Barclays PLC and Barclays Bank PLC, along with Barclays US LLC (BUSL), Barclays’ top-tier US holding company that holds substantially all of Barclays’ US subsidiaries and assets (including Barclays Capital Inc. and Barclays Bank Delaware) are regulated as bank holding companies (BHCs) by the FRB. BUSL is subject to requirements that are similar to those applicable to large US domestic bank holding companies, including in respect of capital adequacy, capital planning and stress testing (including FRB non-objection to proposed capital distributions), risk management and governance, liquidity, leverage limits and financial regulatory reporting. Barclays Bank PLC’s US branches are also subject to enhanced prudential supervision requirements relating to, among others, liquidity and risk management. Because the BHC Act generally restricts the activities of BHCs to banking and activities closely related to banking, Barclays PLC, Barclays Bank PLC and BUSL have elected to be treated as financial holding companies under the BHC Act. Financial holding company status allows these entities to engage in a variety of financial and related activities, directly or through subsidiaries, including underwriting, dealing and market making in securities. Failure to maintain financial holding company status could result in increasingly stringent penalties and ultimately, in the closure or cessation of certain operations in the US. To qualify as a financial holding company, Barclays PLC and Barclays Bank PLC, as foreign banking organisations and BHCs, and BUSL, as a BHC, must maintain certain regulatory capital ratios above minimum requirements and must be deemed to be ‘well managed’ for US bank regulatory purposes. In addition, any US depository institution subsidiaries of the foreign banking organisation or BHC must also maintain certain regulatory capital ratios above minimum requirements and be deemed to be ‘well managed’ and must have at least a ‘satisfactory’ rating under the Community Reinvestment Act of 1977. Supervision in Asia Pacific Barclays’ operations in Asia Pacific are supervised and regulated by a broad range of national regulators including: the Japan Financial Services Agency, the Bank of Japan, the Hong Kong Monetary Authority, the Hong Kong Securities and Futures Commission, the Monetary Authority of Singapore, the Reserve Bank of India, the Securities and Exchange Board of India and the People’s Bank of China, China’s State Administration of Foreign Exchange and the China Banking Regulatory Commission. Such supervision and regulation extends to activities conducted through branches of Barclays Bank PLC in the Asia Pacific region as well as subsidiaries of the Group. Global regulatory developments Regulatory change continues to affect all large financial institutions. Such change emanates from global institutions such as the G20, FSB, IOSCO and BCBS, the EU regionally, and national regulators, especially in the UK and US. The level of regulatory and supervisory uncertainty faced by the Group and the financial markets more broadly continues to remain elevated in our primary markets. In the EU, the legislative and regulatory bodies have been implementing, and continue to propose, multiple financial regulatory reforms, and the conditions of the UK’s eventual exit from the EU remain unclear. As a result, the extent to which the UK will continue to follow EU legislation after Brexit remains unclear. In the US, the financial regulatory environment continues to evolve due to political developments and the ongoing implementation of regulations arising from the DFA. Furthermore, the application of various regional rules on a cross-border basis increases regulatory complexity for global financial institutions. For more information, please see the Risk Factor entitled ‘Regulatory Change agenda and impact on Business Model’ on page 122. The programme of reform of the global regulatory framework previously agreed by G20 Heads of Government in April 2009 has continued to be taken forward throughout 2017. The G20 continues to monitor emerging risks and vulnerabilities in the financial system and has stated that it will take action to address them if necessary. The FSB has been designated by the G20 as the body responsible for co-ordinating the delivery of the global reform programme in relation to the financial services industry. It has focused particularly on the risks posed by systemically important financial institutions. In 2011, G20 Heads of Government adopted FSB proposals to reform the regulation of global systemically important financial institutions (G-SIFls), including global systemically important banks (G-SIBs), such as Barclays. In December 2017, the BCBS finalised ‘Basel III’ (the BCBS international regulatory framework for banks), with the majority of the December 2017 changes expected to be implemented by 1 January 2022, including by regulators in many jurisdictions where Barclays operates. 198 Barclays PLC Annual Report 2017 home.barclays/annualreport Supervision and regulationRisk reviewFinancial regulatory framework Financial services regulation can broadly be categorised as follows: (a) prudential regulation, which aims to promote safety and soundness of financial institutions and reduce risk in the financial system; (b) recovery and resolution, a key aspect of which is to ensure that G-SIFls are capable of being resolved without recourse to taxpayer support and minimising market disruption; (c) structural reform and the Volcker rule; (d) market infrastructure regulation, aimed at enhancing client protection, financial stability and market integrity; and (e) conduct, culture and other regulation. (a) Prudential regulation Certain Basel III standards were implemented in EU law through the Capital Requirements Directive IV (CRD IV), which came into effect in 2014 and included new or enhanced requirements for the quality and quantity of capital, liquidity and leverage. Beyond the minimum standards required by CRD IV, the PRA has expected Barclays, in common with other major UK banks and building societies, to meet a 7% Common Equity Tier 1 (CET1) ratio at the level of the consolidated group since 1 January 2016. G-SIBs are subject to a number of additional prudential requirements, including the requirement to hold additional loss absorbing capacity and additional capital buffers above the level required by Basel III standards. The level of G-SIB buffer is set by the FSB according to a bank’s systemic importance and can range from 1% to 3.5% of risk weighted assets. The G-SIB buffer must be met with common equity. In November 2017, the FSB published an update to its list of G-SIBs, maintaining the 1.5% G-SIB buffer that applies to Barclays. The additional G-SIB buffer has been phased in from January 2016, from when G-SIBs were required to meet 25% of their designated buffer. This increased to 50% in 2017, 75% in 2018 and will increase to 100% in January 2019. Barclays is also subject to, among other buffers, a countercyclical capital buffer (CCyB) based on rates determined by the regulatory authorities in each jurisdiction in which Barclays maintains exposures. These rates may vary in either direction. On 27 June 2017, the FPC raised the UK CCyB rate from 0% to 0.5% with binding effect from 27 June 2018. In November 2017, the FPC raised the UK CCyB rate from 0.5% to 1% with binding effect from 28 November 2018. In May 2016, the FPC set out a framework for determining a systemic risk buffer (SRB) for ring-fenced bodies and large building societies (SRB firms). The SRB is a firm-specific buffer, that is designed to increase the capacity of SRB firms to absorb stress, and which must be met solely with CET1. The framework set out by the PRA, which sets SRB at rates between 0% and 3% of risk weighted assets, will apply from 1 January 2019. In January 2016, the BCBS endorsed a new market risk framework, including rules made as a result of its ‘fundamental review of the trading book’ (FRTB). The implementation of this framework has now been delayed, with the BCBS setting an expected implementation date of 1 January 2022 to allow for a review of the calibration of the framework. The BCBS’s finalisation of Basel III, noted above, among other things, eliminated model-based approaches for certain categories of risk weighted assets (RWAs), (for example, operational risk RWAs, CVA volatility and credit risk RWAs for equity exposures), revised the standardised approach’s risk weights for a variety of exposure categories, replaced the four current approaches for operational risk (including the advanced measurement approach) with a single standardised measurement approach, established 72.5% of standardised approach RWAs for exposure categories as a floor for RWAs calculated under advanced approaches (referred to as the ‘output floor’), and for G-SIBs introduced a leverage ratio buffer in an amount equal to 50% of the applicable G-SIB buffer used for RWA purposes (meaning, for Barclays, a leverage ratio buffer of 0.75%). The majority of the final Basel III changes are expected to be implemented commencing 1 January 2022, with a five-year phase-in period for the output floor. The BCBS has also published final standards on the securitisation framework and interest rate risk in the banking book and guidelines on step-in risk. The final standards for measuring and controlling large exposures were published by the BCBS in April 2014 to take effect in 2019. In November 2016, the European Commission adopted a proposal (commonly referred to as CRD V) to begin the legislative process for introducing these standards within the EU. These proposals, if implemented in their current form, would, among other things, implement FRTB by overhauling existing rules relating to standardised and advanced market risk and the rules governing the inclusion of positions in the regulatory trading book. The proposals would also enhance rules for counterparty credit risk, in line with BCBS proposals finalised in 2014, strengthen requirements relating to leverage and large exposures and introduce a net stable funding ratio (NSFR), requiring banks to fund their assets with stable sources of funds. CRD V also proposes to require that where (i) two or more credit institutions or investment firms established in the EU have a common parent undertaking established outside the EU and (ii) the group has been identified as a G-SIB or has entities in the EU (whether subsidiaries or branches) with total assets of at least €30 billion, the group must establish an intermediate parent undertaking, authorised and established in, and subject to the supervision of, an EU member state. IFRS 9 (an accounting standard that covers accounting for financial instruments), which was adopted into EU law by the European Commission in November 2016, came into force on 1 January 2018. In October 2016, the BCBS issued two documents on the treatment of accounting provisions in the regulatory framework, to take account of the future move to expected credit loss provisioning under IFRS and Financial Accounting Standards Board (FASB) standards. One paper considered transitional arrangements to phase in the immediate capital impact of the new provisioning standards, while the other discussed more fundamental changes to the recognition of provisions in regulatory capital and changes to the risk weighting framework. The BCBS then published an interim approach (including transitional arrangements) on 29 March 2017, retaining the current regulatory treatment of provisions under the Basel framework for an interim period and proposing to consider more thoroughly the longer term regulatory treatment of provisions. On 28 December 2017, an EU Regulation came into force to provide transitional arrangements for mitigating the impact of the introduction of IFRS 9, largely in relation to CET1 capital arising from the expected credit loss accounting measures set out in IFRS 9. The Regulation has applied since 1 January 2018. In the US, BUSL and Barclays Bank PLC’s US branches are subject to enhanced prudential supervision requirements as required by the DFA and described above in ‘Supervision in the US’. In addition to prudential regulations already promulgated under the DFA, the FRB has issued proposed regulations for NSFR implementation. The NSFR, as proposed by the FRB, would apply to US bank holding companies with more than $250bn in total assets or $10bn or more in on-balance sheet foreign exposures, including BUSL, and consolidated depositary institution subsidiaries of such banking organisations with more than $10bn in assets, including Barclays Bank Delaware. Under the proposed rule, such entities would be required to maintain a minimum level of available stable funding that equals or exceeds the amount of required stable funding over a one-year period. Although the proposal provides for an effective date of 1 January 2018, the FRB has not finalised its NSFR proposal and the schedule for finalisation is uncertain. home.barclays/annualreport Barclays PLC Annual Report 2017 199 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceStress testing The Group and certain of its members are subject to supervisory stress testing exercises in a number of jurisdictions. These exercises currently include the annual stress testing programmes of the BoE, the FDIC and the FRB and the biannual stress testing programme of the EBA. These exercises are designed to assess the resilience of banks to adverse economic or financial developments and ensure that they have robust, forward-looking capital planning processes that account for the risks associated with their business profile. Assessment by regulators is on both a quantitative and qualitative basis, the latter focusing on the Group’s data provision, stress testing capability and internal management processes and controls. Failure to meet requirements of regulatory stress tests, or the failure by regulators to approve the stress test results and capital plans of the Group or its members subject to these exercises, could result in the Group or certain of its members being required to enhance its capital position or limit capital distributions, to any external holders of its equity or capital or within the Group. In the US, certain financial institution intermediate holding companies formed in 2016, including BUSL, were not required to participate in the FRB’s Comprehensive Capital Analysis and Review (CCAR) process in 2017. These firms, however, were required under the FRB’s capital plan rule to submit a capital plan to the FRB that was subject to a confidential review process based on the assessment criteria in the capital plan rule. These capital plans were not subject to the FRB’s quantitative assessment, which evaluates a firm’s ability to meet its capital requirements under stress, under CCAR or supervisory stress testing in 2017. (b) Recovery and Resolution Stabilisation and resolution framework An important component of the EU legislative framework is the 2014 Bank Recovery and Resolution Directive (BRRD) which establishes a framework for the recovery and resolution of EU credit institutions and investment firms. The UK implemented the BRRD through the Bank Recovery and Resolution Order 2014, which amended the Banking Act 2009 (the Banking Act) and the Financial Services and Markets Act 2000 (FSMA), and the Banks and Building Societies (Depositor Preference and Priorities) Order 2014, which amended the Insolvency Act 1986 (among other insolvency legislation). Under the Banking Act, UK resolution authorities are empowered to intervene in and resolve a UK financial institution that is no longer viable. Pursuant to these laws, the BoE (in consultation with the PRA and HM Treasury as appropriate) has several stabilisation options where a banking institution is failing or likely to fail: (i) transfer some or all of the securities or business of the bank to a commercial purchaser; (ii) transfer some or all of the property, rights and liabilities of the bank to a ‘bridge bank’ wholly owned by the BoE or to a commercial purchaser; (iii) transfer the impaired or problem assets to an asset management vehicle to allow them to be managed over time; (iv) cancel or reduce certain liabilities of the institution or convert liabilities to equity to absorb losses and recapitalise the institution and (v) transfer the banking institution into temporary public ownership. In addition, the BoE may apply for a court insolvency order in order to wind up or liquidate the institution or to put the institution into special administration. When exercising any of its stabilisation powers, the BoE must generally provide that shareholders bear first losses, followed by creditors in accordance with the priority of their claims under normal insolvency proceedings. In order to enable the exercise of its stabilisation powers, the BoE may impose a temporary stay on the rights of creditors to terminate, accelerate or close out contracts, and in some cases to override events of default or termination rights that might otherwise be invoked as a result of a resolution action. In addition, the Banking Act gives the BoE the power to override, vary, or impose conditions or contractual obligations between a UK bank, its holding company and its group undertakings, in order to enable any transferee or successor bank to operate effectively after any of the resolution tools have been applied. There is also power for HM Treasury to amend the law (excluding provisions made by or under the Banking Act) for the purpose of enabling it to use its powers under this regime effectively, potentially with retrospective effect. The Banking Act powers apply regardless of any contractual restrictions and compensation that may be payable. In July 2016, the PRA issued final rules on ensuring operational continuity in resolution. The rules will apply from 1 January 2019 and will require banks to ensure that their operational structures facilitate effective recovery and resolution planning and the continued provision of functions critical to the economy in a resolution scenario. In November 2016, the European Commission proposed a package of amendments to the BRRD, including the introduction of two new moratorium tools. On 28 December 2017, an EU directive came into force harmonising the priority ranking of unsecured debt instruments under national insolvency laws. EU member states are required to transpose the directive into national law by 29 December 2018. The BoE’s preferred approach for the resolution of the Group is a bail-in strategy with a single point of entry at Barclays PLC. Under such a strategy, Barclays PLC’s subsidiaries would remain operational while Barclays PLC’s eligible liabilities would be written down or converted to equity in order to recapitalise the Group and allow for the continued provision of services and operations throughout the resolution. While regulators in many jurisdictions have indicated a preference for single point of entry resolution, additional resolution or bankruptcy provisions may apply to certain of Barclays Bank PLC’s subsidiaries or branches. In the US, Title II of the DFA established the Orderly Liquidation Authority, a regime for orderly liquidation of systemically important financial institutions, which could apply to BUSL. Specifically, when a systemically important financial institution is in default or in danger of default, the FDIC may be appointed as receiver under the Orderly Liquidation Authority instead of the institution being resolved through a voluntary or involuntary proceeding under the US Bankruptcy Code. In certain circumstances, including insolvency, violations of law and unsafe business practices, the licensing authorities of each US branch of Barclays Bank PLC and of Barclays Bank Delaware have the authority to take possession of the business and property of the applicable Barclays entity they license or to revoke or suspend such licence. Specific resolution regimes may apply to certain Barclays entities or branches in other jurisdictions in which Barclays does business. TLAC and MREL The BRRD requires competent authorities to impose a Minimum Requirement for own funds and Eligible Liabilities (MREL) on financial institutions to facilitate their orderly resolution without broader financial disruption or recourse to public funds. Following the finalisation of the BRRD, in November 2015, the FSB finalised its proposals to enhance the loss absorbing capacity of G-SIBs to ensure that there is sufficient loss absorbing and recapitalisation capacity available in resolution to implement an orderly resolution which minimises the impact on financial stability, ensures the continuity of critical functions and avoids exposing taxpayers to losses. To this end, the FSB has set a new minimum requirement for ‘total loss absorbing capacity’ (TLAC). As the TLAC standard requires a certain amount of those loss absorbing resources to be committed to subsidiaries or sub-groups that are located in host jurisdictions and deemed material for the resolution of the G-SIB as a whole, the FSB published guiding principles on internal TLAC on 6 July 2017. These provide guidance on the size and composition of the internal TLAC requirement, cooperation and co-ordination between home and host authorities and the trigger mechanism for internal TLAC. 200 Barclays PLC Annual Report 2017 home.barclays/annualreport Supervision and regulationRisk reviewThe EU has proposed to implement the TLAC standard (including internal TLAC) via the MREL requirement and the European Commission has proposed amendments in its CRD V proposal to achieve this. As the proposals remain in draft, it is uncertain what the final requirements and timing will be. Under the BoE’s statement of policy on MREL, the BoE will set MREL for UK G-SIBs as necessary to implement the TLAC standard and institution or group-specific MREL requirements will depend on the preferred resolution strategy for that institution or group. The MREL requirements will be phased in from 1 January 2019 and will be fully implemented by 1 January 2022, at which time G-SIBs with resolution entities incorporated in the UK, including Barclays, will be required to meet an MREL equivalent to the higher of (i) two times the sum of its Pillar 1 and Pillar 2A requirements or (ii) the higher of two times its leverage ratio or 6.75% of leverage exposures. However, the PRA will review the MREL calibration by the end of 2020, including assessing the proposal for Pillar 2A recapitalisation which may drive a different 1 January 2022 MREL requirement than currently proposed. In addition, it is proposed that CET1 capital cannot be counted towards both MREL and the combined buffer requirement (CBR), meaning that the CBR will effectively be applied above both the Pillar 1 and Pillar 2A requirements relating to own funds and MREL. In October 2016, the BCBS published its final standard on the prudential treatment of banks’ investments in TLAC instruments issued by other institutions, confirming that internationally active banks (both G-SIBs and non-G-SIBs) must deduct their holdings of TLAC instruments that do not otherwise qualify as regulatory capital from their own Tier 2 capital. Where the investing bank owns less than 10% of the issuing bank’s common shares, TLAC holdings are to be deducted from Tier 2 capital only to the extent that they exceed 10% of the investing bank’s common equity (or 5% for non-regulatory capital TLAC holdings); below this threshold, holdings would instead be subjected to risk-weighting. G-SIBs may only apply risk-weighting to non-regulatory capital TLAC holdings by the 5% threshold where those holdings are in the trading book and are sold within 30 business days. In December 2016, the FRB issued final regulations for TLAC, which apply to BUSL. The FRB’s final TLAC rule, while generally following the FSB term sheet, contains a number of provisions that are more restrictive. For example, the FRB’s TLAC rule includes provisions that require BUSL (the Barclays IHC) to have (i) a specified outstanding amount of eligible long-term debt, (ii) a specified outstanding amount of TLAC (consisting of common and preferred equity regulatory capital plus eligible long-term debt), and (iii) a specified common equity buffer. In addition, the FRB’s TLAC rule would prohibit BUSL, for so long as the Group’s overall resolution plan treats BUSL as a non-resolution entity, from issuing TLAC to entities other than the Group and its non-US subsidiaries. Bank Levy The BRRD requires EU member states to establish a pre-funded resolution financing arrangement with funding equal to 1% of covered deposits by 31 December 2024 to cover the costs of bank resolutions. Where the amount of such pre-funding is insufficient, the BRRD requires that EU member states raise subsequent contributions. The UK government raises both pre-funded and subsequent contributions that would be required were the pre-funded contributions not to cover costs or other expenses incurred by use of the resolution funds by way of a tax on the balance sheets of banks known as the ‘Bank Levy’. Recovery and Resolution Planning The PRA has made rules that require authorised firms to draw up recovery plans and resolution packs, as required by the BRRD. Recovery plans are designed to outline credible actions that authorised firms could implement in the event of severe stress in order to restore their business to a stable and sustainable condition. The resolution pack contains detailed information on the authorised firm in question which will be used to develop resolution strategies for that firm, assess its current level of resolvability against the strategy, and to inform work on identifying barriers to the implementation of operational resolution plans. In the UK, recovery and resolution planning (RRP) work is considered part of continuing supervision. Removal of potential impediments to an orderly resolution of the Group or one or more of its subsidiaries is considered as part of the BoE’s and PRA’s supervisory strategy for each firm, and the PRA can require firms to make significant changes in order to enhance resolvability. Barclays currently provides the PRA with a recovery plan annually and with a resolution pack every other year. In the US, Title I of the DFA and the implementing regulations issued by the FRB and the FDIC require each bank holding company with assets of $50 billion or more, including Barclays, to prepare and submit annually a plan for the orderly resolution of subsidiaries and operations in the event of future material financial distress or failure. Barclays’ next submission will be due on 1 July 2018. Similar requirements (which include powers for competent authorities to adopt resolution measures) are in force or expected to come into force imminently in various other jurisdictions which will affect the Group to the extent it has operations in a relevant jurisdiction. (c) Structural reform and the Volcker rule Recent developments in banking law and regulation in the UK have included legislation designed to ring-fence the retail and smaller deposit-taking businesses of large banks. The Financial Services (Banking Reform) Act 2013 put in place a framework for this ring-fencing and secondary legislation passed in 2014 elaborated on the operation and application of the ring-fence. Ring-fencing will require, among other things, the separation of the retail and smaller deposit-taking business activities of UK banks in the UK and branches of UK banks in the European Economic Area (EEA) into a legally distinct, operationally separate and economically independent entity, which will not be permitted to undertake a range of activities from 1 January 2019. Ring-fencing rules have been published by the PRA, further determining how ring-fenced banks will be permitted to operate. Further rules published by the FCA set out the disclosures that non-ring-fenced banks are required to make to prospective account holders of non-ring-fenced banks who are individuals. Barclays’ approach to compliance with the terms of the UK ring-fencing regime is described in the section titled ‘Structural reform’ on page 204. US regulation places further substantive limits on the activities that may be conducted by banks and holding companies, including foreign banking organisations such as Barclays. The ‘Volcker Rule’, which was part of the DFA and which came into effect in the US in 2015, prohibits banking entities from undertaking certain proprietary trading activities and limits such entities’ ability to sponsor or invest in certain private equity funds and hedge funds (in each case broadly defined). As required by the rule, Barclays has developed and implemented an extensive compliance and monitoring programme addressing proprietary trading and covered fund activities (both inside and outside of the US). home.barclays/annualreport Barclays PLC Annual Report 2017 201 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernance(d) Market infrastructure regulation In recent years, regulators have focused on improving transparency and reducing risk in markets, particularly risks related to over-the-counter (OTC) transactions. This focus has resulted in a variety of new regulations across the G20 countries and beyond that require or encourage on-venue trading, clearing, posting of margin and disclosure of information related to many derivatives transactions. Some of the most significant developments are described below. The European Market Infrastructure Regulation (EMIR) has introduced requirements designed to improve transparency and reduce the risks associated with the derivatives market, some of which are still to be fully implemented. EMIR requires that certain entities that enter into derivative contracts: report such transactions; clear certain over the counter (OTC) transactions where mandated to do so; and implement risk mitigation standards in respect of uncleared OTC trades. The obligation to clear derivatives only applies to certain counterparties and specified types of derivatives. In October 2016, the European Commission adopted a delegated regulation relating to the exchange of collateral, one of the risk mitigation techniques under EMIR. Provisions relating to initial margin have entered into force, subject to a phase-in until 1 September 2020. Provisions relating to variation margin have already entered into force. EMIR has potential operational and financial impacts on the Group, including by imposing collateral requirements. The European Commission has recently proposed various technical changes to EMIR, some of which could result in certain central counterparties (CCPs) used by the Group being forced to relocate to a Eurozone jurisdiction. The changes proposed may have additional operational and financial impacts on the Group’s derivatives business. CRD IV aims to complement EMIR by applying higher capital requirements for bilateral, uncleared OTC derivative trades. Lower capital requirements for cleared derivative trades are only available if the CCP through which the trade is cleared is recognised as a ‘qualifying central counterparty’ (QCCP) which has been authorised or recognised under EMIR. Higher capital requirements may apply to the Group following the UK’s departure from the EU, if UK CCPs are then no longer regarded as QCCPs and vice versa. The new Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation (collectively referred to as MiFID II) have largely been applicable since 3 January 2018. MiFID II affects many of the investment markets in which the Group operates, the instruments in which it trades and the way it transacts with market counterparties and other customers. Changes introduced by MiFID II include: the introduction of a new type of trading venue (the organised trading facility), capturing non-equity trading that falls outside the MiFID I regime; the strengthening of conduct of business requirements, including in relation to conflicts of interest; the expansion of the concept of, and requirements applicable to, firms which systematically trade against proprietary capital (systematic internalisers); and increased obligations on firms to secure best execution for their clients. Additionally, MiFID II mandates a trading obligation for certain types of cleared derivatives. MiFID II strengthens investor protections, imposes new curbs on high frequency and commodity trading, increases pre- and post-trade transparency and introduces a new regime for third country (non-EU) firms. MiFID II also includes new requirements relating to non-discriminatory access to trading venues, central counterparties and benchmarks, research unbundling and harmonised supervisory powers and sanctions across the EU. Some final rules and guidance on the application of MiFID II are yet to be published, therefore, we anticipate continuing development of application of the rules within the market into 2018. US regulators have imposed similar rules as the EU with respect to the mandatory on-venue trading and clearing of certain derivatives, and post-trade transparency, as well as in relation to the margining of OTC derivatives. US regulators have addressed the applicability of certain of their regulations to cross-border transactions, and are continuing to review and consider their rules with respect to their application on a cross-border basis, including with respect to their registration requirements in relation to non-US swap dealers and security-based swap dealers. The regulators may adopt further rules, or provide further guidance, regarding the cross-border applicability of such rules. In December 2017, the CFTC and the European Commission recognised the trading venues of each other’s jurisdiction to allow market participants to comply with mandatory on-venue trading requirements while trading on certain venues recognised by the other jurisdiction. The EU Benchmarks Regulation came into force in June 2016. Although some provisions have applied since 2016, the majority of provisions have applied since 3 January 2018 (subject to transitional provisions). This regulation applies to the administration, contribution of data to and use of benchmarks within the EU. Financial institutions within the EU will be prohibited from using benchmarks unless their administrators are authorised, registered or otherwise recognised in the EU. This may impact the ability of Barclays to use certain benchmarks in the future. In 2015, the European Commission launched work on establishing a Capital Markets Union (CMU) within the EU. The CMU aims to increase the availability of non-bank financing in the EU, deepen the EU single market for financial services and promote growth and financial stability. The CMU work programme is now being considered in light of Brexit. Recent proposals have therefore included considerably broadened central supervisory powers for the European Supervisory Authorities (ESAs) (including in relation to outsourcing, and delegation and risk transfer by entities authorised in the EU to entities or branches in third countries) and an increased focus by the ESAs on ongoing equivalence assessments in the context of third country regimes in various EU regulations and directives. Certain participants in US swap markets are required to register with the CFTC as ‘swap dealers’ or ‘major swap participants’ and/or, following the compliance date for relevant SEC rules, with the SEC as ‘security-based swap dealers’ or ‘major security-based swap participants’. Such registrants are subject to CFTC, and would be subject to SEC regulation and oversight. The SEC finalised the rules governing security based swap dealer registration in 2015 but clarified that registration timing is contingent upon the finalisation of certain additional rules under Title VII of DFA, several of which are still pending. Additional SEC rules governing security-based swap transactions, including security-based swap reporting, will become effective after the security-based swap dealer registration date. Entities required to register are subject to business conduct, record- keeping and reporting requirements and will be subject to capital and margin requirements in connection with transactions with certain US and non-US counterparties. Barclays Bank PLC has provisionally registered with the CFTC as a swap dealer and is subject to CFTC rules on business conduct, record-keeping and reporting. With respect to margin and capital, Barclays is subject to the rules of the FRB in connection with its swap dealer business. 202 Barclays PLC Annual Report 2017 home.barclays/annualreport Supervision and regulationRisk reviewThe CFTC has approved certain comparability determinations that permit substituted compliance with non-US regulatory regimes for certain swap regulations related to business conduct and other requirements, while other determinations remain pending. Most recently, in October 2017, the CFTC issued an order permitting substituted compliance with EU margin rules for certain uncleared derivatives. However, as Barclays is subject to the margin rules of the FRB, it will not benefit from the CFTC’s action unless the FRB takes a similar approach. The CFTC has stated that its transaction-level rules (such as margin and documentation requirements) would apply to certain transactions entered into between a non-US swap dealer and a non-US counterparty, if the transactions are arranged, negotiated or executed by personnel in the US, but has delayed the compliance date for this requirement until the effective date of future CFTC action addressing the way in which each transaction-level requirement must be applied. It is unclear whether further changes will be made to the CFTC’s proposed rules or when they will become effective. In addition, it is uncertain whether and to what degree other US regulators, such as the FRB, will take an approach similar to the CFTC’s regarding substituted compliance. (e) Conduct, culture and other regulation Conduct and culture On 7 March 2016, the PRA and FCA introduced measures to increase the individual accountability of senior managers and other covered individuals in the banking sector. The new regime comprises the ‘Senior Managers Regime’, which applies to a limited number of individuals with senior management responsibilities within a firm, the ‘Certification Regime’, which is intended to assess and monitor the fitness and propriety of a wider range of employees who could pose a risk of significant harm to the firm or its customers, and conduct rules that individuals subject to either regime must comply with. From March 2017, the conduct rules have applied more widely to other staff of firms within the scope of the regime. The Financial Services Act 2010, among other things, requires the UK regulators to make rules about remuneration and to require regulated firms to have a remuneration policy that is consistent with effective risk management. The Banking Act also amended FSMA to allow the FCA to make rules requiring firms to operate a collective consumer redress scheme to deal with cases of widespread failure by regulated firms to meet regulatory requirements that may have created consumer detriment. Our regulators have also enhanced their focus on the promotion of cultural values as a key area for banks, although they generally view the responsibility for reforming culture as primarily sitting with the industry. Data protection and PSD2 Barclays has to comply with national data protection laws, governing the collection, use and disclosure of personal data, in a majority of the countries in which it operates. From 25 May 2018, data protection laws throughout the EU will be replaced by a single General Data Protection Regulation (GDPR) which enhances the rights and protections available to data subjects. The UK government has confirmed the UK will adopt and apply the GDPR from May 2018 and a bill has been published to implement GDPR. The impact across Barclays will be significant, affecting not only Group entities operating and processing personal data within the EU but also those outside the EU offering goods or services to, or monitoring, individuals within the EU. The GDPR contains significant financial penalties for data protection breaches and non-compliance, of up to 4% of Group global turnover. A number of recent developments have indicated a clear political and regulatory desire to make customer transactional account information more easily accessible to customers and parties providing services to them, such as the revised Payment Services Directive (PSD2) (which, in accordance with the requirements under that Directive, must have been implemented by 13 January 2018). In addition to attempting to harmonise conduct rules for all providers of electronic payment services in the EU, PSD2 also creates a new prudential authorisation regime for non-bank payment services providers. PSD2 replaces the previous Payment Services Directive, and has a wider scope, applying transparency and information requirements to payment transactions in all currencies where the provider of at least one leg of the payment service is located in the EU. Cyber security Regulators in the EU and US have been increasingly focused on cyber security risk management for banking organisations and have proposed laws and regulations and other requirements that necessitate implementation of a variety of increased controls for regulated Barclays entities. These include, among others, the adoption of cyber security policies and procedures meeting specified criteria, minimum required security measures, enhanced reporting, compliance certification requirements and other cyber and information risk governance measures. When implemented, the proposals may increase technology and compliance costs for Barclays. Sanctions and financial crime The UK Bribery Act 2010 introduced a new form of corporate criminal liability focused broadly on a company’s failure to prevent bribery on its behalf. The legislation has broad application and in certain circumstances may have extra-territorial impact on entities, persons or activities located outside the UK, including Barclays PLC and its subsidiaries. In practice, the legislation requires Barclays to have adequate procedures to prevent bribery which, due to the extra-territorial nature of the status, makes this both complex and costly. On 30 September 2017, the Criminal Finances Act 2017 introduced new corporate criminal offences of failing to prevent the facilitation of UK and overseas tax evasion. The legislation has very broad extra-territorial application and may impact entities, persons or activities located outside the UK, including Barclays PLC and its subsidiaries. It also requires Barclays to have reasonable prevention procedures in place to prevent the criminal facilitation of tax evasion by persons acting for, or on behalf of, Barclays. In the US, the Bank Secrecy Act, the USA PATRIOT Act 2001 and regulations thereunder contain numerous anti-money laundering and anti-terrorist financing requirements for financial institutions. In addition, Barclays is subject to the US Foreign Corrupt Practices Act, which prohibits certain payments to foreign officials, as well as rules and regulations relating to economic sanctions and embargo programs administered by the US Office of Foreign Assets Control which restrict certain business activities with certain individuals, entities, groups, countries and territories. Two significant new regulatory rules will be coming into force in the US in 2018: the New York Department of Financial Services (DFS) Rule 504 and the US Department of Treasury’s Financial Crime Enforcement Network (FinCEN) Customer Due Diligence (CDD) Rule. Rule 504 enumerates detailed transaction filtering and screening requirements for potential Bank Secrecy Act and anti-money laundering violations and transactions with sanctioned entities, applicable to institutions regulated by the DFS (including Barclays Bank PLC, New York branch) and requires a senior bank official to certify compliance. The CDD Rule requires Barclays to identify natural beneficial owners above a certain threshold of clients that are legal entities within the US market. In some cases, US state and federal regulations addressing sanctions, money laundering and other financial crimes may impact entities, persons or activities located outside the US, including Barclays PLC and its subsidiaries. The enforcement of these regulations has been a major focus of US state and federal government policy relating to financial institutions in recent years, and failure of a financial institution to ensure compliance could have serious legal, financial and reputational consequences for the institution. home.barclays/annualreport Barclays PLC Annual Report 2017 203 Financial reviewFinancial statementsShareholder informationStrategic reportRisk reviewGovernanceBarclays PLCa Future State Legal Entity Barclays Bank UK PLC Barclays Services Limited Barclays Bank PLC Divisional Constructs and ServCo Barclays UK UK consumers and business bank differentiated by scale and digital innovation ServCo Provides critical services to Barclays UK and Barclays International to deliver operational continuity Enabling world-class services for our customers and clients while driving efficiency Barclays International Diversified wholesale and consumer bank Note a Illustration of Barclays business divisions in preparation for regulatory ring-fencing. Plans are subject to internal and regulatory approvals and may change. Structural reform Overview Barclays intends to achieve ring-fencing separation by transferring the Barclays UK division of Barclays Bank PLC to Barclays Bank UK PLC, the ring-fenced bank of the Group. Immediately following the transfer, Barclays Bank PLC’s shares in Barclays Bank UK PLC will be distributed to the Parent company, Barclays PLC, establishing Barclays Bank UK PLC as a direct subsidiary of Barclays PLC. Barclays Bank PLC will continue to house the Barclays International division. The two banking entities will operate alongside one another, together with Barclays Services Limited (ServCo), as subsidiaries of Barclays PLC within the Barclays Group. In order to achieve this target-state structure, Barclays will need to undertake a number of legal transfers, including the transfer of customer and non-customer assets, liabilities and contractual arrangements. Barclays is using a court approved statutory ring-fencing transfer scheme (RFTS) process as set out in the Financial Services and Markets Act 2000 to conduct the majority of these transfers. In addition to the transfers conducted through the RFTS, certain items will be transferred via separate arrangements. Barclays is on track to be compliant with ring-fencing requirements well in advance of the 1 January 2019 statutory deadline. Timeline Barclays’ structural reform timeline, including progress to date and indicative future milestones is as follows: ■■ 2015: – Barclays Bank UK PLC, the legal entity which will become the ring-fenced bank, was incorporated. ■■ 2016: – Barclays UK and Barclays International business divisions were established – Barclays’ US intermediate holding company was established as an umbrella holding company for Barclays’ US subsidiaries, including Barclays Capital Inc. (US broker-dealer) that operates key investment banking businesses and Barclays Bank Delaware that operates Barclaycard US – Barclays Bank UK PLC banking authorisation application was submitted to the regulators – ServCo became a direct subsidiary of Barclays PLC. ■■ 2017: – Banking licence (with restrictions) granted to Barclays Bank UK PLC in April 2017 – The majority of assets, liabilities, and other items connected with service provision were transferred from Barclays Bank PLC to ServCo, resulting in the execution of the ServCo build being substantially complete – Transfers of employees to the target structure employing entities took place in September 2017 under the Transfer of Undertakings (Protection of Employment) Regulations 2006 – Sort codes have been split between Barclays Bank UK PLC and Barclays Bank PLC, with the last tranche completed in January 2018, so that each of the Group’s sort codes is aligned to a single bank – RFTS court process has been initiated with the Directions Hearing held at the High Court of England and Wales on 10 November 2017, where the Barclays Group’s communications programme for notifying customers and other stakeholders of the RFTS was approved. ■■ 2018: – Sanction Hearing will be held on 26 and 27 February 2018 at which the Court will be requested to sanction Barclays’ RFTS – Subject to the Court sanctioning the RFTS, Barclays UK businesses and related items will be transferred to Barclays Bank UK PLC at the RFTS effective date, currently expected to be 1 April 2018. Immediately following the RFTS transfers, the shares in Barclays Bank UK PLC will be transferred from Barclays Bank PLC to Barclays PLC, establishing Barclays Bank UK PLC as a direct subsidiary of Barclays PLC. Illustrative unaudited pro forma financials for Barclays Bank UK PLC and Barclays Bank PLC are available at home.barclays/results. 204 Barclays PLC Annual Report 2017 home.barclays/annualreport Supervision and regulationRisk reviewFinancial review A review of the performance of Barclays, including the key performance indicators, and the contribution of each of our businesses to the overall performance of the Group. Financial review ■■ Key performance indicators ■■ Consolidated summary income statement ■■ Income statement commentary ■■ Consolidated summary balance sheet ■■ Balance sheet commentary ■■ Analysis of results by business ■■ Non-IFRS performance measures Page 206 208 209 210 211 212 223 home.barclays/annualreport Barclays PLC Annual Report 2017 205 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernanceKey performance indicators In assessing the financial performance of the Group, management uses a range of KPIs which focus on the Group’s financial strength, the delivery of sustainable returns and cost management. Significant strategic progress was made in 2017 with the closure of Barclays Non-Core and sell down of our stake in Barclays Africa, marking the completion of our restructuring and enabling us to set new targets for Group returns and costs. The Non-Core segment was closed on 1 July 2017 with RWAs of £23bn, below guidance of approximately £25bn as set out in the 2016 KPIs. With the closure of Non-Core we no longer have a Core and Non-Core distinction within the Group and hence the previous target of Group RoTE to converge with Core RoTE has been updated. The Group is now targeting RoTE, excluding litigation and conduct, of greater than 9% in 2019 and greater than 10% in 2020, based on a Group CET1 ratio of c.13%. Guidance for Group operating expenses, excluding litigation and conduct, is £13.6-13.9bn in 2019 and to have a cost: income ratio of below 60%. Non-IFRS performance measures Barclays’ management believes that the non-IFRS performance measures included in this document provide valuable information to the readers of the financial statements as they enable the reader to identify a more consistent basis for comparing the business’ performance between financial periods, and provide more detail concerning the elements of performance which the managers of these businesses are most directly able to influence or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by Barclays’ management. However, any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well. Refer to pages 223 to 225 for further information and calculations of non-IFRS performance measures included throughout this section, and the most directly comparable IFRS measures. Definition Why is it important and how the Group performed CRD IV fully loaded CET1 ratio Capital requirements are part of the regulatory framework governing how banks and depository institutions are supervised. Capital ratios express a bank’s capital as a percentage of its RWAs as defined by the PRA. In the context of CRD IV, the fully loaded CET1 ratio is a measure of capital that is predominantly common equity as defined by the CRR. Average UK leverage ratio The ratio is calculated as the average fully loaded Tier 1 capital divided by average UK leverage exposure. The average exposure measure excludes qualifying central bank claims. The Group’s capital management objective is to maximise shareholder value by prudently managing the level and mix of its capital to: ensure the Group and all of its subsidiaries are appropriately capitalised relative to their regulatory minimum and stressed capital requirements, support the Group’s risk appetite, growth and strategic options, while seeking to maintain a robust credit proposition for the Group and its subsidiaries. The Group’s CRD IV fully loaded CET1 ratio increased to 13.3% (2016: 12.4%), as RWAs decreased £53bn to £313bn and CET1 capital reduced to £41.6bn (2016: £45.2bn). The 90bps improvement was driven by organic capital generation from continuing operations, and the benefit of the proportional consolidation of BAGL and rundown of Non-Core, partially offset by adverse movements in reserves and the net impact of the remeasurement of US DTAs. Group target: CET1 ratio target of 150-200bps above the expected end point regulatory minimum level, providing 450-500bps buffer to the Bank of England stress test systemic reference point. The leverage ratio is non-risk based and is intended to act as a supplementary measure to the risk-based capital metrics such as the CET1 ratio. The average UK leverage ratio increased to 4.9% (2016: 4.5%) driven by a decrease in average UK leverage exposure to £1,045bn (2016: £1,137bn), partially offset by a decrease in the average fully loaded Tier 1 capital to £51.2bn (2016: £51.6bn). Group target: maintaining the leverage ratio above the expected end point minimum requirement. 13.3% CRD IV fully loaded CET1 ratio 2016: 12.4% 2015: 11.4% 4.9% Average UK leverage ratio 2016: 4.5% 2015: n/a 206 Barclays PLC Annual Report 2017 home.barclays/annualreport Financial reviewDefinition Why is it important and how the Group performed Return on average tangible shareholders’ equity RoTE is calculated as profit after tax attributable to ordinary shareholders, including an adjustment for the tax credit recorded in reserves in respect of other equity instruments, as a proportion of average shareholders’ equity excluding non- controlling interests and other equity instruments adjusted for the deduction of intangible assets and goodwill. Operating expenses Operating expenses excluding litigation and conduct. Cost: income ratio Operating expenses divided by total income. (3.6%) Group RoTE 2016: 3.6% 2015: (0.7%) 5.6% Group RoTE excluding litigation and conduct, losses related to Barclays’ sell down of BAGL and the remeasurement of US DTAs £14.2bn Operating expenses excluding litigation and conduct 2016: £15.0bn 2015: £14.1bn 73% Cost: income ratio 2016: 76% 2015: 84% This measure indicates the return generated by the management of the business based on shareholders’ tangible equity. Achieving a target RoTE demonstrates the organisation’s ability to execute its strategy and align management’s interests with the shareholders’. RoTE lies at the heart of the Group’s capital allocation and performance management process. RoTE for the Group was negative 3.6% (2016: positive 3.6%) reflecting an attributable loss of £1,922m (2016: profit of £1,623m), which included charges for litigation and conduct of £1,207m, a £1,090m impairment of Barclays’ holding in BAGL, a £1,435m loss on the sale of 33.7% of BAGL’s issued share capital and a one-off net charge of £901m due to the remeasurement of US DTAs in Q417. RoTE for the Group excluding litigation and conduct, losses related to the sell down of BAGL and the remeasurement of US DTAs was 5.6%. Based on a CET1 ratio of 13% this would have been 5.5%. Group target: Group RoTE, excluding litigation and conduct, of greater than 9% in 2019 and greater than 10% in 2020, based on a CET1 ratio of c.13%. Barclays views operating expenses as a key strategic area for banks; those who actively manage costs and control them effectively will gain a strong competitive advantage. Operating expenses for the Group were £15.5bn (2016: £16.3bn). Excluding litigation and conduct charges, Group operating expenses were £14.2bn, in line with 2017 guidance. Group target: operating expenses, excluding litigation and conduct, of £13.6 to 13.9bn in 2019. This is a measure management uses to assess the productivity of the business operations. Restructuring the cost base is a key execution priority for management and includes a review of all categories of discretionary spending and an analysis of how we can run the business to ensure that costs increase at a slower rate than income. The Group cost: income ratio reduced to 73% (2016: 76%) driven by a 5% reduction in operating expenses, partially offset by a 2% reduction in total income. The reduction in operating expenses was primarily driven by lower Non-Core related operating expenses. Group target: a cost: income ratio of below 60%. home.barclays/annualreport Barclays PLC Annual Report 2017 207 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernanceFinancial review Consolidated summary income statement For the year ended 31 December Continuing operations Net interest income Net fee, commission and other income Total income 2017 £m 2016 £m 2015 £m 2014 £m 2013 £m 9,845 11,231 21,076 10,537 10,914 21,451 10,608 11,432 22,040 10,086 11,677 21,763 9,457 14,587 24,044 Credit impairment charges and other provisions (2,336) (2,373) (1,762) (1,821) (2,601) Operating expenses excluding UK bank levy and litigation and conduct UK bank levy Litigation and conduct Operating expenses (13,884) (365) (1,207) (15,456) (14,565) (410) (1,363) (16,338) (13,723) (426) (4,387) (18,536) (14,959) (418) (2,807) (18,184) (16,628) (462) (2,442) (19,532) Other net income/(expenses) 257 490 (596) (445) (32) Profit before tax Tax charge Profit/(loss) after tax in respect of continuing operations (Loss)/profit after tax in respect of discontinued operation Non-controlling interests in respect of continuing operations Non-controlling interests in respect of discontinued operation Other equity instrument holdersa Attributable (loss)/profit Selected financial statistics Basic (loss)/earnings per sharea Diluted (loss)/earnings per sharea Return on average tangible shareholders’ equitya 3,541 (2,240) 1,301 (2,195) (249) (140) (639) (1,922) 3,230 (993) 2,237 591 (346) (402) (457) 1,623 1,146 (1,149) (3) 626 (348) (324) (345) (394) 1,313 (1,121) 192 653 (449) (320) (250) (174) 1,879 (1,251) 628 669 (414) (343) – 540 (10.3p) (10.1p) (3.6%) 10.4p 10.3p 3.6% (1.9p) (1.9p) (0.7%) (0.7p) (0.7p) (0.3%) 3.8p 3.7p 1.2% Note a The profit after tax attributable to other equity instrument holders of £639m (2016: £457m) is offset by a tax credit recorded in reserves of £174m (2016: £128m). The net amount of £465m (2016: £329m), along with non-controlling interests is deducted from profit after tax in order to calculate earnings per share and return on average tangible shareholders’ equity. The financial information above is extracted from the published accounts. This information should be read together with the information included in the accompanying consolidated financial statements. 208 Barclays PLC Annual Report 2017 home.barclays/annualreport Operating expenses reduced 12% to £16,338m reflecting lower litigation and conduct charges. This was partially offset by the non-recurrence of the prior year gain of £429m on the valuation of a component of the defined retirement benefit liability and increased structural reform implementation costs. Operating expenses also included a £395m additional charge in Q4 2016 relating to 2016 compensation awards reflecting a decision to more closely align income statement recognition with performance awards and to harmonise deferral structures across the Group. Operating expenses included provisions for UK customer redress of £1,000m (2015: £2,772m). The cost: income ratio improved to 76% (2015: 84%). Other net income of £490m (2015: expense of £596m) included gains on the sale of Barclays Risk Analytics and Index Solutions, the Asia wealth and investment management business and the Southern European cards business, partly offset by the loss on sale of the French retail business of £455m. The effective tax rate on profit before tax decreased to 30.7% (2015: 100.3%) principally as a result of a reduction in non-deductible charges. Profit after tax in respect of continuing operations increased to £2,237m (2015: loss of £3m). Profit after tax in relation to the Africa Banking discontinued operation decreased 6% to £591m as increased credit impairment charges and operating expenses were partially offset by income growth. RoTE was positive 3.6% (2015: negative 0.7%) and basic earnings per share was 10.4p (2015: loss per share of 1.9p). Financial review Income statement commentary 2017 compared to 2016 Profit before tax increased 10% to £3,541m driven by a 5% reduction in operating expenses, partially offset by a 2% reduction in income and lower other net income. Results were impacted by the appreciation of average USD and EUR against GBP of 5% and 7% respectively, compared to 2016, which positively impacted income and adversely affected impairment and operating expenses. Following the closure of Barclays Non-Core on 1 July 2017, Group results for 2017 included a Barclays Non-Core loss before tax for the six months ended 30 June 2017 of £647m, compared to a loss before tax of £2,786m for the full year in 2016. From 1 July 2017, residual Barclays Non-Core assets and liabilities were reintegrated into, and associated financial performance subsequently reported in, Barclays UK, Barclays International and Head Office. Total income decreased to £21,076m (2016: £21,451m) reflecting a £613m decrease in Barclays International and a £262m reduction in Head Office, partially offset by a reduction in losses related to Non-Core. Credit impairment charges were broadly stable at £2,336m (2016: £2,373m) and reflected a charge of £168m in 2017 relating to deferred consideration from an asset sale in US Cards, and the non-recurrence of a £320m charge in 2016 following the management review of the UK and US cards portfolio impairment modelling. Impairment increased in Barclays International driven by an increase in underlying delinquency trends and business growth in US Cards. The Group loan loss rate increased 4bps to 57bps. Operating expenses reduced 5% to £15,456m driven primarily by lower Non-Core related operating expenses. Excluding litigation and conduct charges, Group operating expenses were £14.2bn, in line with 2017 guidance. Other net income of £257m (2016: £490m) primarily reflected a gain of £109m on the sale of Barclays’ share in VocaLink to MasterCard and a gain of £76m on the sale of a joint venture in Japan. The effective tax rate on profit before tax increased to 63.3% (2016: 30.7%) principally due to a one-off tax charge of £1,177m due to the remeasurement of US DTAs as a result of the US Tax Cuts and Jobs Act, partially offset by an unrelated £276m increase in US DTAs due to a remeasurement of Barclays Bank PLC’s US branch DTAs. Loss after tax in respect of the Africa Banking discontinued operation of £2,195m included a £1,090m impairment of Barclays’ holding in BAGL and a £1,435m loss on the sale of 33.7% of BAGL’s issued share capital, primarily due to recycling of currency translation reserve losses to the income statement on accounting deconsolidation. RoTE was negative 3.6% (2016: positive 3.6%) and basic loss per share was 10.3p (2016: earnings per share of 10.4p). Excluding litigation and conduct, losses related to the sell down of BAGL and the one-off net charge due to the remeasurement of US DTAs, RoTE was 5.6% and earnings per share was 16.2p. 2016 compared to 2015 Profit before tax increased to £3,230m (2015: £1,146m). The Group performance reflected good operational performance in Barclays UK and Barclays International while being impacted by the Non-Core loss before tax of £2,786m (2015: £2,603m) driven by the accelerated rundown of Non-Core and provisions for UK customer redress of £1,000m (2015: £2,772m). The appreciation of average USD and EUR against GBP positively impacted income and adversely affected impairment and operating expenses. Total income decreased 3% to £21,451m as Non-Core income reduced £1,776m to a net expense of £1,164m due to the acceleration of the Non-Core rundown, while Barclays International income increased 9% to £14,995m, with growth in both Corporate and Investment Bank (CIB) and Consumer, Cards and Payments, and Barclays UK income increased 2% to £7,517m. Total income included a £615m (2015: £nil) gain on disposal of Barclays’ share of Visa Europe Limited and an own credit loss of £35m (2015: gain of £430m). Credit impairment charges increased £611m to £2,373m including a £320m charge in Q3 2016 following the management review of the UK and US cards portfolio impairment modelling and balance growth primarily within Consumer, Cards and Payments. This was partially offset by a reduction in credit impairment charges of 9% to £122m in Non-Core due to lower impairment charges in European businesses. This resulted in an 11bps increase in the loan loss rate to 53bps. home.barclays/annualreport Barclays PLC Annual Report 2017 209 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernanceFinancial review Consolidated summary balance sheet As at 31 December Assets Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Financial investments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Assets included in disposal groups classified as held for sale Other assets Total assets Liabilities Deposits from banks Items in the course of collection due to other banks Customer accounts Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issuea Subordinated liabilities Repurchase agreements and other similar secured borrowings Liabilities included in disposal groups classified as held for sale Other liabilities Total liabilities Equity Called up share capital and share premium Other equity instruments Other reserves Retained earnings Total equity excluding non-controlling interests Non-controlling interests Total equity Total liabilities and equity Net asset value per ordinary share Tangible net asset value per share Number of ordinary shares of Barclays PLC (in millions) Year-end USD exchange rate Year-end EUR exchange rate Note a Debt securities in issue include covered bonds of £8.5bn (2016: £12.4bn). 2017 £m 2016 £m 2015 £m 2014 £m 2013 £m 171,082 2,153 113,760 116,281 237,669 58,916 35,663 365,552 12,546 1,193 18,433 45,687 1,282 133,069 38,968 350,300 91,756 39,422 434,237 186,779 – 22,128 1,133,248 1,213,126 1,120,012 1,357,906 1,343,628 39,695 1,210 114,717 38,300 439,909 86,066 42,111 427,767 131,753 – 36,378 102,353 1,467 80,240 78,608 346,626 63,317 43,251 392,784 13,454 71,454 19,572 49,711 1,011 77,348 76,830 327,709 90,267 41,349 399,217 28,187 7,364 21,019 37,723 446 429,121 37,351 173,718 238,345 73,314 23,826 40,338 – 13,050 55,615 1,359 431,998 53,464 64,796 347,118 86,693 21,695 196,748 – 20,193 1,067,232 1,141,761 1,054,148 1,291,948 1,279,679 58,390 1,177 427,704 45,124 56,972 439,320 86,099 21,153 124,479 – 31,530 47,080 1,013 418,242 33,967 91,745 324,252 69,150 21,467 25,035 5,997 16,200 48,214 636 423,178 34,687 96,031 340,487 75,932 23,383 19,760 65,292 14,161 22,045 8,941 5,383 27,536 63,905 2,111 66,016 19,887 2,063 249 33,186 55,385 8,564 63,949 1,133,248 1,213,126 1,120,012 1,357,906 1,343,628 21,842 6,449 6,051 30,531 64,873 6,492 71,365 21,586 5,305 1,898 31,021 59,810 6,054 65,864 20,809 4,322 2,724 31,712 59,567 6,391 65,958 322p 276p 17,060 1.35 1.13 344p 290p 16,963 1.23 1.17 324p 275p 16,805 1.48 1.36 335p 285p 16,498 1.56 1.28 331p 283p 16,113 1.65 1.20 210 Barclays PLC Annual Report 2017 home.barclays/annualreport Financial review Balance sheet commentary Total assets Total assets decreased £80bn to £1,133bn. Cash and balances at central banks and items in the course of collection from other banks increased £69bn to £173bn, as the cash contribution to the Group liquidity pool was increased. Trading portfolio assets increased £34bn to £114bn due to increased activity. Financial assets designated at fair value increased £38bn to £116bn primarily due to increased reverse repurchase agreements to fund trading activity. Derivative financial instrument assets decreased £109bn to £238bn which is consistent with the movement in derivative financial instrument liabilities. The decrease reflects the portfolio rundown of Barclays Non-Core, the adoption of daily settlements under the Chicago Mercantile Exchange (CME), an increase in major interest rate forward curves and the depreciation of period end USD against GBP. Financial investments decreased £4bn to £59bn due to a decrease in government bonds held in the liquidity pool. Total loans and advances decreased £35bn to £401bn which comprised of a lending reduction of £22bn and a net decrease of £13bn in settlement and cash collateral balances. Assets included in disposal groups classified as held for sale decreased £70bn to £1bn driven by the disposal of BAGL and the French retail business. Total liabilities Total liabilities decreased £75bn to £1,067bn. Deposits from banks decreased £10bn to £38bn driven by a £7bn decrease due to lower cash collateral and a decrease in central bank funding. Customer accounts increased £6bn to £429bn driven by a £5bn increase due to increased funding requirements to fund the liquidity pool assets and a £14bn increase in deposits. These were partially offset by a £5bn reduction in cash collateral balances and a £7bn reduction in prime brokerage balances. Repurchase agreements and other similar secured borrowing increased £21bn to £40bn. This was primarily due to an increase in central bank repurchase agreements and trading desk funding requirements. Derivative financial instruments decreased £102bn to £238bn in line with the decrease in derivative financial instrument assets. Liabilities included in disposal groups classified as held for sale decreased £65bn to £nil driven by the disposal of BAGL and the French retail business. Financial liabilities designated at fair value increased £78bn to £174bn. During the period, repurchase agreements designated at fair value have increased £71bn and debt securities by £7bn. Total shareholders’ equity Total shareholders’ equity decreased £5.3bn to £66.0bn. Share capital and share premium increased £0.2bn to £22.0bn due to the issuance of shares under employee share schemes and the Barclays PLC Scrip Dividend Programme. Other equity instruments increased £2.5bn to £8.9bn primarily due to the issuance of equity accounted AT1 securities. The available for sale reserve increased £0.4bn to £0.3bn. The reserve movement is driven by fair value movements on available for sale investments. Cash flow hedging reserve has decreased £0.9bn to £1.2bn driven by a £0.6bn decrease in the fair value of interest rate swaps held for hedging purposes as forward interest rates increased and £0.6bn due to gains recycled to the income statement, offset by a £0.3bn tax charge. The currency translation reserve remained flat at £3.1bn which principally reflected the depreciation of period end USD against GBP, offset by a £1.6bn net loss from recycling of the currency translation reserve to the income statement. This included a £1.4bn recycling of the currency translation reserve associated with the disposal of BAGL. Non-controlling interests decreased £4.4bn to £2.1bn, driven by a £3.4bn reduction due to the disposal of BAGL and £0.9bn relating to the redemption of preference shares. Tangible net asset value per share decreased to 276p (2016: 290p) as profit before tax was more than offset by the net impact of the remeasurement of US DTAs in Q4 2017 and adverse movements across reserves. home.barclays/annualreport Barclays PLC Annual Report 2017 211 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernanceAnalysis of results by business Barclays UK Income statement information Net interest income Net fee, commission and other income Total income Credit impairment charges and other provisions Net operating income Operating expenses excluding UK bank levy and litigation and conduct UK bank levy Litigation and conduct Operating expenses Other net expenses Profit before tax Attributable profit/(loss) Balance sheet information Loans and advances to customers at amortised cost Total assets Customer deposits Loan: deposit ratio Risk weighted assets Period end allocated tangible equity Key facts Average LTV of mortgage portfolioa Average LTV of new mortgage lendinga Number of branches Mobile banking active customers 30 day arrears rate – Barclaycard Consumer UK Number of employees (full time equivalent)b Performance measures Return on average allocated tangible equity Average allocated tangible equity Cost: income ratio Loan loss rate (bps) Net interest margin 2017 £m 2016 £m 2015 £m 6,086 1,297 7,383 (783) 6,600 (4,030) (59) (759) (4,848) (5) 1,747 853 6,048 1,469 7,517 (896) 6,621 (3,792) (48) (1,042) (4,882) (1) 1,738 828 5,973 1,370 7,343 (706) 6,637 (3,464) (77) (2,511) (6,052) – 585 (47) £183.8bn £166.4bn £237.4bn £209.6bn £193.4bn £189.0bn 88% £67.5bn £8.5bn 95% £70.9bn £9.6bn £166.1bn £202.5bn £176.8bn 94% £69.5bn £9.0bn 48% 64% 1,208 6.4m 1.8% 22,800 9.8% £9.1bn 66% 42 3.49% 48% 63% 1,305 5.4m 1.9% 36,000 9.6% £8.9bn 65% 52 3.62% 49% 64% 1,362 4.5m 2.3% 38,800 (0.3%) £9.3bn 82% 42 3.56% Notes a Average LTV of mortgage portfolio and new mortgage lending calculated on the balance weighted basis. b As a result of the establishment of the Group Service Company in September 2017, employees who are now employed by the Group Service Company and who were previously allocated to, or were within, Barclays UK and Barclays International are now reported in Head Office. 212 Barclays PLC Annual Report 2017 home.barclays/annualreport Financial reviewAnalysis of Barclays UK Analysis of total income Personal Banking Barclaycard Consumer UK Wealth, Entrepreneurs & Business Banking Total income Analysis of credit impairment charges and other provisions Personal Banking Barclaycard Consumer UK Wealth, Entrepreneurs & Business Banking Total credit impairment charges and other provisions Analysis of loans and advances to customers at amortised cost Personal Banking Barclaycard Consumer UK Wealth, Entrepreneurs & Business Bankinga Total loans and advances to customers at amortised cost Analysis of customer deposits Personal Banking Barclaycard Consumer UK Wealth, Entrepreneurs & Business Banking Total customer deposits Note a Includes the integration of the ESHLA portfolio at amortised cost from Barclays Non-Core. 2017 £m 3,823 1,977 1,583 7,383 (222) (541) (20) (783) 2016 £m 3,891 2,022 1,604 7,517 (183) (683) (30) (896) 2015 £m 3,714 2,065 1,564 7,343 (194) (488) (24) (706) £139.8bn £135.0bn £16.5bn £14.9bn £183.8bn £166.4bn £16.4bn £27.6bn £134.0bn £16.2bn £15.9bn £166.1bn £141.1bn £139.3bn – £49.7bn £193.4bn £189.0bn – £52.3bn £131.0bn – £45.8bn £176.8bn home.barclays/annualreport Barclays PLC Annual Report 2017 213 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernanceCredit impairment charges increased 27% to £896m due to a £200m charge in Q3 2016 following the management review of the cards portfolio impairment modelling. The 30 day and 90 day arrears rates on the cards portfolio improved year on year to 1.9% (2015: 2.3%) and 0.9% (2015: 1.2%) respectively. Operating expenses reduced 19% to £4,882m reflecting lower provisions for UK customer redress, savings realised from strategic cost programmes, relating to restructuring of the branch network and technology improvements, partially offset by structural reform programme implementation costs. The cost: income ratio was 65% (2015: 82%) and RoTE was 9.6% (2015: (0.3%)). Loans and advances to customers were stable at £166.4bn (December 2015: £166.1bn). Total assets increased £7.1bn to £209.6bn primarily reflecting an increase in the allocated liquidity pool. Customer deposits increased 7% to £189.0bn primarily driven by higher balances in Personal Banking and WEBB. RWAs reduced £2.0bn to £67.5bn primarily driven by changes in the mortgages credit risk model. Analysis of results by business 2017 compared to 2016 Profit before tax increased 1% to £1,747m as lower PPI charges of £700m (2016: £1,000m) and a reduction in credit impairment charges were partially offset by the non-recurrence of the gain on disposal of Barclays’ share of Visa Europe Limited in 2016, higher costs of setting up the ring-fenced bank and increased investment, primarily in cyber resilience, digital and technology. Total income decreased 2% to £7,383m, of which £151m reflected the non-recurrence of the gain on disposal of Barclays’ share of Visa Europe Limited in 2016. Personal Banking income decreased 2% to £3,823m, driven by the non-recurrence of the Visa gain and the impact of the UK base rate reduction in 2016, partially offset by deposit pricing initiatives, growth in balances and an update to effective interest rate modelling. Barclaycard Consumer UK income decreased 2% to £1,977m reflecting a provision for remediation in H2 2017. Wealth, Entrepreneurs & Business Banking (WEBB) income decreased 1% to £1,583m driven by the non-recurrence of the Visa gain, partially offset by growth in balances. Net interest income increased 1% to £6,086m due to deposit pricing initiatives and growth in loans and advances to customers and deposits, partially offset by the impact of the UK base rate reduction in 2016. Net interest margin decreased 13bps to 3.49% reflecting the integration of the Education, Social Housing and Local Authority (ESHLA) portfolio from Non-Core on 1 July 2017. Net fee, commission and other income decreased 12% to £1,297m driven by the non-recurrence of the Visa gain. Credit impairment charges decreased 13% to £783m principally reflecting the non- recurrence of a £200m charge in 2016 following the management review of the cards portfolio impairment modelling, partially offset by higher charges in Barclaycard Consumer UK and Personal Banking. Operating expenses decreased 1% to £4,848m due to lower charges for PPI of £700m (2016: £1,000m), partially offset by the costs of setting up the ring-fenced bank and increased investment, primarily in cyber resilience, digital and technology. The cost: income ratio was 66% (2016: 65%). Loans and advances to customers increased 10% to £183.8bn and total assets increased 13% to £237.4bn, reflecting the integration of the ESHLA portfolio from Non-Core into WEBB on 1 July 2017 and mortgage growth in Personal Banking in H2 2017. Customer deposits increased 2% to £193.4bn due to deposit growth, partially offset by the realignment of clients between Barclays UK and Barclays International in preparation for structural reform. RWAs increased to £70.9bn (December 2016: £67.5bn) reflecting the integration of the ESHLA portfolio. 2016 compared to 2015 Profit before tax increased £1,153m to £1,738m reflecting lower provisions for UK customer redress and a reduction in operating expenses. This was partially offset by an increase in credit impairment charges following the management review of the cards portfolio impairment modelling. Total income, including a gain on disposal of Barclays’ share of Visa Europe Limited recognised in Personal Banking and WEBB, increased 2% to £7,517m. Personal Banking income increased 5% to £3,891m driven by the gain on disposal of Barclays’ share of Visa Europe Limited, improved deposit margins and balance growth, partially offset by lower mortgage margins. Barclaycard Consumer UK income decreased 2% to £2,022m primarily as a result of the European Interchange Fee Regulation, which came into full effect from December 2015, offset by balance growth and gains from debt sales. WEBB income increased 3% to £1,604m reflecting the gain on disposal of Barclays’ share of Visa Europe Limited, improved margins and deposit growth, partially offset by reduced transactional fee income. Net interest income increased 1% to £6,048m due to balance growth and deposit pricing initiatives, partially offset by lower mortgage margins. Net interest margin increased 6bps to 3.62% reflecting higher margins on deposits, partially offset by lower mortgage margins. Net fee, commission and other income increased 7% to £1,469m due to the gain on disposal of Barclays’ share of Visa Europe Limited, partially offset by the impact of the European Interchange Fee Regulation in Barclaycard Consumer UK, which came into full effect from December 2015, and reduced fee and commission income in WEBB. 214 Barclays PLC Annual Report 2017 home.barclays/annualreport Financial reviewBarclays International Income statement information Net interest income Net trading income Net fee, commission and other income Total income Credit impairment charges and other provisions Net operating income Operating expenses excluding UK bank levy and litigation and conduct UK bank levy Litigation and conduct Operating expenses Other net income Profit before tax Attributable profit Balance sheet information Loans and advances to banks and customers at amortised costa Trading portfolio assets Derivative financial instrument assets Derivative financial instrument liabilities Reverse repurchase agreements and other similar secured lending Financial assets designated at fair value Total assets Customer depositsb Loan: deposit ratioc Risk weighted assets Period end allocated tangible equity Key facts Number of employees (full time equivalent)d Performance measures Return on average allocated tangible equity Average allocated tangible equity Cost: income ratio Loan loss rate (bps) Net interest margin 2017 £m 2016 £m 2015 £m 4,307 3,971 6,104 14,382 (1,506) 12,876 (9,321) (265) (269) (9,855) 254 3,275 847 4,512 4,580 5,903 14,995 (1,355) 13,640 (9,129) (284) (48) (9,461) 32 4,211 2,412 4,324 3,782 5,641 13,747 (922) 12,825 (8,029) (253) (1,310) (9,592) 45 3,278 1,758 £198.7bn £211.3bn £113.0bn £73.2bn £236.2bn £156.2bn £237.8bn £160.6bn £13.4bn £12.4bn £104.1bn £62.3bn £856.1bn £648.5bn £225.1bn £216.2bn 78% £210.3bn £212.7bn £25.6bn £27.5bn 62% £184.1bn £61.9bn £111.5bn £119.0bn £24.7bn £46.8bn £532.2bn £185.6bn 80% £194.8bn £23.8bn 11,500 36,900 39,100 3.4% £28.1bn 69% 75 4.16% 9.8% £25.5bn 63% 63 3.98% 7.2% £24.9bn 70% 49 3.80% Notes a As at 31 December 2017, loans and advances included £170.4bn (December 2016: £185.9bn) of loans and advances to customers (including settlement balances of £15.7bn (December 2016: £19.5bn) and cash collateral of £35.9bn (December 2016: £30.1bn)), and £28.3bn (December 2016: £25.4bn) of loans and advances to banks (including settlement balances of £2.3bn (December 2016: £1.7bn) and cash collateral of £18.0bn (December 2016: £6.3bn)). Loans and advances to banks and customers in respect of Consumer, Cards and Payments were £38.6bn (December 2016: £39.7bn). b As at 31 December 2017, customer deposits included settlement balances of £15.2bn (December 2016: £16.6bn) and cash collateral of £27.3bn (December 2016: £20.8bn). c Loan: deposit ratio excludes investment banking balances other than interest earning lending. Comparatives have been restated to include interest earning lending balances within the investment banking business. d As a result of the establishment of the Group Service Company in September 2017, employees who are now employed by the Group Service Company and who were previously allocated to, or were within, Barclays UK and Barclays International are now reported in Head Office. home.barclays/annualreport Barclays PLC Annual Report 2017 215 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernance Financial review Analysis of results by business Analysis of Barclays International Corporate and Investment Bank Income statement information Macro Credit Equities Markets Banking fees Corporate lending Transaction banking Banking Other Total income Credit impairment charges and other provisions Operating expenses Other net income Profit before tax Balance sheet information Loans and advances to banks and customers at amortised cost Customer deposits Risk weighted assets Performance measures Return on average allocated tangible equity Average allocated tangible equity Consumer, Cards and Payments Income statement information Total income Credit impairment charges and other provisions Operating expenses Other net income Profit before tax Balance sheet information Loans and advances to banks and customers at amortised cost Customer deposits Risk weighted assets Key facts 30 day arrears rate – Barclaycard US Total number of Barclaycard business clients Value of payments processed Performance measures Return on average allocated tangible equity Average allocated tangible equity 2017 £m 2016 £m 2015 £m 1,634 1,241 1,629 4,504 2,612 1,093 1,629 5,334 40 9,878 (213) (7,742) 133 2,056 2,304 1,185 1,790 5,279 2,397 1,195 1,657 5,249 5 10,533 (260) (7,624) 1 2,650 2,108 824 1,912 4,844 2,087 1,361 1,663 5,111 495 10,450 (199) (7,929) – 2,322 £160.1bn £171.6bn £165.9bn £166.2bn £176.2bn £178.6bn £152.0bn £143.8bn £167.3bn 1.1% £24.0bn 6.1% £21.9bn 5.4% £21.9bn 4,504 (1,293) (2,113) 121 1,219 4,462 (1,095) (1,837) 31 1,561 3,297 (723) (1,663) 45 956 £38.6bn £59.2bn £34.1bn £39.7bn £50.0bn £34.1bn £32.1bn £41.8bn £27.5bn 2.6% 366,000 £322bn 2.6% 355,000 £296bn 2.2% 341,000 £271bn 16.7% £4.2bn 31.4% £3.6bn 20.2% £3.0bn 216 Barclays PLC Annual Report 2017 home.barclays/annualreport Derivative financial instrument assets and liabilities increased £80.0bn to £236.2bn and £77.2bn to £237.8bn respectively, reflecting the integration of balances from Non-Core on 1 July 2017, partially offset by adoption of daily settlements under the CME, an increase in major interest rate forward curves and the depreciation of period end USD against GBP. Financial assets designated at fair value increased £41.8bn to £104.1bn primarily due to increased reverse repurchase agreements activity. Customer deposits increased £8.9bn to £225.1bn, with Consumer, Cards and Payments increasing £9.2bn to £59.2bn driven by the realignment of certain clients from Barclays UK to Barclays International in preparation for structural reform. RWAs decreased £2.4bn to £210.3bn due to the net impact of the remeasurement of US DTAs and the depreciation of period end USD against GBP, partially offset by increased trading portfolio and securities financing transaction volumes. 2017 compared to 2016 Profit before tax decreased 22% to £3,275 driven by a 4% decrease in total income, an 11% increase in credit impairment charges and a 4% increase in operating expenses. Total income decreased 4% to £14,382m, including the 5% appreciation of average USD and the 7% appreciation of average EUR against GBP, as CIB income decreased 6% to £9,878m, partially offset by a 1% increase in Consumer, Cards and Payments income to £4,504m. Markets income decreased 15% to £4,504m. Macro income decreased 29% to £1,634m driven by lower market volatility in rates, the exit of the energy-related commodities business and the integration of Non-Core assets on 1 July 2017. Credit income increased 5% to £1,241m due to improved performance in municipals. Equities income decreased 9% to £1,629m driven by US equity derivatives as a result of lower market volatility, partially offset by improved performance in equity financing. Banking income increased 2% to £5,334m. Banking fee income increased 9% to £2,612m due to higher debt and equity underwriting fees, with fee share gains in banking overall and debt underwriting. Corporate lending declined 9% to £1,093m driven by lower lending balances due to the realignment of certain clients between Barclays UK and Barclays International in preparation for structural reform and the reallocation of RWAs within CIB, as well as the non-recurrence of prior year treasury gains and lower work-out gains. Transaction banking declined 2% to £1,629m driven by lower trade balances and the non-recurrence of prior year treasury gains, partially offset by higher average deposit balances. Consumer, Cards and Payments income increased 1% to £4,504m driven by continued business growth, a gain of £192m relating to the Q1 2017 asset sale in US Cards and a valuation gain on Barclays’ preference shares in Visa Inc. of £74m, partially offset by the non-recurrence of the £464m gain on the disposal of Barclays’ share of Visa Europe Limited in 2016. Credit impairment charges increased 11% to £1,506m, including the appreciation of average USD and EUR against GBP. CIB credit impairment charges decreased 18% to £213m primarily due to the non-recurrence of oil and gas single name charges in 2016, offset by a single name charge in 2017. Consumer, Cards and Payments credit impairment charges increased 18% to £1,293m primarily due to a £168m charge in Q3 2017 relating to deferred consideration from the Q1 2017 asset sale in US Cards, an increase in underlying delinquency trends and business growth in US Cards. This was partially offset by the non-recurrence of a £120m charge in 2016 following the management review of the cards portfolio impairment modelling. The 30 and 90 day arrears rates within US Cards were stable at 2.6% (December 2016: 2.6%) and 1.3% (December 2016: 1.3%) respectively, including a benefit from the Q1 2017 asset sale in US Cards. Operating expenses increased 4% to £9,855m, including the appreciation of average USD and EUR against GBP. CIB operating expenses increased 2% to £7,742m reflecting a provision of £240m in respect of foreign exchange matters recognised in Q4 2017, continued investment in technology, partially offset by lower restructuring charges and the reduced impact of the change in compensation awards introduced in Q4 2016. Consumer, Cards and Payments increased 15% to £2,113m including continued growth and investment, primarily within the US Cards and merchant acquiring businesses. Other net income increased to £254m (2016: £32m) due to a gain of £109m on the sale of Barclays’ share in VocaLink to MasterCard and a gain of £76m on the sale of a joint venture in Japan. Attributable profit reduced to £847m (2016: £2,412m) including the net tax charge due to the remeasurement of US DTAs in Q4 2017. Loans and advances to banks and customers at amortised cost decreased £12.6bn to £198.7bn with CIB decreasing £11.5bn to £160.1bn due to a reduction in lending. Consumer, Cards and Payments decreased £1.1bn to £38.6bn due to the depreciation of period end USD against GBP, partially offset by the realignment of certain clients from Barclays UK to Barclays International in preparation for structural reform. Trading portfolio assets increased £39.8bn to £113.0bn due to increased activity. home.barclays/annualreport Barclays PLC Annual Report 2017 217 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernanceFinancial assets designated at fair value increased £15.5bn to £62.3bn and reverse repurchase agreements and other similar lending decreased £11.3bn to £13.4bn. Since 2015, new reverse repurchase agreements in certain businesses have been designated at fair value to better align to the way the business manages the portfolio’s risk and performance. On a net basis reverse repos have increased by £4.2bn as a result of increased matched book trading. Customer deposits increased £30.6bn to £216.2bn, with CIB increasing £22.4bn to £166.2bn primarily driven by increases in deposits cash collateral and the appreciation of USD and EUR against GBP. Consumer, Cards and Payments increased £8.2bn to £50.0bn driven by balance growth in Barclaycard US and Private Banking, and the appreciation of USD and EUR against GBP. RWAs increased £17.9bn to £212.7bn, due to the appreciation of USD against GBP, and business growth, including the acquisition of the JetBlue credit card portfolio in Consumer, Cards and Payments. Financial review Analysis of results by business 2016 compared to 2015 Profit before tax increased 28% to £4,211m due to the gain on disposal of Barclays’ share of Visa Europe Limited and a 1% decrease in total operating expenses, partially offset by a 47% increase in impairment. Total income increased 9% to £14,995m, including the appreciation of average USD and EUR against GBP, with Consumer, Cards and Payments income increasing 35% to £4,462m and CIB income increasing 1% to £10,533m. Markets income increased 9% to £5,279m. Credit income increased 44% to £1,185m driven by strong performance in fixed income flow credit which benefited from increased market volatility and client demand. Equities income decreased 6% to £1,790m with lower client activity in Asia and the simplification of the EMEA business, partially offset by improved performance in cash, derivatives and financing in H2 2016. Macro income increased 9% to £2,304m driven by increased activity post the EU referendum decision and US elections. Banking income increased 3% to £5,249m. Banking fees income increased 15% to £2,397m driven by higher debt underwriting and advisory fees, partially offset by lower equity underwriting fees. Corporate lending reduced 12% to £1,195m due to losses on fair value hedges and the non-recurrence of one-off work-out gains recognised in Q2 2015. Transaction banking was broadly flat at £1,657m (2015: £1,663m) as income from higher deposit balances was offset by margin compression. Consumer, Cards and Payments income increased 35% to £4,462m driven by the £464m gain on disposal of Barclays’ share of Visa Europe Limited, growth across all key businesses and the appreciation of average USD and EUR against GBP. Credit impairment charges increased 47% to £1,355m including the appreciation of average USD and EUR against GBP. CIB credit impairment charges increased 31% to £260m driven by the impairment of a number of single name exposures. Consumer, Cards and Payments credit impairment charges increased 51% to £1,095m primarily driven by balance growth, a change in portfolio mix and a £120m charge in Q3 2016 following a management review of the cards portfolio impairment modelling. Operating expenses decreased 1% to £9,461m. CIB decreased 4% to £7,624m reflecting lower litigation and conduct costs. This was partially offset by the appreciation of average USD against GBP, an additional charge in Q4 2016 relating to the 2016 compensation awards, higher restructuring costs, £150m of which related to reducing the real estate footprint in Q3 2016, and higher structural reform programme implementation costs including those relating to the incorporation of the US IHC on 1 July 2016. Consumer, Cards and Payments increased 10% to £1,837m due to continued business growth and the appreciation of average USD and EUR against GBP, partially offset by lower restructuring costs. The cost: income ratio was 63% (2015: 70%) and RoTE was 9.8% (2015: 7.2%). Loans and advances to banks and customers at amortised cost increased £27.2bn to £211.3bn with CIB increasing £19.6bn to £171.6bn due to increased lending and cash collateral and the appreciation of USD and EUR against GBP. Consumer, Cards and Payments increased £7.6bn to £39.7bn driven by appreciation of USD and EUR against GBP and growth in Barclaycard US, including the acquisition of the JetBlue credit card portfolio. Trading portfolio assets increased £11.3bn to £73.2bn due to an increase in client activity and appreciation of major currencies against GBP. Derivative financial instrument assets and liabilities increased £44.7bn to £156.2bn and £41.6bn to £160.6bn respectively, due to the appreciation of USD and EUR against GBP and decreases in forward interest rates. 218 Barclays PLC Annual Report 2017 home.barclays/annualreport Head Office Income statement information Net interest income Net fee, commission and other incomea Total income Credit impairment charges and other provisions Net operating (expenses)/income Operating expenses excluding UK bank levy and litigation and conduct UK bank levy Litigation and conduct Operating expenses Other net (expenses)/income (Loss)/profit before tax Attributable (loss)/profit Balance sheet information Total assets Risk weighted assetsb Period end allocated tangible equity Key facts Number of employees (full time equivalent)c Performance measures Average allocated tangible equity 2017 £m (435) 276 (159) (17) (176) (277) (41) (151) (469) (189) (834) (868) 2016 £m (183) 286 103 – 103 (135) (2) (27) (164) 128 67 110 2015 £m (305) 643 338 – 338 (272) (8) (66) (346) (106) (114) 11 £39.7bn £31.8bn £10.0bn £75.2bn £53.3bn £9.7bn £59.4bn £39.7bn £5.0bn 45,600 100 100 £9.3bn £6.5bn £2.6bn Notes a Following the early adoption of the own credit provisions of IFRS 9 on 1 January 2017, own credit, which was previously reported in net fee, commission and other income, is now recognised in other comprehensive income. The comparative figures for net fee, commission and other income include own credit. b Includes Africa Banking RWAs of £6.4bn (December 2016: £42.3bn). c As a result of the establishment of the Group Service Company in September 2017, employees who are now employed by the Group Service Company and who were previously allocated to, or were within, Barclays UK and Barclays International are now reported in Head Office. Other net income increased to £128m (2015: expense of £106m) primarily due to recycling of the currency translation reserve on the disposal of the Southern European cards business. The 2015 expense included losses on sale relating to legacy businesses. Total assets increased £15.8bn to £75.2bn primarily driven by the appreciation of ZAR against GBP. RWAs increased £13.6bn to £53.3bn primarily driven by the appreciation of ZAR against GBP and the reallocation of operational risk RWAs from Non-Core associated with exited businesses and assets. 2017 compared to 2016 Loss before tax was £834m (2016: profit of £67m). Total income reduced to an expense of £159m (2016: income of £103m) primarily due to lower net income from treasury operations. Operating expenses increased to £469m (2016: £164m) due to costs associated with Non-Core assets and businesses, which were integrated on 1 July 2017, and increased litigation and conduct costs, including a settlement to resolve the civil action brought by the US Federal Energy Regulatory Commission’s Office of Enforcement and provisions for other legacy redress. Other net expenses were £189m (2016: income of £128m) driven by an expense of £180m on the recycling of the currency translation reserve to the income statement on the sale of Barclays Bank Egypt. 2016 included a gain due to recycling of the currency translation reserve on disposal of the Southern European cards business. Total assets decreased to £39.7bn (December 2016: £75.2bn) primarily due to the accounting deconsolidation of BAGL, which accounted for £65bn of total assets on deconsolidation from the Barclays Group. This was partially offset by the integration of Non-Core assets on 1 July 2017, of which c.£9bn related to Italian mortgages. RWAs decreased to £31.8bn (December 2016: £53.3bn) reflecting a £31.1bn reduction as a result of the proportional consolidation of BAGL, partially offset by the integration of Non-Core assets. 2016 compared to 2015 Profit before tax was £67m (2015: loss of £114m). Net operating income decreased 70% to £103m due to an own credit charge of £35m (2015: gain of £430m), partially offset by changes in net income from treasury operations. Operating expenses reduced 53% to £164m primarily due to a reduction in structural reform implementation costs now allocated to the businesses and a reduction in litigation and conduct costs. home.barclays/annualreport Barclays PLC Annual Report 2017 219 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernanceAnalysis of results by business Barclays Non-Core Income statement information Net interest income Net trading income Net fee, commission and other income Total income Credit impairment charges and other provisions Net operating (expenses)/income Operating expenses excluding UK bank levy and litigation and conduct UK bank levy Litigation and conduct Operating expenses Other net income/(expenses) Loss before tax Attributable loss Balance sheet information Loans and advances to banks and customers at amortised cost Derivative financial instrument assets Derivative financial instrument liabilities Reverse repurchase agreements and other similar secured lending Financial assets designated at fair value Total assets Customer deposits Risk weighted assets Key facts Number of employees (full time equivalent) Note a Represents financial results for the six months ended 30 June 2017. The Non-Core segment was closed on 1 July 2017 with the residual assets and liabilities reintegrated into, and associated financial performance subsequently reported in, Barclays UK, Barclays International and Head Office. Financial results up until 30 June 2017 are reflected in the Non-Core segment within the Group’s results for the year ended 31 December 2017. 2017a £m (112) (488) 70 (530) (30) (560) (256) – (28) (284) 197 (647) (419) 2016 £m 2015 £m 160 (1,703) 379 (1,164) (122) (1,286) (1,509) (76) (246) (1,831) 331 (2,786) (1,916) 615 (706) 703 612 (134) 478 (1,958) (88) (500) (2,546) (535) (2,603) (2,418) – £51.1bn – £188.7bn – £178.6bn £0.1bn – – £14.5bn – £279.7bn £12.5bn – £32.1bn – £51.8bn £213.7bn £202.1bn £3.1bn £21.4bn £325.8bn £20.9bn £54.3bn – 5,500 9,900 220 Barclays PLC Annual Report 2017 home.barclays/annualreport Financial review2017a £m 2016 £m 2015 £m 1,024 762 1,786 (177) 1,609 (1,130) – 5 484 (1,090) (1,435) (2,041) (154) (2,195) (2,335) 2,169 1,577 3,746 (445) 3,301 (2,345) (65) 6 897 – – 897 (306) 591 189 1,950 1,464 3,414 (353) 3,061 (2,091) (50) 7 927 – – 927 (301) 626 302 – – – £65.1bn £42.3bn £47.9bn £31.7bn 40,800 41,500 Discontinued Operation: Africa Banking Income statement information Net interest income Net fee, commission and other income Total income Credit impairment charges and other provisions Net operating income Operating expenses excluding UK bank levy and impairment of Barclays’ holding in BAGL UK bank levy Other net income excluding loss on sale of BAGL Profit before tax excluding impairment of Barclays’ holding in BAGL and loss on sale of BAGL Impairment of Barclays’ holding in BAGL Loss on sale of BAGL (Loss)/profit before tax Tax charge (Loss)/profit after tax Attributable (loss)/profit Balance sheet information Total assets Risk weighted assets Key facts Number of employees (full time equivalent) Note a The Africa Banking income statement represents five months of results as a discontinued operation to 31 May 2017. On 1 March 2016, Barclays announced its intention to reduce the Group’s 62.3% interest in BAGL to a level which would permit Barclays to deconsolidate BAGL from a regulatory perspective and, prior to that, from an accounting perspective. From this date, BAGL was treated as a discontinued operation. On 5 May 2016, Barclays sold 12.2% of the Group’s interest in BAGL and on 1 June 2017 Barclays sold a further 33.7% of BAGL’s issued share capital, resulting in the accounting deconsolidation of BAGL from the Barclays Group. At this time, Barclays’ holding in BAGL technically met the requirements to be treated as an Associate. However, following a revision of its governance rights in July 2017 and the difference being immaterial, the holding was treated as an available for sale asset from the transaction date. In Q317 Barclays contributed 1.5% of BAGL’s ordinary shares to a Black Economic Empowerment scheme, resulting in Barclays accounting for 126 million ordinary shares in BAGL, representing 14.9% of BAGL’s issued share capital. The retained investment is reported as an available for sale asset in the Head Office segment, with Barclays’ share of BAGL’s dividend recognised in the Head Office income statement. For regulatory reporting purposes, BAGL is treated on a proportional consolidated basis based on a holding of 14.9% as at Q4 2017. Subject to regulatory approval, Barclays expects to fully deconsolidate BAGL from a regulatory perspective by the end of 2018. home.barclays/annualreport Barclays PLC Annual Report 2017 221 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernanceFinancial review Analysis of results by business Margins analysis Total Barclays UK and Barclays International net interest income increased 1% to £10.4bn due to an increase in average customer assets to £278.5bn (2016: £274.6bn) with growth in Barclays UK, partially offset by a reduction in Barclays International. Net interest margin decreased 2bps to 3.74% primarily reflecting the integration of ESHLA loans from Non-Core on 1 July 2017 into Barclays UK, partially offset by broadly stable net interest income in Barclays International, despite reducing average customer assets. Group net interest income decreased to £9.8bn (2016: £10.5bn) including net structural hedge contributions of £1.3bn (2016: £1.5bn). Net interest margin by business reflects movements in the Group’s internal funding rates which are based on the cost to the Group of alternative funding in wholesale markets. The internal funding rate prices intra-group funding and liquidity to appropriately give credit to businesses with net surplus liquidity and to charge those businesses in need of alternative funding at a rate that is driven by prevailing market rates and includes a term premium. Barclays UK Barclays Internationala Total Barclays UK and Barclays International Otherb Total net interest income Year ended 31 December 2017 Year ended 31 December 2016 Average customer assets £m 174,484 104,039 278,523 Net interest margin % 3.49 4.16 3.74 Net interest income £m 6,086 4,326 10,412 (567) 9,845 Net interest income £m 6,048 4,275 10,323 214 10,537 Average customer assets £m 167,233 107,333 274,566 Net interest margin % 3.62 3.98 3.76 Notes a Barclays International margins include interest earning lending balances within the investment banking business. b Other includes Head Office and non-lending related investment banking balances. Barclays Non-Core is included for the full comparative period and the first six months of the current period. 222 Barclays PLC Annual Report 2017 home.barclays/annualreport Financial review Non-IFRS performance measures Barclays’ management believes that the non-IFRS performance measures included in this document provide valuable information to the readers of the financial statements as they enable the reader to identify a more consistent basis for comparing the business’ performance between financial periods, and provide more detail concerning the elements of performance which the managers of these businesses are most directly able to influence or are relevant for an assessment of Barclays PLC and its subsidiaries (the Group). They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by Barclays’ management. Any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well. Non-IFRS performance measures glossary Measure Loan: deposit ratio Period end allocated tangible equity Average tangible shareholders’ equity Definition Loans and advances divided by customer accounts calculated for Barclays UK and Barclays International, excluding investment banking balances other than interest earning lending. This excludes particular liabilities issued by the retail businesses that have characteristics comparable to retail deposits (for example, structured Certificates of Deposit and retail bonds), which are included within debt securities in issue. Allocated tangible equity is calculated as 12.0% (2016: 11.5%) of CRD IV fully loaded RWAs for each business, adjusted for CRD IV fully loaded capital deductions, excluding goodwill and intangible assets, reflecting the assumptions the Group uses for capital planning purposes. Head Office allocated tangible equity represents the difference between the Group’s tangible shareholders’ equity and the amounts allocated to businesses. Calculated as the average of the previous month’s period end tangible equity and the current month’s period end tangible equity. The average tangible shareholders’ equity for the period is the average of the monthly averages within that period. Return on average tangible shareholders’ equity Return on average allocated tangible equity Average allocated tangible equity Calculated as the average of the previous month’s period end allocated tangible equity and the current month’s period end allocated tangible equity. The average allocated tangible equity for the period is the average of the monthly averages within that period. Statutory profit after tax attributable to ordinary shareholders, including an adjustment for the tax credit in reserves in respect of other equity instruments, as a proportion of average shareholders’ equity excluding non-controlling interests and other equity instruments adjusted for the deduction of intangible assets and goodwill. The components of the calculation have been included on page 224. Statutory profit after tax attributable to ordinary shareholders, including an adjustment for the tax credit in reserves in respect of other equity instruments, as a proportion of average allocated tangible equity. The components of the calculation have been included on page 224. Operating expenses divided by total income. Operating expenses excluding charges for litigation and conduct. The components of the calculation have been included on page 225. Quoted in basis points and represents total loan impairment divided by gross loans and advances to banks and customers held at amortised cost at the balance sheet date. The components of the calculation have been included on page 147. Net interest income divided by the sum of average customer assets. The components of the calculation have been included on page 222. Calculated by dividing shareholders’ equity, excluding non-controlling interests and other equity instruments, less goodwill and intangible assets, by the number of issued ordinary shares. The components of the calculation have been included on page 225. Cost: income ratio Operating expenses excluding litigation and conduct Loan loss rate Tangible net asset value per share Net interest margin home.barclays/annualreport Barclays PLC Annual Report 2017 223 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernance Financial review Non-IFRS performance measures Returns Return on average tangible equity is calculated as profit for the period attributable to ordinary equity holders of the parent (adjusted for the tax credit recorded in reserves in respect of interest payments on other equity instruments) divided by average tangible equity for the period, excluding non- controlling and other equity interests for businesses. Allocated tangible equity has been calculated as 12.0% (2016: 11.5%) of CRD IV fully loaded RWAs for each business, adjusted for CRD IV fully loaded capital deductions, excluding goodwill and intangible assets, reflecting the assumptions the Group uses for capital planning purposes. Head Office average allocated tangible equity represents the difference between the Group’s average tangible shareholders’ equity and the amounts allocated to businesses. For the year ended 31 December 2017 Barclays UK Corporate and Investment Bank Consumer, Cards and Payments Barclays International Head Officea Barclays Non-Core Africa Banking discontinued operationa Barclays Group For the year ended 31 December 2016 Barclays UK Corporate and Investment Bank Consumer, Cards and Payments Barclays International Head Officea Barclays Non-Core Africa Banking discontinued operationa Barclays Group For the year ended 31 December 2015 Barclays UK Corporate and Investment Bank Consumer, Cards and Payments Barclays International Head Officea Barclays Non-Core Africa Banking discontinued operationa Barclays Group Note a Average allocated tangible equity for Africa Banking is included within Head Office. Tax credit in respect of interest payments on other equity instruments £m Profit/(loss) attributable to ordinary equity holders of the parent £m Attributable profit/(loss) £m Average tangible equity £bn Return on average tangible equity % 853 167 680 847 (868) (419) (2,335) (1,922) 828 1,270 1,142 2,412 110 (1,916) 189 1,623 (47) 1,146 612 1,758 11 (2,418) 302 (394) 40 102 18 120 4 10 – 174 29 72 11 83 (1) 17 – 128 14 34 8 42 – 14 – 70 893 269 698 967 (864) (409) (2,335) (1,748) 857 1,342 1,153 2,495 109 (1,899) 189 1,751 (33) 1,180 620 1,800 11 (2,405) 302 (324) 9.1 24.0 4.2 28.1 9.3 2.4 n/m 48.9 8.9 21.9 3.6 25.5 6.5 7.8 n/m 48.7 9.3 21.9 3.0 24.9 2.6 10.9 n/m 47.7 9.8 1.1 16.7 3.4 n/m n/m n/m (3.6) 9.6 6.1 31.4 9.8 n/m n/m n/m 3.6 (0.3) 5.4 20.2 7.2 n/m n/m n/m (0.7) 224 Barclays PLC Annual Report 2017 home.barclays/annualreport Performance measures excluding litigation and conduct, losses related to Barclays’ sell down of BAGL and the remeasurement of US DTAs Barclays Group profit attributable to ordinary equity holders of the parenta Barclays Group profit attributable to ordinary equity holders Impact of litigation and conduct Impact of impairment of Barclays’ holding in BAGL Impact of loss on the sale of BAGL Net impact of the remeasurement of US DTAs Barclays Group profit attributable to ordinary equity holders of the parent excluding litigation and conduct, losses related to Barclays’ sell down of BAGL and the remeasurement of US DTAs Barclays Group return on average shareholders’ equity Barclays Group average tangible shareholders’ equity Barclays Group return on average tangible shareholders’ equity excluding litigation and conduct, losses related to Barclays’ sell down of BAGL and the remeasurement of US DTAs Barclays Group average tangible shareholders’ equity based on a CET1 ratio of 13% 2017 £m (1,748) 1,150 1,008 1,435 901 2,746 £48.9bn 5.6% £50.3bn Barclays Group return on average tangible shareholders’ equity excluding litigation and conduct, losses related to Barclays’ sell down of BAGL and the remeasurement of US DTAs based on a CET1 ratio of 13% 5.5% Barclays Group basic earnings per ordinary share Basic weighted average number of shares 16,996m Barclays Group basic earnings per ordinary share excluding litigation and conduct, losses related to Barclays’ sell down of BAGL and the remeasurement of US DTAs 16.2p Operating expenses excluding litigation and conduct Barclays Group operating expenses Impact of litigation and conduct Barclays Group operating expenses excluding litigation and conduct Tangible net asset value Total equity excluding non-controlling interests Other equity instruments Goodwill and intangiblesb Tangible shareholders’ equity excluding non-controlling interests attributable to ordinary shareholders of the parent Shares in issue Tangible net asset value per share 2017 £m (15,456) 1,207 (14,249) 2016 £m (16,338) 1,363 (14,975) 2015 £m (18,536) 4,387 (14,149) 2017 £m 63,905 (8,941) (7,849) 2016 £m 64,873 (6,449) (9,245) 2015 £m 59,810 (5,305) (8,222) 47,115 49,179 46,283 17,060m 16,963m 16,805m 276p 290p 275p Notes a The profit after tax attributable to other equity instrument holders of £639m (2016: £457m) is offset by a tax credit recorded in reserves of £174m (2016: £128m). The net amount of £465m (2016: £329m), along with non-controlling interests is deducted from profit after tax in order to calculate earnings per share and return on average tangible shareholders’ equity. b Comparative figures for 2016 and 2015 included goodwill and intangibles in relation to Africa Banking. home.barclays/annualreport Barclays PLC Annual Report 2017 225 Risk reviewFinancial statementsShareholder informationStrategic reportFinancial reviewGovernancePresentation of information Barclays approach to disclosures Barclays aims to continually enhance its disclosures and their usefulness to the readers of the financial statements in the light of developing market practice and areas of focus. Consequently Barclays’ disclosures go beyond the minimum standards required by accounting standards and other regulatory requirements. Barclays continues to support the recommendations and guidance made by the Financial Stability Board and its various task forces which continue to promote a broadening of disclosures by global banks in a number of areas, including liquidity and funding, credit risk and market risk. Barclays has adopted the recommendations across the Annual Report and Pillar 3 Report. In line with the Financial Reporting Council’s guidance on Clear and Concise reporting, Barclays has focused reporting on material items and sought to present information in order to aid users’ understanding such as including detail on relevant accounting policies within each note. British Bankers’ Association (BBA) Code for Financial Reporting Disclosure as adopted by UK Finance in 2017 Barclays has adopted the BBA Code for Financial Reporting Disclosure and has prepared the 2017 Annual Report and Accounts in compliance with the Code. It is Barclays’ view that best in class disclosures will continue to evolve in light of ongoing market and stakeholder engagement within the banking sector. Barclays is committed to continuously reflect the objectives of reporting set out in the BBA Code for Financial Reporting Disclosure. This code sets out five disclosure principles together with supporting guidance which states that UK banks will: ■■ provide high quality, meaningful and decision-useful disclosures ■■ review and enhance their financial instrument disclosures for key areas of interest ■■ assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance ■■ seek to enhance the comparability of financial statement disclosures across the UK banking sector and ■■ clearly differentiate in their annual reports between information that is audited and information that is unaudited. Statutory accounts The consolidated accounts of Barclays PLC and its subsidiaries (set out on pages 234 to 238 along with the accounts of Barclays PLC itself on pages 239 to 240) have been prepared in accordance with the IFRSs as adopted by the European Union. The accounting policies on pages 241 to 246 and the notes commencing on page 247 apply equally to both sets of accounts unless otherwise stated. Capital Requirements Country-by-Country Reporting HM Treasury has transposed the requirements set out under CRD IV and issued the Capital Requirements Country-by-Country Reporting Regulations 2013. The legislation requires Barclays PLC to publish additional information in respect of the year ended 31 December 2017. This information is available on the Barclays website: barclays.com/citizenship/reports-and- publications/country-snapshot.html 226 Barclays PLC Annual Report 2017 home.barclays/annualreport Financial statements Detailed analysis of our statutory accounts, independently audited and providing in-depth disclosure on the financial performance of the Group. Consolidated financial statements Notes to the financial statements Performance/return Assets and liabilities held at fair value ■■ Independent Auditor’s Report ■■ Consolidated income statement ■■ Consolidated statement of comprehensive income ■■ Consolidated balance sheet ■■ Consolidated statement of changes in equity ■■ Consolidated cash flow statement ■■ Parent company accounts ■■ Significant accounting policies ■■ Segmental reporting ■■ Net interest income ■■ Net fee and commission income ■■ Net trading income ■■ Net investment income ■■ Credit impairment charges and other provisions ■■ Operating expenses ■■ Profit/(loss) on disposal of subsidiaries, associates and joint ventures ■■ Tax ■■ Earnings per share ■■ Dividends on ordinary shares ■■ Trading portfolio ■■ Financial assets designated at fair value ■■ Derivative financial instruments ■■ Financial investments ■■ Financial liabilities designated at fair value ■■ Fair value of financial instruments ■■ Offsetting financial assets and financial liabilities Financial instruments held at amortised cost ■■ Loans and advances to banks and customers ■■ Finance leases ■■ Reverse repurchase and repurchase agreements including other Non-current assets and other investments Accruals, provisions, contingent liabilities and legal proceedings Capital instruments, equity and reserves Employee benefits Scope of consolidation Other disclosure matters similar lending and borrowing ■■ Property, plant and equipment ■■ Goodwill and intangible assets ■■ Operating leases ■■ Accruals, deferred income and other liabilities ■■ Provisions ■■ Contingent liabilities and commitments ■■ Legal, competition and regulatory matters ■■ Subordinated liabilities ■■ Ordinary shares, share premium and other equity ■■ Reserves ■■ Non-controlling interests ■■ Share-based payments ■■ Pensions and post-retirement benefits ■■ Principal subsidiaries ■■ Structured entities ■■ Investments in associates and joint ventures ■■ Securitisations ■■ Assets pledged ■■ Related party transactions and Directors’ remuneration ■■ Auditors’ remuneration ■■ Assets included in disposal groups classified as held for sale and associated liabilities ■■ Barclays PLC (the Parent company) ■■ Related undertakings Page 228 234 235 236 237 238 239 241 247 249 249 250 250 250 252 252 253 257 257 258 258 259 262 262 262 275 277 277 278 279 280 282 283 283 285 285 294 297 297 298 299 301 306 307 310 311 312 313 315 315 317 318 Note n/a n/a n/a n/a n/a n/a n/a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 home.barclays/annualreport Barclays PLC Annual Report 2017 227 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceIndependent Auditor’s report to the members of Barclays PLC Our opinion is unmodified We have audited the financial statements of Barclays PLC (“the Company”) for the year ended 31 December 2017 which comprise the consolidated and Parent company balance sheets as at 31 December 2017 and the consolidated income statement, consolidated and Parent company statements of comprehensive income, cash flow statements and statements of changes in equity for the year then ended, and the related notes, including the significant accounting policies in note 1. In our opinion the financial statements: ■■ give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December 2017 and of the Group’s loss and the Parent company’s profit for the year then ended; ■■ have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; ■■ have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our reports to the Board Audit Committee. We were appointed as auditor by the directors on 31 March 2017. The financial year ended 31 December 2017 is our first year as auditor. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. 228 Barclays PLC Annual Report 2017 home.barclays/annualreport Independent Auditor’s reportHow our audit addressed the key audit matter Our procedures included: ■■ Controls testing: For UK and US Barclaycard and UK mortgages portfolios we tested the design and operating effectiveness of the key controls over the completeness and accuracy of the key inputs and assumptions into the impairment models, the identification of impaired and forborne accounts and key systems reconciliations. We evaluated controls over the modelling process, including model monitoring, validation and approval. We tested controls over model outputs and recognition and approval of post model adjustments and management overlays. For corporate exposures, we tested design and operating effectiveness of the key controls over the determination of whether loans displayed indicators of impairment; ■■ Our financial risk modelling expertise: In the UK and US Barclaycard and UK mortgage portfolios we assessed the appropriateness of the Group’s impairment methodologies using our experience to independently assess segmentation, emergence periods and recovery period assumptions. For a sample of customer accounts we re-evaluated when an emergence period should start by using underlying customer data and comparing this to the emergence period in the models used by the Group; ■■ Test of details: We tested a selection of post model adjustments and management overlays in order to assess the reasonableness of the adjustments by challenging key assumptions, inspecting the calculation methodology and tracing a sample back to source data; ■■ Test of details: In the UK and US Barclaycard and UK mortgages portfolios we analysed account source data to identify accounts that were paying less than their contractual amount. These accounts were then checked to the forborne accounts identified by the Group; ■■ Our credit experience: We examined a risk based sample of corporate exposures on the early watch list not identified as impaired and formed our own judgement, based on the individual facts and circumstances, as to whether impairment was required. Our results: The results of our testing were satisfactory and we considered the credit impairment charge and provision recognised to be acceptable. Our procedures included: ■■ Enquiry of Directors: We enquired of the Directors to obtain their view on the status of all significant litigation and regulatory matters; ■■ Enquiry of lawyers: For all significant litigation and regulatory matters we enquired of the Group’s internal legal counsel and inspected internal notes and reports. We also received formal confirmations from external counsel. For the most significant litigation and regulatory matters we also had discussions with external counsel. Based on these procedures we challenged the timing of the recognition of provisions where there is potential exposure but it is not clear whether an obligation exists or where the Directors have determined a reliable estimate is not possible. For the significant provisions we independently assessed the estimated value of the provision, based on our enquiries of lawyers; ■■ Assessing transparency: Assessed whether the disclosures detailing significant litigation and regulatory matters adequately disclose the potential liabilities and the significant uncertainties that exist. Our results: The results of our testing were satisfactory and we considered the liabilities recognised, and the disclosures made, to be acceptable. Key audit matter Impairment of loans and advances to customers Refer to page 57 (Board Audit Committee Report). Subjective estimate The calculation of certain credit provisions for the Group is inherently judgemental. Individual and collective impairment provisions (identified and unidentified) may not reflect recent developments in credit quality, arrears experience, or emerging macro-economic risks. The most significant areas are: ■■ Complex impairment models - Models used in the UK and US Barclaycard and UK mortgages portfolios to estimate the existence of incurred loss events and the resultant expected write-offs. Judgement is required to determine the inputs, methodologies and assumptions and these can significantly impact the provisions held. The most significant judgements include the segmentation level at which historical loss rates are calculated, and the length of the recovery period and the loss emergence period applied to historical loss provisions. ■■ Forborne accounts - Forbearance requires special consideration in impairment provisioning, as latent losses may not be appropriately recognised where payment or other concessions have been granted to the customer to provide temporary relief from debt obligations. Forbearance has the greatest potential financial significance on the UK and US Barclaycard and UK mortgages portfolios. ■■ Identification of impairment - Corporate exposures on the Group’s early watchlist are individually assessed for impairment based on a borrower’s financial performance, solvency and liquidity. The bespoke nature of this assessment means there is an inherent risk that loss impairment triggers may not be identified on a timely basis. Alongside the above, another area of focus is post modelling adjustments and management overlays in the UK and US Barclaycard and UK mortgages portfolios as they have the potential to be significant, judgemental and may be difficult to corroborate. Litigation and regulatory matters Contained within the provision for Legal, competition and regulatory matters of £435 million and Note 29 Legal, competition and regulatory matters (2016: £455 million) Refer to page 56 (Board Audit Committee Report), page 283 (accounting policy on accounting for provisions), page 285 (accounting policy on accounting for contingent liabilities), and page 283 (financial disclosures note 27 Provisions) and page 285 (financial disclosures note 29 Legal, competition and regulatory matters) Determining obligation The Group and Parent operates in a highly litigious and regulated environment and faces legal, competition and regulatory challenges which can lead to potential claims and exposures (together “litigation and regulatory matters”). In certain litigation and regulatory matters significant judgment is required by the Directors to determine if there is a present obligation under relevant accounting standards. Subjective estimate If there is a present obligation the amounts involved can be potentially significant, and the application of accounting standards to estimate the expected outflow, if any, of any liability to be recognised is inherently subjective. Disclosure quality When a liability is not recognised for possible significant outflows but there is more than a remote likelihood of an adverse outcome, the related disclosure is key to understanding the risks and potential effect on the Group and Parent. home.barclays/annualreport Barclays PLC Annual Report 2017 229 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceKey audit matter Payment Protection Insurance (‘PPI’) Redress Contained within the provision for Conduct redress PPI of £1,606 million (2016: £1,979 million) Refer to page 56 (Board Audit Committee Report), page 283 (accounting policy on accounting for provisions) and page 283 (financial disclosure note 27 Provisions). Subjective estimate The calculation of the provision of PPI redress costs for the Group requires the Directors to determine a number of key inputs. The determination of these is judgemental and requires the Directors to consider a range of information. The most significant input into the PPI provision calculation is the future complaint flow and that is where we have focussed our procedures. The Directors have developed a model which calculates the expected future complaint flow and associated redress cost. In 2017 a key factor impacting the period over which the model forecasts complaint flows was the introduction of a Financial Conduct Authority (“FCA”) timebar for processing new complaints. The effective date of the timebar is August 2019, and prior to that the FCA is running a consumer communications campaign to give potential complainants notice of the timebar. The Directors have assessed the appropriateness of the provision with reference to the expected impact of this timebar and also in the context of the historical observation across the industry in recent years that the compliant flow has always been greater than expected. Disclosure quality The related PPI disclosures provide the key assumptions underpinning the calculation of the future complaint flow and sensitivity of the provision to the flow and are therefore key to understanding the judgement which has been applied. How our audit addressed the key audit matter Our procedures included: ■■ Enquiry of Directors: We enquired of the Directors as to how they have determined the future complaint flow with particular focus on the way in which the impact of the FCA consumer communications campaign was determined. We also enquired to the reason for adjustments in the provision estimates in 2017, and determined whether these adjustments were indicative of bias in the estimation process; ■■ Enquiry of regulators: We inspected the regulatory correspondence with the FCA and PRA to identify any regulatory observations on the future complaint flow. We also made enquiries of the FCA discussing in more detail the nature of the matters contained in regulatory correspondence that could materially affect the level of provisions held; ■■ Controls testing: We tested the design and operating effectiveness of the key controls over capturing of historic complaints volumes and estimating the future complaint flow; ■■ Sensitivity analysis: We tested the operation of the model used to determine the future complaint flow and related redress estimates and considered the sensitivity of the model to variations in the future complaint flow. We also considered the appropriateness of the scenarios used to model the potential range of future complaint flows, with particular focus on the way the impact of the timebar and FCA communication campaign have been determined, and considered the sensitivity of the model to variations in the future complaint flow by inspecting the calculation methodology and challenging the key assumptions using our industry knowledge; ■■ Independent reperformance: We built our own model to allow us to determine a range of potential future complaint flows and compared these to the Group’s own range. Where there were differences in the inputs and ranges we challenged the Group’s rationale for these and assessed whether they were reasonable. We also used our model to understand the effect of these ranges on the potential future redress cost; ■■ Assessing transparency: We assessed whether the disclosures appropriately disclose and address the uncertainty which exists when determining the future complaint flow. As a part of this, we re-performed the sensitivity analysis that is disclosed. Our results: The results of our testing were satisfactory and we considered the liability recognised, and the disclosures made, to be acceptable. 230 Barclays PLC Annual Report 2017 home.barclays/annualreport Independent Auditor’s report to the members of Barclays PLCIndependent Auditor’s reportKey audit matter Valuation of financial instruments (trading, held at fair value and derivatives) Contained within the level 3 assets and liabilities valued at £15,598 million and £5,681 million respectively (2016: £27,020 million and £14,219 million) Refer to page 56 (Board Audit Committee Report), page 262 (accounting policy on accounting for financial assets and liabilities – fair values) and page 262 (financial disclosure Note 18 Fair value of financial instruments). Subjective valuation The fair value of the Group’s financial instruments is determined through the application of valuation techniques which often involve the exercise of judgement by the Directors and the use of assumptions, estimates and valuation models. Estimation uncertainty can be high for those instruments where significant valuation inputs are unobservable (i.e. Level 3 instruments). At 31 December 2017, Level 3 instruments represented 2.9% of the Group’s financial instrument assets carried at fair value (£15.6 billion) and 1.2% of the Group’s financial instrument liabilities carried at fair value (£5.7 billion). Within this Level 3 population the fair value instrument portfolios in the Group with the most significant judgements include: ■■ Education, Social Housing and Local Authority (ESHLA) loan portfolio – as at 31 December 2017 the Group has outstanding ESHLA loans which require significant judgement in the valuation due to the long dated nature of the portfolio, the lack of a secondary market in the relevant loans and unobservable loan spreads. ■■ Longer-dated portfolios – we identified three portfolios (two derivative portfolios and a bond package) each with a significant risk attached to the valuation methodology due to the lack of observable pricing inputs. The bond package also includes a long standing valuation disparity with the counterparty. User Access Management (‘UAM’) Control Performance User Access Management key controls are an important component of the General IT Control environment assuring only authorised access to the infrastructure, financial systems and data throughout the Group. In 2016, controls to detect instances of direct developer access to the production environment, were not consistently implemented and operated throughout the Group. Also, where inappropriate direct developer access had been identified by compensating controls, there were no follow up activities performed to determine if and how these access rights were used, potentially resulting in unauthorised changes to the infrastructure and financial systems. During 2017 a remediation programme and further compensating controls were implemented to address inappropriate direct developer access to infrastructure and financial systems, including an assessment of potential access by developers that were not covered by the further compensating controls. If the above controls for User Access Management are deficient and are not remediated or adequately mitigated the pervasive nature of these key controls may undermine our ability to place some reliance on fully automated and IT dependent controls in our audit. How our audit addressed the key audit matter Our procedures included: ■■ Control testing: We tested the design and operating effectiveness of key controls relating specifically to the ESHLA and the three longer dated portfolios. These included: – Controls over independent price verification (IPV) key inputs, including completeness of positions and risk factors subject to IPV. For ESHLA we tested the gilt asset swap curve and credit spreads. For the long dated portfolios we tested material risk parameters; – Management review controls over fair value adjustments (FVA). For ESHLA these related to pre-payments. For the longer-dated portfolios these related to exit adjustments and model shortcoming reserves. In addition we tested funding and credit adjustments for all significant risk portfolios. – Controls over the validation, completeness, implementation and usage of valuation models. This included controls over adjustments to mitigate model limitations and assumptions. ■■ Independent reperformance: Our own valuation specialists independently re-priced a selection of trades from the three longer- dated portfolios and challenged management on the valuations where they were outside our expected range. ■■ Methodology choice: In the context of observed industry practice, our own valuation specialists assisted us in challenging the appropriateness of significant models and methodologies used in calculating fair values, risk exposures, completeness of risk factors, and in calculating FVAs; ■■ Comparing valuations: For a selection of material collateral disputes within the longer-dated portfolios our own valuation specialists challenged the valuation methodology where significant fair value differences were observable with the counterparty; ■■ Historical comparison: For the longer-dated bond package portfolio we inspected significant gains and losses on historical trade exits both in the current year and prior years and challenged whether these data points indicate elements of fair value not incorporated in the current valuation methodologies; ■■ Benchmarking: For the ESHLA portfolio we independently sourced comparable credit spreads and proxy bond spreads and investigated significant variances. Our results: The results of our testing were satisfactory and we considered the fair value of level 3 financial instrument assets and liabilities recognised to be acceptable. Our procedures included: ■■ Assessment of remediation: We inspected selected activities of the remediation programme to determine the appropriateness of the remediation and a new mitigating and compensating detective control implemented in the year; ■■ Control testing: We tested the design and operating effectiveness of the key controls over User Access Management. This included the new mitigating and compensating control implemented in the year that identifies inappropriate developer access to production, the procedures to assess potential use, and the removal of these access rights; ■■ Control reperformance: for a selection of key automated and technology dependent controls, that were tested before the remediation programme concluded, we independently reperformed procedures to determine that these controls remained unchanged or were changed following the standard change management process throughout the year; ■■ Extended scope: To determine that a further detective compensating control and retrospective scan of developer activities on key IT applications was complete and accurate, we reperformed on a sample basis management’s assessment of potential access by developers that were not covered by the further compensating control. Our results: Our testing did not identify developers who had access and used the access without authorisation that would have required us to expand the extent of our planned detailed testing. home.barclays/annualreport Barclays PLC Annual Report 2017 231 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceOur application of materiality and an overview of the scope of our audit Materiality Materiality for the Group financial statements as a whole was set at £225 million, determined with reference to a benchmark of group profit before tax from continuing operations, normalised to exclude charges related to litigation and conduct as disclosed in note 2, of £4,748 million, of which it represents 4.7%. Materiality for the Parent company financial statements as a whole was set at £225 million, determined with reference to a benchmark of net assets, of which it represents 0.6%. We agreed to report to the Board Audit Committee any corrected or uncorrected identified misstatements exceeding £11 million, in addition to other identified misstatements that warranted reporting on qualitative grounds. Group materiality 1 2 A B A £225m Whole financial statements materiality B £165m Range of materiality at 10 components (£25m-£165m) C £11m Misstatements reported to the Board Audit Committee C 1 Profit before tax from continuing operations* 2 Group materiality £4,748m £225m *normalised to exclude charges related to litigation and conduct Scope – general We subjected 6 of the group’s reporting components to full scope audits for group purposes and 4 to an audit of one or more account balances, of which 3 focused on loans and advances and related impairment and interest, and 1 focused on Financial assets designated at fair value. The latter were not individually financially significant enough to require a full scope audit for group purposes, but did present specific individual risks that needed to be addressed. The work on 5 of the 6 components was performed by component auditors and the rest, including the audit of the Parent company, was performed by the Group team. For those items excluded from normalised group profit before tax, the component teams performed procedures on items relating to their components. The group team performed procedures on the remaining excluded items. The components within the scope of our work accounted for the percentages illustrated opposite. Group total income 1 3 2 1 Full scope for group audit purposes 2 Audit of one or more account balance 3 Residual components – other procedures 79% 2% 19% Group total assets 1 3 2 1 Full scope for group audit purposes 2 Audit of one or more account balance 3 Residual components – other procedures 87% 3% 10% Scope – disclosure of IFRS 9 effect The Group is adopting IFRS 9 Financial Instruments from 1 January 2018 and has included an estimate of the financial impact of the change in accounting standard in accordance with IAS 8 Changes in Accounting Estimates and Errors as set out in note 1. This disclosure notes that the estimate has been prepared under an interim control environment with models that continue to undergo validation. While further testing of the financial impact will be performed as part of our 2018 year end audit, we have performed sufficient audit procedures for the purposes of assessing the disclosures made in accordance with IAS 8. Specifically we have: ■■ considered the appropriateness of key technical decisions, judgements, assumptions and elections made in determining the estimate; ■■ considered key classification and measurement decisions, including business model assessments and solely payment of principal and interest outcomes; ■■ involved credit risk modelling and economic specialists in the consideration of credit risk modelling decisions and macroeconomic variables, including forward economic guidance and generation of multiple economic scenarios, for a sample of models used in determining the estimate; ■■ considered interim controls and governance processes related to the calculation and approval of the estimated transitional impact. Team structure The Group team instructed component auditors as to the significant areas to be covered, including the relevant key audit matters detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £25 million to £165 million, having regard to the mix of size and risk profile of the Group across the components. The Group team visited all of the components in scope for group reporting purposes to assess the audit risk and strategy. Video and telephone conference meetings were also held with these component auditors. At these visits and meetings, we reviewed the components’ key workpapers, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor. The Group operates a shared service centre in India, the outputs of which are included in the financial information of the reporting components it services and therefore it is not a separate reporting component. The shared service centre is subject to specified risk-focused audit procedures, predominantly the testing of transaction processing, reconciliations and review controls. Additional procedures are performed at certain reporting components to address the audit risks not covered by the work performed over the shared service centres. The Group team and certain component teams visited the shared service centre and performed consistent risk assessment procedures as described above for component site visits. We have nothing to report on going concern We are required to report to you if: ■■ we have anything material to add or draw attention to in relation to the directors’ statement in note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Parent company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or ■■ the same statement under the Listing Rules is materially inconsistent with our audit knowledge. We have nothing to report in these respects. We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. 232 Barclays PLC Annual Report 2017 home.barclays/annualreport Independent Auditor’s report to the members of Barclays PLCIndependent Auditor’s report Strategic report and Directors’ report Based solely on our work on the other information: ■■ we have not identified material misstatements in the strategic report and the Directors’ report; ■■ in our opinion the information given in those reports for the financial year is consistent with the financial statements; and ■■ in our opinion those reports have been prepared in accordance with the Companies Act 2006. Directors’ remuneration report In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Disclosures of principal risks and longer- term viability Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: ■■ the directors’ confirmation within the Viability statement (pages 40 to 41) that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; ■■ the material existing and emerging risks disclosures describing these risks within the Viability Statement (pages 40 to 41) and explaining how they are being managed and mitigated; and ■■ the directors’ explanation in the Viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Under the Listing Rules we are required to review the Viability statement. We have nothing to report in this respect. Corporate governance disclosures We are required to report to you if: ■■ we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or ■■ the section of the Annual Report describing the work of the Board Audit Committee does not appropriately address matters communicated by us to the Board Audit Committee. We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: ■■ adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or ■■ the Parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or ■■ certain disclosures of directors’ remuneration specified by law are not made; or ■■ we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 88, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and Parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the Parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc. org.uk/auditorsresponsibilities. Irregularities – ability to detect We identified relevant areas of laws and regulations that could have a material effect on the financial statements from our sector experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group’s regulatory correspondence. We had regard to laws and regulations in areas that directly affect the financial statements including financial reporting (including related company legislation) and taxation legislation. We considered the extent of compliance with those laws and regulations as part of our procedures on the related annual accounts items. In addition we considered the impact of laws and regulations in the specific areas of regulatory capital and liquidity, conduct including PPI mis-selling, money laundering, sanctions list and financial crime, market abuse regulations and certain aspects of company legislation recognising the financial and regulated nature of the Group’s activities. With the exception of any known or possible non-compliance, and as required by auditing standards, our work in respect of these was limited to enquiry of the directors and other management and inspection of regulatory correspondence. We considered the effect of any known or possible non-compliance with these as part of our procedures on the related annual accounts items, including known or possible non-compliance as set out in certain key audit matters disclosures in the “Key audit matters: our assessment of risks of material misstatement” section of this report. We communicated identified laws and regulations throughout our team and remained alert to any indications of non- compliance throughout the audit. As with any audit, there remained a higher risk of non-detection of non-compliance with relevant areas of laws and regulations, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Guy Bainbridge (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 21 February 2018 home.barclays/annualreport Barclays PLC Annual Report 2017 233 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceConsolidated income statement For the year ended 31 December Continuing operations Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net trading income Net investment income Other income Total income Credit impairment charges and other provisions Net operating income Staff costs Infrastructure costs Administration and general expenses Provision for UK customer redress Provision for ongoing investigations and litigation relating to Foreign Exchange Operating expenses Share of post-tax results of associates and joint ventures Profit/(loss) on disposal of subsidiaries, associates and joint ventures Profit before tax Taxation Profit/(loss) after tax in respect of continuing operations (Loss)/profit after tax in respect of discontinued operation (Loss)/profit after tax Attributable to: Equity holders of the parent Other equity instrument holdersa Total equity holders of the parent Non-controlling interests in respect of continuing operations Non-controlling interests in respect of discontinued operation (Loss)/profit after tax Earnings per share Basic (loss)/earnings per ordinary share Basic earnings/(loss) per ordinary share in respect of continuing operations Basic (loss)/earnings per ordinary share in respect of discontinued operation Diluted (loss)/earnings per share Diluted earnings/(loss) per ordinary share in respect of continuing operations Diluted (loss)/earnings per ordinary share in respect of discontinued operation Notes 2017 £m 2016 £m 2015 £m 3 3 4 4 5 6 7 8 8 8 8 9 10 33 33 11 11 11 11 11 11 13,631 (3,786) 9,845 8,751 (1,937) 6,814 3,500 861 56 21,076 (2,336) 18,740 (8,560) (2,949) (3,247) (700) – (15,456) 70 187 3,541 (2,240) 1,301 (2,195) (894) (1,922) 639 (1,283) 249 140 (894) (10.3) 3.5 (13.8) (10.1) 3.4 (13.5) 14,541 (4,004) 10,537 8,570 (1,802) 6,768 2,768 1,324 54 21,451 (2,373) 19,078 (9,423) (2,998) (2,917) (1,000) – (16,338) 70 420 3,230 (993) 2,237 591 2,828 1,623 457 2,080 346 402 2,828 10.4 9.3 1.1 10.3 9.2 1.1 13,953 (3,345) 10,608 8,470 (1,611) 6,859 3,426 1,097 50 22,040 (1,762) 20,278 (8,853) (2,691) (2,983) (2,772) (1,237) (18,536) 41 (637) 1,146 (1,149) (3) 626 623 (394) 345 (49) 348 324 623 (1.9) (3.7) 1.8 (1.9) (3.7) 1.8 Note a The profit after tax attributable to other equity instrument holders of £639m (2016: £457m) is offset by a tax credit recorded in reserves of £174m (2016: £128m). The net amount of £465m (2016: £329m), along with non-controlling interests (NCI) is deducted from profit after tax in order to calculate earnings per share and return on average shareholders’ equity. 234 Barclays PLC Annual Report 2017 home.barclays/annualreport Consolidated financial statementsConsolidated statement of comprehensive income For the year ended 31 December (Loss)/profit after tax Profit/(loss) after tax in respect of continuing operations (Loss)/profit after tax in respect of discontinued operation Other comprehensive (loss)/income that may be recycled to profit or loss from continuing operations: Currency translation reserve Currency translation differencesa Available for sale reserve Net gains from changes in fair value Net gains transferred to net profit on disposal Net losses transferred to net profit due to impairment Net losses/(gains) transferred to net profit due to fair value hedging Changes in insurance liabilities and other movements Tax Cash flow hedging reserve Net (losses)/gains from changes in fair value Net gains transferred to net profit Tax Other Other comprehensive (loss)/income that may be recycled to profit or loss from continuing operations Other comprehensive income/(loss) not recycled to profit or loss from continuing operations: Retirement benefit remeasurements Own credit Tax Other comprehensive income/(loss) not recycled to profit or loss from continuing operations 2017 £m (894) 1,301 (2,195) 2016 £m 2,828 2,237 591 2015 £m 623 (3) 626 (1,337) 3,024 748 473 (294) 3 283 11 (27) (626) (643) 321 (5) (1,841) 115 (7) (66) 42 2,147 (912) 20 (1,677) 53 (18) 1,455 (365) (292) 13 3,448 (1,309) – 329 (980) 64 (374) 17 (148) 86 126 (312) (238) 57 20 46 1,176 – (260) 916 Other comprehensive (loss)/income for the year from continuing operations (1,799) 2,468 962 Other comprehensive income/(loss) for the year from discontinued operation 1,301 1,520 (1,348) Total comprehensive (loss)/income for the year: Total comprehensive (loss)/income for the year, net of tax from continuing operations Total comprehensive (loss)/income for the year, net of tax from discontinued operation Total comprehensive (loss)/income for the year Attributable to: Equity holders of the parent Non-controlling interests Total comprehensive (loss)/income for the year Note a Includes £189m loss (2016: £101m gain) on recycling of currency translation differences. (498) (894) (1,392) (1,749) 357 (1,392) 4,705 2,111 6,816 5,233 1,583 6,816 959 (722) 237 45 192 237 home.barclays/annualreport Barclays PLC Annual Report 2017 235 Consolidated financial statementsRisk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceConsolidated balance sheet As at 31 December Assets Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Financial investments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Prepayments, accrued income and other assets Investments in associates and joint ventures Property, plant and equipment Goodwill and intangible assets Current tax assets Deferred tax assets Retirement benefit assets Assets included in disposal groups classified as held for sale Total assets Liabilities Deposits from banks Items in the course of collection due to other banks Customer accounts Repurchase agreements and other similar secured borrowing Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issue Subordinated liabilities Accruals, deferred income and other liabilities Provisions Current tax liabilities Deferred tax liabilities Retirement benefit liabilities Liabilities included in disposal groups classified as held for sale Total liabilities Equity Called up share capital and share premium Other equity instruments Other reserves Retained earnings Total equity excluding non-controlling interests Non-controlling interests Total equity Total liabilities and equity The Board of Directors approved the financial statements on pages 234 to 322 on 21 February 2018. John McFarlane Group Chairman James E Staley Group Chief Executive Tushar Morzaria Group Finance Director Notes 2017 £m 2016 £m 2015 £m 171,082 2,153 113,760 116,281 237,669 58,916 35,663 365,552 12,546 2,389 718 2,572 7,849 482 3,457 966 1,193 49,711 1,011 77,348 76,830 327,709 90,267 41,349 399,217 28,187 3,010 573 3,468 8,222 415 4,495 836 7,364 1,133,248 1,213,126 1,120,012 102,353 1,467 80,240 78,608 346,626 63,317 43,251 392,784 13,454 2,893 684 2,825 7,726 561 4,869 14 71,454 13 14 15 16 20 20 22 38 23 24 10 10 35 43 37,723 446 429,121 40,338 37,351 173,718 238,345 73,314 23,826 8,565 3,543 586 44 312 – 47,080 1,013 418,242 25,035 33,967 91,745 324,252 69,150 21,467 10,610 4,142 903 122 423 5,997 1,067,232 1,141,761 1,054,148 48,214 636 423,178 19,760 34,687 96,031 340,487 75,932 23,383 8,871 4,134 737 29 390 65,292 22 13 17 15 30 26 27 10 10 35 43 31 31 32 22,045 8,941 5,383 27,536 63,905 2,111 66,016 21,586 5,305 1,898 31,021 59,810 6,054 65,864 1,133,248 1,213,126 1,120,012 21,842 6,449 6,051 30,531 64,873 6,492 71,365 33 236 Barclays PLC Annual Report 2017 home.barclays/annualreport Consolidated financial statements Consolidated statement of changes in equity Called up share capital and share premiuma £m 21,842 – 21,842 – – – – – – – Other equity instru- mentsa £m 6,449 – 6,449 639 – – – – – – – Currency Cash Available trans- flow for sale lation hedging reserveb reserveb reserveb £m £m £m 3,051 (74) 2,105 – – 3,051 (74) 2,105 – – – (1,336) – – – (948) – – – – – – – – 449 – – – – Own credit reserveb £m – (175) (175) – – – – – (11) – Other reserves and treasury sharesb £m – Total equity excluding non- controlling Retained interests earnings £m £m 969 30,531 64,873 – 175 969 30,706 64,873 1,052 413 – (1,336) 449 – (948) – 53 53 (11) – (5) (5) – – – – – – – Non- controlling interests £m – 249 Total equity £m 6,492 71,365 – 6,492 71,365 1,301 (1) (1,337) 449 – (948) – 53 – (11) – (5) – – 639 449 (948) (1,336) (11) – 461 (746) 248 (498) (11) 438 – 4 (944) – 1,339 3 – – (11) – – (2,335) (1,003) – (1,874) (1,749) 117 – – 109 (894) 357 (1,392) 117 – – – 117 86 – 639 – – – – – – 2,490 (639) – – – – – – – – – – – – – – – – – – – – – 22,045 21,586 – – – – – – – – – 2 8,941 5,305 457 – – – – – – – – – 364 317 – – (387) – – – – – – – 1,161 1,261 – – – 798 – – – – – – 3,054 (623) – 3,022 – – – – – 457 (387) 798 3,022 – – 68 – 457 – (4) (391) – 46 844 – 652 3,674 – 188 – – – – – – – – – 21,842 1,132 (457) – – – – – 12 6,449 – – – – – – – – – – – – – – – – – – – – – – – (74) 2,105 – – – – 3,051 – – – – – – – – 7 (179) – – – – – – – – – – – – – – – – – – – – – – 505 591 – 591 – – – (315) – 174 (479) – 2,490 (465) (479) (315) – – 2,490 (465) (860) (1,339) (315) – 329 – – – (636) (509) (359) 8 17 983 27,536 63,905 (307) – (307) (509) (924) (415) (359) (3,462) (3,821) 16 2,111 66,016 (1) 943 31,021 59,810 1,891 1,434 3,022 – (387) – 798 – (980) (980) 12 12 – – – – – – 6,054 65,864 2,237 3,024 (387) 798 (980) 13 346 2 – – – 1 – – – – – 466 4,356 349 4,705 183 649 – 877 5,233 68 1,234 1,583 – 2,111 6,816 68 668 856 – 856 – – – (140) – 128 (417) – – – 1,132 1,132 (329) (329) (417) (1,170) (1,587) (140) (140) – 166 – – – (415) (757) (349) 3 (249) (757) (349) 15 969 30,531 64,873 – (249) (575) (1,332) 252 601 14 (1) 6,492 71,365 Balance as at 31 December 2016 Effects of changes in accounting policiesc Balance as at 1 January 2017 Profit after tax Currency translation movements Available for sale investments Cash flow hedges Pension remeasurement Own credit reserve Other Total comprehensive income net of tax from continuing operations Total comprehensive income net of tax from discontinued operation Total comprehensive income for the year Issue of new ordinary shares Issue of shares under employee share schemes Issue and exchange of other equity instruments Other equity instruments coupons paid Redemption of preference shares Increase in treasury shares Vesting of shares under employee share schemes Dividends paid Net equity impact of BAGL disposal Other reserve movements Balance as at 31 December 2017 Balance as at 1 January 2016 Profit after tax Currency translation movements Available for sale investments Cash flow hedges Pension remeasurement Other Total comprehensive income net of tax from continuing operations Total comprehensive income net of tax from discontinued operation Total comprehensive income for the year Issue of new ordinary shares Issue of shares under employee share schemes Issue and exchange of other equity instruments Other equity instruments coupons paid Redemption of preference shares Increase in treasury shares Vesting of shares under employee share schemes Dividends paid Net equity impact of partial BAGL disposal Other reserve movements Balance as at 31 December 2016 Notes a For further details refer to Note 31. b For further details refer to Note 32. c As a result of the early adoption of the own credit provisions of IFRS 9 on 1 January 2017, own credit which was previously recorded in the income statement is now recognised within other comprehensive income. The cumulative unrealised own credit net loss of £175m has therefore been reclassified from retained earnings to a separate own credit reserve, within other reserves. During 2017, a £4m loss (net of tax) on own credit has been booked in the reserve. home.barclays/annualreport Barclays PLC Annual Report 2017 237 Consolidated financial statementsRisk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceConsolidated cash flow statement For the year ended 31 December Continuing operations Reconciliation of profit before tax to net cash flows from operating activities: Profit before tax Adjustment for non-cash items: Allowance for impairment Depreciation, amortisation and impairment of property, plant, equipment and intangibles Other provisions, including pensions Net profit on disposal of investments and property, plant and equipment Other non-cash movements including exchange rate movements Changes in operating assets and liabilities Net decrease/(increase) in loans and advances to banks and customers Net decrease in reverse repurchase agreements and other similar lending Net (decrease)/increase in deposits and debt securities in issue Net increase/(decrease) in repurchase agreements and other similar borrowing Net decrease/(increase) in derivative financial instruments Net (increase)/decrease in trading assets Net increase/(decrease) in trading liabilities Net decrease/(increase) in financial assets and liabilities designated at fair value Net (increase) in other assets Net (decrease) in other liabilities Corporate income tax paid Net cash from operating activities Purchase of available for sale investments Proceeds from sale or redemption of available for sale investments Purchase of property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment and intangibles Disposal of discontinued operation, net of cash disposed Disposal of subsidiaries, net of cash disposed Other cash flows associated with investing activities Net cash from investing activities Dividends paid and other coupon payments on equity instruments Issuance of subordinated debt Redemption of subordinated debt Net issue of shares and other equity instruments Repurchase of shares and other equity instruments Net purchase of treasury shares Net cash from financing activities Effect of exchange rates on cash and cash equivalents Net increase in cash and cash equivalents from continuing operations Net cash from discontinued operation Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash and cash equivalents comprise: Cash and balances at central banks Loans and advances to banks with original maturity less than three months Available for sale treasury and other eligible bills with original maturity less than three months Trading portfolio assets with original maturity less than three months Cash and cash equivalents held for sale Notes 2017 £m 2016 £m 2015 £m 3,541 3,230 1,146 2,336 1,241 1,875 (325) 1,031 27,361 908 (7,166) 20,578 6,815 (33,492) 2,664 40,014 (3,775) (2,187) (708) 60,711 (83,127) 88,298 (1,456) 283 (1,060) 358 206 3,502 (1,273) 3,041 (1,378) 2,490 (1,339) (580) 961 (4,773) 60,401 101 60,502 144,110 204,612 171,082 32,820 682 28 – 204,612 2,357 1,261 1,964 (912) (20,025) (25,385) 14,733 49,064 (4,852) (2,318) (5,577) 880 807 (2,629) (532) (780) 11,286 (65,086) 102,515 (1,707) 358 – 595 32 36,707 (1,304) 1,457 (1,143) 1,400 (1,587) (140) (1,317) 10,473 57,149 405 57,554 86,556 144,110 102,353 38,252 356 – 3,149 144,110 1,752 1,215 4,241 (374) 226 22,641 103,471 (33,120) (99,602) (3,315) 37,091 (10,877) (3,064) (2,661) (1,766) (1,670) 15,334 (120,061) 114,529 (1,928) 393 – – 516 (6,551) (1,496) 879 (556) 1,278 – (679) (574) 1,689 9,898 (1,821) 8,077 78,479 86,556 49,711 35,876 816 153 – 86,556 10 30 30 43 Interest received was £21,784m (2016: £22,099m; 2015: £20,376m) and interest paid was £10,310m (2016: £8,850m; 2015: £7,534m). The Group is required to maintain balances with central banks and other regulatory authorities and these amounted to £3,360m (2016: £4,254m; 2015: £4,369m). For the purposes of the cash flow statement, cash comprises cash on hand and demand deposits and cash equivalents comprise highly liquid investments that are convertible into cash with an insignificant risk of changes in value with original maturities of three months or less. Repurchase and reverse repurchase agreements are not considered to be part of cash equivalents. 238 Barclays PLC Annual Report 2017 home.barclays/annualreport Consolidated financial statementsFinancial statements of Barclays PLC Parent company accounts Statement of comprehensive income For the year ended 31 December Dividends received from subsidiary Net interest (expense)/income Other income Operating expenses Profit before tax Tax Profit after tax Other comprehensive income Total comprehensive income Profit after tax attributable to: Ordinary equity holders Other equity instrument holders Profit after tax Total comprehensive income attributable to: Ordinary equity holders Other equity instrument holders Total comprehensive income Notes 44 2017 £m 674 (10) 690 (96) 1,258 (111) 1,147 60 1,207 508 639 1,147 568 639 1,207 2016 £m 621 5 334 (26) 934 (60) 874 26 900 417 457 874 443 457 900 2015 £m 876 (7) 227 (6) 1,090 (43) 1,047 – 1,047 702 345 1,047 702 345 1,047 For the year ended 31 December 2017, profit after tax was £1,147m (2016: £874m) and total comprehensive income was £1,207m (2016: £900m). Other comprehensive income of £60m (2016: £26m) relates to the gain on available for sale instruments. The Company has 90 members of staff (2016: 7). Balance sheet As at 31 December Assets Investment in subsidiaries Loans and advances to subsidiaries Financial investments Derivative financial instruments Other assets Total assets Liabilities Deposits from banks Subordinated liabilities Debt securities in issue Other liabilities Total liabilities Equity Called up share capital Share premium account Other equity instruments Other reserves Retained earnings Total equity Total liabilities and equity Notes 2017 £m 2016 £m 44 44 44 44 44 44 31 31 31 39,354 23,970 4,782 161 202 68,469 500 6,501 22,110 153 29,264 4,265 17,780 8,943 480 7,737 39,205 68,469 36,553 19,421 1,218 268 105 57,565 547 3,789 16,893 14 21,243 4,241 17,601 6,453 420 7,607 36,322 57,565 The financial statements on pages 239 to 240 and the accompanying note on page 317 were approved by the Board of Directors on 21 February 2018 and signed on its behalf by: John McFarlane Group Chairman James E Staley Group Chief Executive Tushar Morzaria Group Finance Director home.barclays/annualreport Barclays PLC Annual Report 2017 239 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceFinancial statements of Barclays PLC Parent company accounts Statement of changes in equity Balance as at 1 January 2017 Profit after tax and other comprehensive income Issue of new ordinary shares Issue of shares under employee share schemes Issue of other equity instruments Vesting of employee share schemes Dividends Other equity instruments coupons paid Other Balance as at 31 December 2017 Balance as at 1 January 2016 Profit after tax and other comprehensive income Issue of new ordinary shares Issue of shares under employee share schemes Issue of other equity instruments Vesting of employee share schemes Dividends Other equity instruments coupons paid Other Balance as at 31 December 2016 Notes 12 12 Called up share capital and share premium £m 21,842 – 117 86 – – – – – 22,045 Other equity instruments £m 6,453 639 – – 2,490 – – (639) – 8,943 Capital redemption reserve £m 394 – – – – – – – – 394 Available for sale reserve £m 26 60 – – – – – – – 86 21,586 – 68 188 – – – – – 21,842 5,321 457 – – 1,132 – – (457) – 6,453 394 – – – – – – – – 394 – 26 – – – – – – – 26 Retained earnings £m 7,607 508 – 27 – (11) (509) 123 (8) 7,737 7,851 417 – – – – (757) 91 5 7,607 Total equity £m 36,322 1,207 117 113 2,490 (11) (509) (516) (8) 39,205 35,152 900 68 188 1,132 – (757) (366) 5 36,322 Cash flow statement For the year ended 31 December Reconciliation of profit before tax to net cash flows from operating activities: Profit before tax Changes in operating assets and liabilities Other non-cash movements Corporate income tax paid Net cash generated from operating activities Capital contribution to subsidiary Net cash used in investing activities Issue of shares and other equity instruments Net increase in loans and advances to subsidiaries of the Parent Net increase in debt securities in issue Proceeds of borrowings and issuance of subordinated debt Dividends paid Coupons paid on AT1 instruments Net cash generated from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Net cash generated from operating activities includes: Dividends received Interest (paid)/received 2017 £m 2016 £m 2015 £m 1,258 102 76 – 1,436 (2,801) (2,801) 2,581 (9,707) 6,503 3,019 (392) (639) 1,365 – – – 934 37 62 – 1,033 (1,250) (1,250) 1,388 (10,942) 9,314 1,671 (757) (457) 217 – – – 1,090 100 52 (27) 1,215 (1,560) (1,560) 1,771 (4,973) 4,052 921 (1,081) (345) 345 – – – 674 (10) 621 5 876 (7) The Parent company’s principal activity is to hold the investment in its wholly-owned subsidiaries, Barclays Bank PLC and Barclays Services Limited. Dividends received are treated as operating income. The Company was not exposed at 31 December 2017 or 2016 to significant risks arising from the financial instruments it holds, which comprised loans and advances and other assets which had no market risk or material credit risk. 240 Barclays PLC Annual Report 2017 home.barclays/annualreport Notes to the financial statements for the year ended 31 December 2017 This section describes Barclays’ significant policies and critical accounting estimates that relate to the financial statements and notes as a whole. If an accounting policy or a critical accounting estimate relates to a particular note, the accounting policy and/or critical accounting estimate is contained with the relevant note. 1 Significant accounting policies 1. Reporting entity These financial statements are prepared for Barclays PLC and its subsidiaries (the Barclays PLC Group or the Group) under Section 399 of the Companies Act 2006. The Group is a major global financial services provider engaged in retail banking, credit cards, wholesale banking, investment banking, wealth management and investment management services. In addition, individual financial statements have been presented for the holding company. 2. Compliance with International Financial Reporting Standards The consolidated financial statements of the Group, and the individual financial statements of Barclays PLC, have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations (IFRICs) issued by the Interpretations Committee, as published by the International Accounting Standards Board (IASB). They are also in accordance with IFRS and IFRIC interpretations endorsed by the European Union. The principal accounting policies applied in the preparation of the consolidated and individual financial statements are set out below, and in the relevant notes to the financial statements. These policies have been consistently applied. 3. Basis of preparation The consolidated and individual financial statements have been prepared under the historical cost convention modified to include the fair valuation of investment property, and particular financial instruments, to the extent required or permitted under IFRS as set out in the relevant accounting policies. They are stated in millions of pounds Sterling (£m), the functional currency of Barclays PLC. The financial statements have been prepared on a going concern basis, in accordance with The Companies Act 2006 as applicable to companies using IFRS. 4. Accounting policies Barclays prepares financial statements in accordance with IFRS. The Group’s significant accounting policies relating to specific financial statement items, together with a description of the accounting estimates and judgements that were critical to preparing them, are set out under the relevant notes. Accounting policies that affect the financial statements as a whole are set out below. (i) Consolidation Barclays applies IFRS 10 Consolidated financial statements. The consolidated financial statements combine the financial statements of Barclays PLC and all its subsidiaries. Subsidiaries are entities over which Barclays PLC has control. The Group has control over another entity when the Group has all of the following: 1) power over the relevant activities of the investee, for example through voting or other rights 2) exposure to, or rights to, variable returns from its involvement with the investee and 3) the ability to affect those returns through its power over the investee. The assessment of control is based on the consideration of all facts and circumstances. The Group reassesses whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Intra-group transactions and balances are eliminated on consolidation. Consistent accounting policies are used throughout the Group for the purposes of the consolidation. Changes in ownership interests in subsidiaries are accounted for as equity transactions if they occur after control has already been obtained and they do not result in loss of control. As the consolidated financial statements include partnerships where the Group member is a partner, advantage has been taken of the exemption under Regulation 7 of the Partnership (Accounts) Regulations 2008 with regard to preparing and filing of individual partnership financial statements. Details of the principal subsidiaries are given in Note 36, and a complete list of all subsidiaries is presented in Note 45. (ii) Foreign currency translation The Group applies IAS 21 The Effects of Changes in Foreign Exchange Rates. Transactions and balances in foreign currencies are translated into Sterling at the rate ruling on the date of the transaction. Foreign currency balances are translated into Sterling at the period end exchange rates. Exchange gains and losses on such balances are taken to the income statement. The Group’s foreign operations (including subsidiaries, joint ventures, associates and branches) based mainly outside the UK may have different functional currencies. The functional currency of an operation is the currency of the main economy to which it is exposed. Prior to consolidation (or equity accounting) the assets and liabilities of non-Sterling operations are translated at the closing rate and items of income, expense and other comprehensive income are translated into Sterling at the rate on the date of the transactions. Exchange differences arising on the translation of foreign operations are included in currency translation reserves within equity. These are transferred to the income statement when the Group disposes of the entire interest in a foreign operation, when partial disposal results in the loss of control of an interest in a subsidiary, when an investment previously accounted for using the equity method is accounted for as a financial asset, or on the disposal of an autonomous foreign operation within a branch. home.barclays/annualreport Barclays PLC Annual Report 2017 241 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance1 Significant accounting policies continued (iii) Financial assets and liabilities The Group applies IAS 39 Financial Instruments: Recognition and Measurement to the recognition, classification and measurement, and derecognition of financial assets and financial liabilities, the impairment of financial assets, and hedge accounting. Recognition The Group recognises financial assets and liabilities when it becomes a party to the terms of the contract. Trade date or settlement date accounting is applied depending on the classification of the financial asset. Classification and measurement Financial assets and liabilities are initially recognised at fair value and may be held at fair value or amortised cost depending on the Group’s intention toward the assets and the nature of the assets and liabilities, mainly determined by their contractual terms. The accounting policy for each type of financial asset or liability is included within the relevant note for the item. The Group’s policies for determining the fair values of the assets and liabilities are set out in Note 18. Derecognition The Group derecognises a financial asset, or a portion of a financial asset, from its balance sheet where the contractual rights to cash flows from the asset have expired, or have been transferred, usually by sale, and with them either substantially all the risks and rewards of the asset or significant risks and rewards, along with the unconditional ability to sell or pledge the asset. Financial liabilities are de-recognised when the liability has been settled, has expired or has been extinguished. An exchange of an existing financial liability for a new liability with the same lender on substantially different terms – generally a difference of 10% in the present value of the cash flows or a substantive qualitative amendment – is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Transactions in which the Group transfers assets and liabilities, portions of them, or financial risks associated with them can be complex and it may not be obvious whether substantially all of the risks and rewards have been transferred. It is often necessary to perform a quantitative analysis. Such an analysis compares the Group’s exposure to variability in asset cash flows before the transfer with its retained exposure after the transfer. A cash flow analysis of this nature may require judgement. In particular, it is necessary to estimate the asset’s expected future cash flows as well as potential variability around this expectation. The method of estimating expected future cash flows depends on the nature of the asset, with market and market-implied data used to the greatest extent possible. The potential variability around this expectation is typically determined by stressing underlying parameters to create reasonable alternative upside and downside scenarios. Probabilities are then assigned to each scenario. Stressed parameters may include default rates, loss severity, or prepayment rates. (iv) Issued debt and equity instruments The Group applies IAS 32, Financial Instruments: Presentation, to determine whether funding is either a financial liability (debt) or equity. Issued financial instruments or their components are classified as liabilities if the contractual arrangement results in the Group having an obligation to either deliver cash or another financial asset, or a variable number of equity shares, to the holder of the instrument. If this is not the case, the instrument is generally an equity instrument and the proceeds included in equity, net of transaction costs. Dividends and other returns to equity holders are recognised when paid or declared by the members at the AGM and treated as a deduction from equity. Where issued financial instruments contain both liability and equity components, these are accounted for separately. The fair value of the debt is estimated first and the balance of the proceeds is included within equity. 5. New and amended standards and interpretations The accounting policies adopted are consistent with those of the previous financial year, with the exception of the accounting treatment of own credit on financial liabilities designated at fair value though profit or loss under the fair value option. Barclays has elected to early adopt the presentation of Barclays own credit gains and losses in other comprehensive income as allowed by IFRS 9 Financial Instruments, from 1 January 2017. This will have no effect on net assets, and any changes due to own credit in prior periods have not been restated. The cumulative own credit amount has been reclassified from retained earnings to a separate reserve. Any realised and unrealised amounts recognised in other comprehensive income will not be reclassified to the income statement in future periods; refer to Note 32 for further details. There were no other material or amended standards or interpretations that resulted in a change in accounting policy. Future accounting developments There have been and are expected to be a number of significant changes to the Group’s financial reporting after 2017 as a result of amended or new accounting standards that have been or will be issued by the IASB. The most significant of these are as follows: IFRS 9 – Financial instruments IFRS 9 Financial Instruments which replaces IAS 39 Financial Instruments: Recognition and Measurement is effective for periods beginning on or after 1 January 2018 and was endorsed by the EU in November 2016. IFRS 9, in particular the impairment requirements, will lead to significant changes in the accounting for financial instruments. 242 Barclays PLC Annual Report 2017 home.barclays/annualreport for the year ended 31 December 2017Notes to the financial statements1 Significant accounting policies continued i) Impairment IFRS 9 introduces a revised impairment model which will require entities to recognise expected credit losses based on unbiased forward- looking information. This replaces the existing IAS 39 incurred loss model which only recognises impairment if there is objective evidence that a loss has already been incurred and would measure the loss at the most probable outcome. The IFRS 9 impairment model will be applicable to all financial assets at amortised cost, lease receivables, debt financial assets at fair value through other comprehensive income, loan commitments and financial guarantee contracts. This contrasts to the IAS 39 impairment model which is not applicable to loan commitments and financial guarantee contracts, which were covered by IAS 37. In addition, IAS 39 required the impairment of available for sale debt to be based on the fair value loss rather than estimated future cash flows as for amortised cost assets. Intercompany exposures, including loan commitments and financial guarantee contracts, are also in scope under IFRS 9 in the standalone reporting entity accounts. The measurement of expected credit loss will involve increased complexity and judgement including estimation of probabilities of default, loss given default, a range of unbiased future economic scenarios, estimation of expected lives and estimation of exposures at default and assessing significant increases in credit risk. It is expected to have a material financial impact and impairment charges will tend to be more volatile. Impairment will also be recognised earlier and the amounts will be higher. Unsecured products with longer expected lives, such as revolving credit cards, are expected to be most impacted. The expected increase in the accounting impairment provision reduces CET1 capital, but the impact is partially mitigated by releasing the ‘excess of expected loss over impairment’ deduction from CET1 capital. In addition, the European Union will be adopting transitional arrangements to mitigate or spread the capital impacts of IFRS 9 adoption over a five-year period from 1 January 2018, which Barclays will apply. Separately, the Basel Committee on Banking Supervision is considering the need for permanent changes to the regulatory capital framework in order to take account of expected credit loss provisioning. Key concepts and management judgements The impairment requirements are complex and require management judgements, estimates and assumptions. Key concepts and management judgements include: ■■ Determining a significant increase in credit risk since initial recognition IFRS 9 requires the recognition of 12 month expected credit losses (the portion of lifetime expected credit losses from default events that are expected within 12 months of the reporting date) if credit risk has not significantly increased since initial recognition (stage 1), and lifetime expected credit losses for financial instruments for which the credit risk has increased significantly since initial recognition (stage 2) or which are credit impaired (stage 3). Barclays will assess when a significant increase in credit risk has occurred based on quantitative and qualitative assessments. Exposures are considered to have resulted in a significant increase in credit risk and are moved to stage 2 when: – Quantitative test The annualised cumulative weighted average lifetime probability of default has increased by more than the agreed threshold relative to the equivalent at origination. The relative thresholds are defined as percentage increases and set at an origination score band and segment level. – Qualitative test Accounts that meet the portfolio’s ‘high risk’ criteria and are subject to closer credit monitoring. – Backstop criteria Accounts that are 30 calendar days or more past due. The 30 days past due criteria is a backstop rather than a primary driver of moving exposures into stage 2. Exposures will move back to stage 1 once they no longer meet the criteria for a significant increase in credit risk and when any cure criteria used for credit risk management are met. This is subject to all payments being up to date and the customer evidencing ability and willingness to maintain future payments. Barclays will not rely on the low credit risk exemption which would assume facilities of investment grade are not significantly deteriorated. Determining the probability of default at initial recognition is expected to require management estimates, in particular for exposures issued before the effective date of IFRS 9. For certain revolving facilities such as credit cards and overdrafts, this is expected to be when the facility was first entered into which could be a long time in the past. Management overlays and other exceptions to model outputs are applied only if consistent with the objective of identifying significant increases in credit risk. ■■ Forward-looking information Credit losses are the expected cash shortfalls from what is contractually due over the expected life of the financial instrument, discounted at the original effective interest rate. Expected credit losses are the unbiased probability-weighted credit losses determined by evaluating a range of possible outcomes and considering future economic conditions. When there is a non-linear relationship between forward-looking economic scenarios and their associated credit losses, a range of forward-looking economic scenarios, currently expected to be a minimum of five, will be considered to ensure a sufficient unbiased representative sample of the complete distribution is included in determining the expected loss. Stress testing methodologies will be leveraged within forecasting economic scenarios for IFRS 9 purposes. home.barclays/annualreport Barclays PLC Annual Report 2017 243 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance1 Significant accounting policies continued ■■ Definition of default, credit impaired assets, write-offs, and interest income recognition The definition of default for the purpose of determining expected credit losses has been aligned to the Regulatory Capital CRR Article 178 definition of default, which considers indicators that the debtor is unlikely to pay, includes exposures in forbearance and is no later than when the exposure is more than 90 days past due or 180 days past due in the case of UK mortgages. When exposures are identified as credit impaired or purchased or originated as such, IFRS 9 requires separate disclosure and interest income is required to be calculated on the carrying value net of the impairment allowance. Credit impaired is expected to be when the exposure has defaulted which is also anticipated to align to when an exposure is identified as individually impaired under the incurred loss model of IAS 39. Write-off polices are not expected to change from IAS 39. ■■ Expected life Lifetime expected credit losses must be measured over the expected life. This is restricted to the maximum contractual life and takes into account expected prepayment, extension, call and similar options. The exceptions are certain revolver financial instruments, such as credit cards and bank overdrafts, that include both a drawn and an undrawn component where the entity’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity’s exposure to credit losses to the contractual notice period. The expected life for these revolver facilities is expected to be behavioural life. Where data is insufficient or analysis inconclusive, an additional ‘maturity factor’ may be incorporated to reflect the full estimated life of the exposures, based upon experienced judgement and/or peer analysis. Potential future modifications of contracts are not taken into account when determining the expected life or exposure at default until they occur. ■■ Discounting Expected credit losses are discounted at the effective interest rate at initial recognition or an approximation thereof and consistent with income recognition. For loan commitments, the effective interest rate is that rate that is expected to apply when the loan is drawn down and a financial asset is recognised. Issued financial guarantee contracts are discounted at the risk free rate. Lease receivables are discounted at the rate implicit in the lease as prescribed in IAS 17. For variable/floating rate financial assets, the spot rate at the reporting date is used and projections of changes in the variable rate over the expected life are not made to estimate future interest cash flows or for discounting. ■■ Modelling techniques Expected credit losses are calculated by multiplying three main components, being the probability of default, loss given default and the exposure at default, discounted at the original effective interest rate. The regulatory Basel Committee of Banking Supervisors (BCBS) expected credit loss calculations are leveraged for IFRS 9 modelling but adjusted for key differences which include: – BCBS requires 12 month through the economic cycle losses, whereas IFRS 9 requires 12 months or lifetime point in time losses based on conditions at the reporting date and multiple forecasts of the future economic conditions over the expected lives and – IFRS 9 models do not include certain conservative BCBS model floors and downturn assessments and require discounting to the reporting date at the original effective interest rate rather than using the cost of capital to the date of default. Management adjustments will be made to modelled output to account for situations where known or expected risk factors and information have not been considered in the modelling process, for example, forecast economic scenarios for uncertain political events. Expected credit loss is measured at the individual financial instrument level, however, a collective approach where financial instruments with similar risk characteristics are grouped together, with apportionment to individual financial instruments, is used where effects can only be seen at a collective level, for example, for forward-looking information. For the IFRS 9 impairment assessment, Barclays Risk Models are used to determine the probability of default, loss given default and exposure at default. For stage 2 and 3, Barclays applies lifetime probability of defaults but uses 12 month probability of defaults for stage 1. The expected credit loss drivers of probability of default , exposure at default and loss given default are modelled at an account level which considers vintage, among other credit factors. Also, the assessment of significant increase in credit risk is based on the initial lifetime probability of default curve, which accounts for the different credit risk underwritten over time. ii) Forbearance Both performing and non-performing forbearance assets are classified as stage 3 except where it is established that the concession granted has not resulted in diminished financial obligation and that no other regulatory definitions of default criteria has been triggered, in which case the asset is classified as stage 2. The minimum probationary period for non-performing forbearance is 12 months and for performing forbearance, 24 months. Hence, a minimum of 36 months is required for non-performing forbearance to move out of a forborne state. iii) Project governance and credit risk management Barclays has a jointly accountable Risk and Finance implementation and governance programme with representation from all impacted departments. The current Impairment Committee structures were initiated and tested from H1 2017, providing oversight for both IAS 39 and IFRS 9 impairment results. The impairment reporting process commences with the production of economic scenarios. The Senior Scenario Review Committee (SSRC) reviews and approves the scenario narratives, the core set of macroeconomic variables, probability weightings, and any scenario specific management overlays which are used in all expected credit loss models. The SSRC attests that the scenarios adequately account for the non-linearity and asymmetry of the loss distribution. The Group Impairment Committee, formed of members from both Finance and Risk and attended by both the Group Finance Director and the CRO, is responsible for overseeing impairment policy and practice across Barclays Group and will approve impairment results. Reported results and key messages are communicated to the Board Audit Committee, which has an oversight role and provides challenge of key assumptions, including the basis of the scenarios adopted. 244 Barclays PLC Annual Report 2017 home.barclays/annualreport for the year ended 31 December 2017Notes to the financial statements1 Significant accounting policies continued iv) Classification and measurement IFRS 9 requires financial assets to be classified on the basis of two criteria: 1) the business model within which financial assets are managed, and 2) their contractual cash flow characteristics (whether the cash flows represent ‘solely payments of principal and interest’). Financial assets will be measured at amortised cost if they are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and their contractual cash flows represent solely payments of principal and interest. Financial assets will be measured at fair value through other comprehensive income if they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and their contractual cash flows represent solely payments of principal and interest. Business models are determined on initial application and this may differ from the model before 1 January 2018 for certain portfolios. Barclays assesses the business model at a portfolio level. Information that is considered in determining the business model includes: 1) policies and objectives for the relevant portfolio, 2) how the performance and risks of the portfolio are managed, evaluated and reported to management, and 3) the frequency, volume and timing of sales in prior periods, sales expectation for future periods, and the reasons for such sales. Financial assets managed on a fair value basis and those that are held for trading are held at fair value through profit and loss. In assessing whether contractual cash flows are solely payments of principal and interest, terms that could change the contractual cash flows so that it would not meet the condition for solely payments of principal and interest are considered, including: 1) contingent and leverage features, 2) non-recourse arrangements and 3) features that could modify the time value of money. Other financial assets are measured at fair value through profit and loss. There is an option to make an irrevocable election for non-traded equity investments to be measured at fair value through other comprehensive income, in which case dividends are recognised in profit or loss, but gains or losses are not reclassified to profit or loss upon derecognition, and impairment is not recognised in the income statement. On 12 October 2017, the IASB published an amendment to IFRS 9, relating to prepayment features with negative compensation; this amendment is effective from 1 January 2019 with early application permitted, however has yet to be endorsed by the EU. This amendment allows financial assets with such features to be measured at amortised cost or fair value through other comprehensive income provided the ‘solely payments of principal and interest’ criteria in IFRS 9 are otherwise met. In addition, the amendment to IFRS 9 clarifies that a financial asset passes the solely payments of principal and interest criterion regardless of the event or circumstance that causes the early termination of the contract, and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. Such prepayment features are present in some fixed rate corporate and investment bank loans, and are considered to meet the criteria for amortised cost under IFRS 9. Prepayment features are consistent with the solely payments of principal and interest criteria if the prepayment feature substantially represents unpaid amounts of principal and interest and reasonable compensation for early termination of the contract. While there are some classification changes these are not significant from a Group perspective. v) Hedge accounting IFRS 9 contains revised requirements on hedge accounting, adoption of which is optional. In addition, certain aspects of IAS 39, being the portfolio fair value hedge for interest rate risk, continues to be available for entities (while applying IFRS 9 to the remainder of the entity’s hedge accounting relationships) until the IASB completes its accounting for dynamic risk management project. Based on analysis performed, Barclays will continue applying IAS 39 hedge accounting, although it will implement the amended IFRS 7 hedge accounting disclosure requirements. vi) Own credit Barclays has applied the option in IFRS 9 to recognise changes in own credit for financial liabilities designated at fair value through profit and loss under the fair value option in other comprehensive income from 1 January 2017. vii) Expected impact IFRS 9 will be applied retrospectively on adoption on 1 January 2018. Opening shareholders’ equity is expected to decrease by approximately £2.2bn post-tax. This impact assessment has been estimated under an interim control environment with models that continue to undergo validation. The implementation of the comprehensive end state control environment will continue as Barclays introduces business as usual controls throughout 2018. Barclays will not restate comparatives on initial application of IFRS 9 on 1 January 2018. IFRS 15 – Revenue from Contracts with Customers In 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers which will replace IAS 18 Revenue and IAS 11 Construction Contracts. It applies to all contracts with customers except leases, financial instruments and insurance contracts. The standard establishes a more systematic approach for revenue measurement and recognition by introducing a five-step model governing revenue recognition. The five-step model includes: 1) identifying the contract with the customer, 2) identifying each of the performance obligations included in the contract, 3) determining the amount of consideration in the contract, 4) allocating the consideration to each of the identified performance obligations and 5) recognising revenue as each performance obligation is satisfied. In April 2016, the IASB issued clarifying amendments to IFRS 15 which provide additional application guidance, but did not change the underlying principles of the standard. The standard was endorsed by the EU in September 2016. Barclays will implement this standard on 1 January 2018. Barclays has elected the cumulative effect transition method with a transition adjustment calculated as of 1 January 2018, and recognised in retained earnings without restating comparative periods. There are no significant impacts from the adoption of IFRS 15 in relation to the timing of when Barclays recognises revenues or when revenue should be recognised gross as a principal or net as an agent. home.barclays/annualreport Barclays PLC Annual Report 2017 245 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance1 Significant accounting policies continued IFRS 16 – Leases In January 2016, the IASB issued IFRS 16 Leases, which will replace IAS 17 Leases. IFRS 16 will apply to all leases with the exception of licenses of intellectual property, rights held by licensing agreement within the scope of IAS 38 Intangible Assets, service concession arrangements, leases of biological assets within the scope of IAS 41 Agriculture, and leases of minerals, oil, natural gas and similar non-regenerative resources. IFRS 16 will not result in a significant change to lessor accounting; however for lessee accounting there will no longer be a distinction between operating and finance leases. Instead, lessees will be required to recognise both a right of use asset and lease liability on-balance sheet for all leases. As a result, Barclays will observe an increase in both assets and liabilities for transactions currently accounted for as operating leases as at 1 January 2019 (the effective date of IFRS 16). A scope exemption will apply to short-term and low-value leases. Current project implementation efforts are focused on preparing and sourcing information. The standard was endorsed by the EU in November 2017. Barclays will implement this standard on 1 January 2019. Barclays is currently assessing the expected impact of adopting this standard. IFRS 17 – Insurance contracts In May 2017, the IASB issued IFRS 17 Insurance Contracts, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts that was issued in 2005. IFRS 17 applies to all types of insurance contracts (i.e. life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The standard is effective from 1 January 2021 and has not yet been endorsed by the EU. Barclays is currently assessing the expected impact of adopting this standard. IFRS 2 – Classification and Measurement of Share-based Payment Transactions – Amendments to IFRS 2 The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. The amendments are effective for annual periods beginning on or after 1 January 2018. Adoption of the amendments will not have a significant impact on Barclays. IFRIC Interpretation 23 – Uncertainty over Income Tax Treatment IFRIC 23 clarifies the application of IAS 12 to accounting for income tax treatments that have yet to be accepted by tax authorities, in scenarios where it may be unclear how tax law applies to a particular transaction or circumstance, or whether a taxation authority will accept an entity’s tax treatment. The effective date is 1 January 2019. Barclays is currently assessing the impact of IFRIC 23. 6. Critical accounting estimates and judgements The preparation of financial statements in accordance with IFRS requires the use of estimates. It also requires management to exercise judgement in applying the accounting policies. The key areas involving a higher degree of judgement or complexity, or areas where assumptions are significant to the consolidated and individual financial statements are highlighted under the relevant note. Critical accounting estimates and judgements are disclosed in: ■■ Credit impairment charges on page 250 ■■ Tax on page 253 ■■ Fair value of financial instruments on page 262 ■■ Pensions and post retirement benefits – obligations on page 301 ■■ Provisions including conduct and legal, competition and regulatory matters on page 283. 7. Other disclosures To improve transparency and ease of reference, by concentrating related information in one place, certain disclosures required under IFRS have been included within the Risk review section as follows: ■■ Credit risk on page 127 and the tables on pages 138 to 158 ■■ Market risk on page 129 and the tables on pages 159 to 163 ■■ Treasury and capital risk – capital on page 130 and the tables on pages 179 to 187 ■■ Treasury and capital risk – liquidity on page 130 and the tables on pages 166 to 178. These disclosures are covered by the Audit opinion (included on pages 228 to 233) where referenced as audited. 246 Barclays PLC Annual Report 2017 home.barclays/annualreport for the year ended 31 December 2017Notes to the financial statementsNotes to the financial statements Performance/return The notes included in this section focus on the results and performance of the Group. Information on the income generated, expenditure incurred, segmental performance, tax, earnings per share and dividends are included here. For further detail on performance, please see income statement commentary within Financial review (unaudited) on page 209. 2 Segmental reporting Presentation of segmental reporting The Group’s segmental reporting is in accordance with IFRS 8 Operating Segments. Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Committee, which is responsible for allocating resources and assessing performance of the operating segments, and has been identified as the chief operating decision maker. All transactions between business segments are conducted on an arm’s-length basis, with intra-segment revenue and costs being eliminated in Head Office. Income and expenses directly associated with each segment are included in determining business segment performance. Barclays PLC is a transatlantic consumer and wholesale bank and for segmental reporting purposes defines its divisions as follows: ■■ Barclays UK which offers everyday products and services to retail customers and small to medium sized enterprises based in the UK. The division includes the UK Personal business; the small UK Corporate and UK Wealth businesses; and the Barclaycard UK consumer credit cards business. ■■ Barclays International which delivers products and services designed for our larger corporate, wholesale and international banking clients. The division includes the large UK Corporate business; the international Corporate and Wealth businesses; the Investment Bank; the international Barclaycard business; and Barclaycard Business Solutions. ■■ Head Office which comprises head office and central support functions (including treasury) and businesses in transition. The Non-Core segment was closed on 1 July 2017, with the residual assets and liabilities reintegrated into, and associated financial performance subsequently reported in, Barclays UK, Barclays International and Head Office. Financial results up until 30 June 2017 are reflected in the Non-Core segment within the Group’s results for the year ended 31 December 2017. Comparative results have not been restated. Analysis of results by business For the year ended 31 December 2017 Total income Credit impairment charges and other provisions Net operating income/(expenses) Operating expenses excluding UK bank levy and litigation and conduct UK bank levy Litigation and conduct Operating expenses Other net (expenses)/incomec Profit/(loss) before tax from continuing operations Total assets (£bn) Number of employees (full time equivalent)d For the year ended 31 December 2016 Total income Credit impairment charges and other provisions Net operating income/(expenses) Operating expenses excluding UK bank levy and litigation and conduct UK bank levy Litigation and conduct Operating expenses Other net (expenses)/income Profit/(loss) before tax from continuing operations Total assets (£bn)e Number of employees (full time equivalent)f Barclays UK £m Barclays International £m Head Officea £m Barclays Non-Coreb £m Group results £m 7,383 (783) 6,600 (4,030) (59) (759) (4,848) (5) 1,747 237.4 22,800 7,517 (896) 6,621 (3,792) (48) (1,042) (4,882) (1) 1,738 209.6 36,000 14,382 (1,506) 12,876 (9,321) (265) (269) (9,855) 254 3,275 856.1 11,500 14,995 (1,355) 13,640 (9,129) (284) (48) (9,461) 32 4,211 648.5 36,900 (159) (17) (176) (277) (41) (151) (469) (189) (834) 39.7 45,600 103 – 103 (135) (2) (27) (164) 128 67 75.2 100 (530) (30) (560) (256) – (28) (284) 197 (647) – – 21,076 (2,336) 18,740 (13,884) (365) (1,207) (15,456) 257 3,541 1,133.2 79,900 (1,164) (122) (1,286) (1,509) (76) (246) (1,831) 331 (2,786) 279.7 5,500 21,451 (2,373) 19,078 (14,565) (410) (1,363) (16,338) 490 3,230 1,213.0 119,300 Notes a The reintegration of Non-Core assets on 1 July 2017 resulted in the transfer of c.£9bn of assets into Head Office relating to a portfolio of Italian mortgages. The portfolio generated a loss before tax of £37m in the second half of the year and included assets of £9bn as at 31 December 2017. b The Non-Core segment was closed on 1 July 2017. Financial results up until 30 June 2017 are reflected in the Non-Core segment for 2017. c Other net (expenses)/income represents the share of post-tax results of associates and joint ventures, profit (or loss) on disposal of subsidiaries, associates and joint ventures, and gains on acquisitions. d As a result of the establishment of the Group Service Company in September 2017, employees who are now employed by the Group Service Company and who were previously allocated to, or were within, Barclays UK and Barclays International are now reported in Head Office. e Africa Banking assets held for sale were reported in Head Office for 2016. f Number of employees included 40,800 in relation to Africa Banking for 2016. home.barclays/annualreport Barclays PLC Annual Report 2017 247 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance2 Segmental reporting continued Analysis of results by business For the year ended 31 December 2015 Total income Credit impairment charges and other provisions Net operating income Operating expenses excluding UK bank levy and litigation and conduct UK bank levy Litigation and conduct Operating expenses Other net income/(expenses)a Profit/(loss) before tax from continuing operations Total assets (£bn)b Number of employees (full time equivalent)c Barclays UK £m Barclays International £m Head Office £m Barclays Non-Core £m Group results £m 7,343 (706) 6,637 (3,464) (77) (2,511) (6,052) – 585 202.5 38,800 13,747 (922) 12,825 (8,029) (253) (1,310) (9,592) 45 3,278 532.2 39,100 338 – 338 (272) (8) (66) (346) (106) (114) 59.4 100 612 (134) 478 (1,958) (88) (500) (2,546) (535) (2,603) 325.8 9,900 22,040 (1,762) 20,278 (13,723) (426) (4,387) (18,536) (596) 1,146 1,120.0 129,400 Notes a Other net income/(expenses) represents the share of post-tax results of associates and joint ventures, profit (or loss) on disposal of subsidiaries, associates and joint ventures, and gains on acquisitions. b Africa Banking assets held for sale were reported in Head Office for 2015. c Number of employees included 41,500 in relation to Africa Banking for 2015. Income by geographic region For the year ended 31 December Continuing operations United Kingdom Europe Americas Africa and Middle East Asia Total Income from individual countries which represent more than 5% of total incomea For the year ended 31 December Continuing operations United Kingdom United States 2017 £m 2016 £m 2015 £m 11,190 1,663 7,443 251 529 21,076 11,096 2,087 7,278 419 571 21,451 12,160 2,245 6,610 387 638 22,040 2017 £m 2016 £m 2015 £m 11,190 6,871 11,096 6,876 12,160 6,228 Note a Total income based on counterparty location. Income from each single external customer does not amount to 10% or greater of the Group’s total income. 248 Barclays PLC Annual Report 2017 home.barclays/annualreport Performance/returnNotes to the financial statements3 Net interest income Accounting for interest income and expenses The Group applies IAS 39 Financial Instruments: Recognition and Measurement. Interest income on loans and advances at amortised cost, financial investments debt securities, and interest expense on financial liabilities held at amortised cost, are calculated using the effective interest method which allocates interest, and direct and incremental fees and costs, over the expected lives of the assets and liabilities. The effective interest method requires the Group to estimate future cash flows, in some cases based on its experience of customers’ behaviour, considering all contractual terms of the financial instrument, as well as the expected lives of the assets and liabilities. Barclays incurs certain costs to originate credit card balances with the most significant being co-brand partner fees. To the extent these costs are attributed to revolving customer balances they are capitalised and subsequently included within the calculation of the effective interest rate. They are amortised to interest income over the period of expected repayment of the originated balance. Costs attributed to transacting customer balances are recorded within fee and commission expense when incurred. There are no other individual estimates involved in the calculation of effective interest rates that are material to the results or financial position. Cash and balances with central banks Financial investments Loans and advances to banks Loans and advances to customers Other Interest income Deposits from banks Customer accounts Debt securities in issue Subordinated liabilities Other Interest expense Net interest income 2017 £m 583 754 286 11,783 225 13,631 (370) (1,123) (915) (1,223) (155) (3,786) 9,845 2016 £m 186 740 600 12,958 57 14,541 (265) (1,514) (990) (1,104) (131) (4,004) 10,537 2015 £m 157 698 487 12,512 99 13,953 (128) (1,406) (553) (1,015) (243) (3,345) 10,608 Costs to originate credit card balances of £497m (2016: £480m; 2015: £368m) have been amortised to interest income during the year. Interest income includes £48m (2016: £75m; 2015: £91m) accrued on impaired loans. Included in net interest income is hedge ineffectiveness as detailed in Note 15 amounting to £43m (2016: £71m; 2015: £81m). 4 Net fee and commission income Accounting for net fee and commission income The Group applies IAS 18 Revenue. Fees and commissions charged for services provided or received by the Group are recognised as the services are provided, for example on completion of the underlying transaction. Fee and commission income Banking, investment management and credit related fees and commissions Foreign exchange commission Fee and commission income Fee and commission expense Net fee and commission income 2017 £m 2016 £m 2015 £m 8,622 129 8,751 (1,937) 6,814 8,452 118 8,570 (1,802) 6,768 8,340 130 8,470 (1,611) 6,859 home.barclays/annualreport Barclays PLC Annual Report 2017 249 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance5 Net trading income Accounting for net trading income In accordance with IAS 39, trading positions are held at fair value, and the resulting gains and losses are included in the income statement, together with interest and dividends arising from long and short positions and funding costs relating to trading activities. Income arises from both the sale and purchase of trading positions, margins which are achieved through market-making and customer business and from changes in fair value caused by movements in interest and exchange rates, equity prices and other market variables. Own credit gains/(losses) As a result of the early adoption of the own credit provisions of IFRS 9 on 1 January 2017, own credit on financial liabilities designated at fair value through profit and loss which was previously recorded in the income statement is now recognised within other comprehensive income. Trading income Own credit (losses)/gains Net trading income 2017 £m 3,500 – 3,500 2016 £m 2,803 (35) 2,768 2015 £m 2,996 430 3,426 Included within net trading income were gains of £640m (2016: £31m gain; 2015: £992m gain) on financial assets designated at fair value and gains of £472m (2016: £346m gain; 2015: £187m loss) on financial liabilities designated at fair value. 6 Net investment income Accounting for net investment income Dividends are recognised when the right to receive the dividend has been established. Other accounting policies relating to net investment income are set out in Note 14 and Note 16. Net gain from disposal of available for sale investments Dividend income Net gain from financial instruments designated at fair value Other investment income Net investment income 7 Credit impairment charges and other provisions 2017 £m 298 48 338 177 861 2016 £m 912 8 158 246 1,324 2015 £m 385 8 193 511 1,097 Accounting for the impairment of financial assets Loans and other assets held at amortised cost In accordance with IAS 39, the Group assesses at each balance sheet date whether there is objective evidence that loan assets will not be recovered in full and, wherever necessary, recognises an impairment loss in the income statement. An impairment loss is recognised if there is objective evidence of impairment as a result of events that have occurred and these have adversely impacted the estimated future cash flows from the assets. These events include: ■■ becoming aware of significant financial difficulty of the issuer or obligor ■■ a breach of contract, such as a default or delinquency in interest or principal payments ■■ the Group, for economic or legal reasons relating to the borrower’s financial difficulty, grants a concession that it would not otherwise consider ■■ it becomes probable that the borrower will enter bankruptcy or other financial reorganisation ■■ the disappearance of an active market for that financial asset because of financial difficulties ■■ observable data at a portfolio level indicating that there is a measurable decrease in the estimated future cash flows, although the decrease cannot yet be ascribed to individual financial assets in the portfolio – such as adverse changes in the payment status of borrowers in the portfolio or national or local economic conditions that correlate with defaults on the assets in the portfolio. Impairment assessments are conducted individually for significant assets, which comprise all wholesale customer loans and larger retail business loans, and collectively for smaller loans and for portfolio level risks, such as country or sectoral risks. For the purposes of the assessment, loans with similar credit risk characteristics are grouped together – generally on the basis of their product type, industry, geographical location, collateral type, past due status and other factors relevant to the evaluation of expected future cash flows. The impairment assessment includes estimating the expected future cash flows from the asset or the group of assets, which are then discounted using the original effective interest rate calculated for the asset. If this is lower than the carrying value of the asset or the portfolio, an impairment allowance is raised. If, in a subsequent period, the amount of the impairment loss decreases, and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. Following impairment, interest income continues to be recognised at the original effective interest rate on the restated carrying amount, representing the unwind of the discount of the expected cash flows, including the principal due on non-accrual loans. Uncollectable loans are written off against the related allowance for loan impairment on completion of the Group’s internal processes when all reasonably expected recoverable amounts have been collected. Subsequent recoveries of amounts previously written off are credited to the income statement. 250 Barclays PLC Annual Report 2017 home.barclays/annualreport Performance/returnNotes to the financial statements 7 Credit impairment charges and other provisions continued Available for sale financial assets Impairment of available for sale debt instruments Debt instruments are assessed for impairment in the same way as loans. If impairment is deemed to have occurred, the cumulative decline in the fair value of the instrument that has previously been recognised in the available for sale reserve is removed from reserves and recognised in the income statement. This may be reversed if there is evidence that the circumstances of the issuer have improved. Impairment of available for sale equity instruments Where there has been a prolonged or significant decline in the fair value of an equity instrument below its acquisition cost, it is deemed to be impaired. The cumulative net loss that has been previously recognised directly in the available for sale reserve is removed from reserves and recognised in the income statement. Increases in the fair value of equity instruments after impairment are recognised directly in other comprehensive income. Further declines in the fair value of equity instruments after impairment are recognised in the income statement. Critical accounting estimates and judgements The calculation of impairment involves the use of judgement based on the Group’s experience of managing credit risk. Within the retail and small businesses portfolios, which comprise large numbers of small homogeneous assets with similar risk characteristics where credit scoring techniques are generally used, statistical techniques are used to calculate impairment allowances on a portfolio basis, based on historical recovery rates and assumed emergence periods. These statistical analyses employ as primary inputs, the extent to which accounts in the portfolio are in arrears, and historical information on the eventual losses encountered from such delinquent portfolios. There are many such models in use, each tailored to a product, line of business or customer category. Judgement and knowledge is needed in selecting the statistical methods to use when the models are developed or revised. The impairment allowance reflected in the financial statements for these portfolios is therefore considered to be reasonable and supportable. The impairment charge reflected in the income statement for retail portfolios is £2,095m (2016: £2,053m; 2015: £1,535m) and amounts to 90% (2016: 87%; 2015: 88%) of the total impairment charge on loans and advances. For individually significant assets, impairment allowances are calculated on an individual basis and all relevant considerations that have a bearing on the expected future cash flows are taken into account (for example, the business prospects for the customer, the realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process). The level of the impairment allowance is the difference between the value of the discounted expected future cash flows (discounted at the loan’s original effective interest rate), and its carrying amount. Subjective judgements are made in the calculation of future cash flows. Furthermore, judgements change with time as new information becomes available or as work-out strategies evolve, resulting in frequent revisions to the impairment allowance as individual decisions are taken. Changes in these estimates would result in a change in the allowances and have a direct impact on the impairment charge. The impairment charge reflected in the financial statements in relation to wholesale portfolios is £238m (2016: £299m; 2015: £209m) and amounts to 10% (2016: 13%; 2015: 12%) of the total impairment charge on loans and advances. Further information on impairment allowances and related credit information is set out within the Risk review on page 156. New and increased impairment allowances Releases Recoveries Impairment charges on loans and advances Provision charges/(releases) for undrawn contractually committed facilities and guarantees provided Loan impairment Available for sale investment Reverse repurchase agreements Credit impairment charges and other provisions 2017 £m 3,187 (533) (334) 2,320 13 2,333 3 – 2,336 2016 £m 3,259 (551) (365) 2,343 9 2,352 21 – 2,373 2015 £m 2,641 (535) (350) 1,756 (12) 1,744 18 – 1,762 home.barclays/annualreport Barclays PLC Annual Report 2017 251 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance8 Operating expenses Accounting for staff costs The Group applies IAS 19 Employee benefits in its accounting for most of the components of staff costs. Short-term employee benefits – salaries, accrued performance costs and social security are recognised over the period in which the employees provide the services to which the payments relate. Performance costs – recognised to the extent that the Group has a present obligation to its employees that can be measured reliably and are recognised over the period of service that employees are required to work to qualify for the payments. Deferred cash and share awards are made to employees to incentivise performance over the period employees provide services. To receive payment under an award, employees must provide service over the vesting period. The period over which the expense for deferred cash and share awards is recognised is based upon the period employees consider their services contribute to the awards. For past awards, the Group considers that it is appropriate to recognise the awards over the period from the date of grant to the date that the awards vest. In relation to awards granted from 2017, the Group, taking into account the changing employee understanding surrounding those awards, considered it appropriate for expense to be recognised over the vesting period including the financial year prior to the grant date. The accounting policies for share-based payments, and pensions and other post-retirement benefits are included in Note 34 and Note 35 respectively. Infrastructure costs Property and equipment Depreciation of property, plant and equipment Operating lease rentals Amortisation of intangible assets Impairment of property, equipment and intangible assets Gain on property disposals Total infrastructure costs Administration and general costs Consultancy, legal and professional fees Subscriptions, publications, stationery and communications Marketing, advertising and sponsorship Travel and accommodation UK bank levy Goodwill impairment Other administration and general expenses Total administration and general costs Staff costs Provision for UK customer redress Provision for ongoing investigations and litigation including Foreign Exchange Operating expenses 2017 £m 1,363 446 342 715 80 3 2,949 1,127 630 433 150 365 – 542 3,247 8,560 700 – 15,456 2016 £m 1,180 492 561 670 95 – 2,998 1,105 644 435 136 410 – 187 2,917 9,423 1,000 – 16,338 2015 £m 1,082 475 411 570 150 3 2,691 1,078 678 451 188 425 102 61 2,983 8,853 2,772 1,237 18,536 9 Profit/(loss) on disposal of subsidiaries, associates and joint ventures During the year, the profit on disposal of subsidiaries, associates and joint ventures was £187m (2016: profit of £420m; 2015: loss of £637m), principally relating to the sale of VocaLink and Barclays Wealth Services Japan. Please refer to Note 43 for further detail. 252 Barclays PLC Annual Report 2017 home.barclays/annualreport Performance/returnNotes to the financial statements10 Tax Accounting for income taxes Barclays applies IAS 12 Income Taxes in accounting for taxes on income. Income tax payable on taxable profits (current tax) is recognised as an expense in the periods in which the profits arise. Withholding taxes are also treated as income taxes. Income tax recoverable on tax allowable losses is recognised as a current tax asset only to the extent that it is regarded as recoverable by off-setting against taxable profits arising in the current or prior periods. Current tax is measured using tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except in certain circumstances where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax is determined using tax rates and legislation enacted or substantively enacted by the balance sheet date which are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets and liabilities are only offset when there is both a legal right to set-off and an intention to settle on a net basis. The Group considers an uncertain tax position to exist when it considers that ultimately, in the future, the amount of profit subject to tax may be greater than the amount initially reflected in the Group’s tax returns. The Group accounts for provisions in respect of uncertain tax positions in two different ways. A current tax provision is recognised when it is considered probable that the outcome of a review by a tax authority of an uncertain tax position will alter the amount of cash tax due to, or from, a tax authority in the future. From recognition, the current tax provision is then measured at the amount the Group ultimately expects to pay the tax authority to resolve the position. Deferred tax provisions are adjustments made to the carrying value of deferred tax assets in respect of uncertain tax positions. A deferred tax provision is recognised when it is considered probable that the outcome of a review by a tax authority of an uncertain tax position will result in a reduction in the carrying value of the deferred tax asset. From recognition of a provision, measurement of the underlying deferred tax asset is adjusted to take into account the expected impact of resolving the uncertain tax position on the loss or temporary difference giving rise to the deferred tax asset. The approach taken to measurement takes account of whether the uncertain tax position is a discrete position that will be reviewed by the tax authority in isolation from any other position, or one of a number of issues which are expected to be reviewed together concurrently and resolved simultaneously with a tax authority. Barclays’ measurement of provisions is based upon its best estimate of the additional profit that will become subject to tax. For a discrete position, consideration is given only to the merits of that position. Where a number of issues are expected to be reviewed and resolved together, Barclays will take into account not only the merits of its position in respect of each particular issue but also the overall level of provision relative to the aggregate of the uncertain tax positions across all the issues that are expected to be resolved at the same time. In addition, in assessing provision levels, it is assumed that tax authorities will review uncertain tax positions and that all facts will be fully and transparently disclosed. Critical accounting estimates and judgements There are two key areas of judgement that impact the reported tax position. Firstly, the level of provisioning for uncertain tax positions; and secondly, the recognition and measurement of deferred tax assets. The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of current and deferred tax balances, including provisions for uncertain tax positions in the next financial year. The provisions for uncertain tax positions cover a diverse range of issues and reflect advice from external counsel where relevant. It should be noted that only a proportion of the total uncertain tax positions will be under audit at any point in time, and could therefore be subject to challenge by a tax authority over the next year. Deferred tax assets have been recognised based on business profit forecasts. Details on the recognition of deferred tax assets is provided in this note. Current tax charge/(credit) Current year Adjustments in respect of prior years Deferred tax charge/(credit) Current year Adjustments in respect of prior years Tax charge 2017 £m 768 55 823 1,507 (90) 1,417 2,240 2016 £m 896 (361) 535 393 65 458 993 2015 £m 1,605 (188) 1,417 (346) 78 (268) 1,149 home.barclays/annualreport Barclays PLC Annual Report 2017 253 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance10 Tax continued The table below shows the reconciliation between the actual tax charge and the tax charge that would result from applying the standard UK corporation tax rate to the Group’s profit before tax. Profit before tax from continuing operations Tax charge based on the standard UK corporation tax rate of 19.25% (2016: 20%; 2015: 20.25%) Impact of profits/losses earned in territories with different statutory rates to the UK (weighted average tax rate is 29.4% (2016: 32.8%; 2015: 33.4%)) 2017 £m 3,541 2017 % 2016 £m 3,230 2016 % 2015 £m 1,146 2015 % 682 19.3% 646 20.0% 232 20.3% 356 10.1% 415 12.8% 151 13.1% Recurring items: Non-creditable taxes including withholding taxes Non-deductible expenses Impact of UK bank levy being non-deductible Tax adjustments in respect of share-based payments Non-taxable gains and income Changes in recognition of deferred tax and effect of unrecognised tax losses Impact of Barclays Bank PLC's overseas branches being taxed both locally and in the UK Adjustments in respect of prior years Other items Non-recurring items: Remeasurement of US deferred tax assets due to US tax rate reduction Impact of the UK branch exemption election on US branch deferred tax assets Non-deductible provisions for UK customer redress Non-deductible provisions for investigations and litigation Non-taxable gains and income on divestments Non-deductible impairments and losses on divestments Total tax charge 191 90 70 5 (178) (71) 5.4% 2.5% 2.0% 0.1% (5.0%) (2.0%) (61) (35) 128 (1.7%) (1.0%) 3.6% 1,177 (276) 129 72 (39) – 2,240 33.2% (7.8%) 3.6% 2.0% (1.1%) – 63.3% 277 114 82 34 (199) (178) (128) (296) 88 – – 203 48 (180) 67 993 8.6% 3.5% 2.5% 1.1% (6.2%) (5.5%) (4.0%) (9.2%) 2.7% 309 67 96 30 27.0% 5.8% 8.4% 2.6% (197) (17.2%) (6.2%) (71) (35) (110) 144 (3.1%) (9.6%) 12.6% – – 6.3% 1.5% (5.6%) 2.1% – – 24.7% 22.8% (4.4%) 3.4% 30.7% 1,149 100.3% – – 283 261 (50) 39 Factors driving the effective tax rate The effective tax rate of 63.3% is higher than the UK corporation tax rate of 19.25% primarily due to the impact of the Tax Cuts and Jobs Act (US Tax Reform), enacted on 22 December 2017, which reduced the US federal corporate income tax rate from 35% to 21%. As the rate reduction was enacted before the balance sheet date, this has resulted in a one-off tax charge as a result of the remeasurement of the Group’s US deferred tax assets in the 2017 period. This downward remeasurement of the Group’s US deferred tax assets as a result of the rate reduction is partially offset by the increase in the value of the US branch deferred tax assets as a result of Barclays Bank PLC making a tax election in the period to exclude the future profits and losses of its overseas branches from UK taxation. In addition, the effective tax rate is also affected by profits earned outside the UK being taxed at local statutory tax rates that are higher than the UK tax rate, provisions for UK customer redress, investigations and litigation being non-deductible for tax purposes, non-creditable taxes and non-deductible expenses including UK bank levy. These factors, which have each increased the effective tax rate, are partially offset by the impact of non-taxable gains and income in the period. The Group’s future tax charge will be sensitive to the geographic mix of profits earned and the tax rates in force in the jurisdictions that the Group operates in. In the UK, legislation to reduce the corporation tax rate to 17% from 1 April 2020 has been enacted. The reduction of the US federal corporate income tax rate to 21% from 1 January 2018 is expected to have a positive impact on the returns generated by the Group’s US business. The ultimate impact however, is subject to any effect of the Base Erosion Anti-abuse Tax (BEAT), which was introduced by US Tax Reform and presented as an anti-avoidance provision, but is capable of having broad application to companies making payments to foreign affiliates. The provisions introducing the BEAT are complex and there are currently uncertainties surrounding their practical and technical application. The Group is currently considering any future impact of the BEAT which may reduce the benefit of the reduction in the US federal corporate income tax rate. Tax in the consolidated statement of comprehensive income The tax relating to each component of other comprehensive income can be found in the consolidated statement of comprehensive income which additionally includes within Other a tax charge of £5m (2016: £21m credit) relating to share-based payments. Tax in respect of discontinued operation Tax relating to the discontinued operation can be found in the BAGL disposal group income statement (refer to Note 43). The tax charge of £154m (2016: £306m charge) relates entirely to the profit from the ordinary activities of the discontinued operation. 254 Barclays PLC Annual Report 2017 home.barclays/annualreport Performance/returnNotes to the financial statements10 Tax continued Current tax assets and liabilities Movements on current tax assets and liabilities were as follows: Assets Liabilities As at 1 January Income statement from continuing operations Other comprehensive income Corporate income tax paid Other movements Assets Liabilities As at 31 December Deferred tax assets and liabilities The deferred tax amounts on the balance sheet were as follows: Intermediate Holding Company (IHC Tax Group) Barclays Bank PLC (US Branch Tax Group) Barclays PLC – UK tax group Other Deferred tax asset Deferred tax liability Net deferred tax 2017 £m 561 (737) (176) (823) 93 708 94 (104) 482 (586) (104) 2017 £m 1,413 1,234 492 318 3,457 (44) 3,413 2016 £m 415 (903) (488) (535) 23 780 44 (176) 561 (737) (176) 2016 £m 2,207 1,766 575 321 4,869 (29) 4,840 US deferred tax assets in the IHC and US Branch Tax Groups The deferred tax asset in the IHC Tax Group of £1,413m (2016: £2,207m) includes £286m (2016: £321m) relating to tax losses and the deferred tax asset in the US Branch Tax Group of £1,234m (2016: £1,766m) includes £283m (2016: £142m) relating to tax losses. The deferred tax assets of the Group’s US business have been remeasured due to the reduction in the US federal corporate income tax rate enacted in the year. No account has been taken of the impact of any potential future BEAT liabilities in measuring the US deferred tax assets and liabilities and any future BEAT liabilities would be accounted for in the period they arise. Under US tax rules, losses occurring prior to 1 January 2018 can be carried forward and offset against profits for a period of 20 years. The losses first arose in 2011 in the IHC Tax Group and 2008 in the US Branch Tax Group and therefore, any unused amounts may begin to expire in 2031 and 2028 respectively. The remaining US deferred tax assets relate to temporary differences for which there is no time limit on recovery. The deferred tax assets for the IHC and the US Branch Tax Groups’ tax losses are currently projected to be fully utilised by 2019. In prior periods, the US Branch deferred tax assets have been measured as the difference between the UK and US tax rates to take into account UK taxation expected to arise on the profits of the US Branch. During the period, Barclays Bank PLC made a UK tax election that causes the future profits or losses of the Company’s overseas branches to be excluded from the charge to UK tax and therefore subject to tax only in the applicable overseas jurisdiction. The deferred tax assets held by the US Branch of Barclays Bank PLC have been remeasured to the US tax rate as a result of this election. UK tax group deferred tax asset The deferred tax asset in the UK tax group of £492m (2016: £575m) relates entirely to temporary differences. Other deferred tax assets The deferred tax asset of £318m (2016: £321m) in other entities within the Group includes £27m (2016: £40m) relating to tax losses carried forward. These deferred tax assets relate to a number of different territories and their recognition is based on profit forecasts or local country law which indicate that it is probable that the losses and temporary differences will be utilised. home.barclays/annualreport Barclays PLC Annual Report 2017 255 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance10 Tax continued Of the deferred tax asset of £318m (2016: £321m), an amount of £218m (2016: £267m) relates to entities which have suffered a loss in either the current or prior year. This has been taken into account in reaching the above conclusion that these deferred tax assets will be fully recovered in the future. The table below shows movements on deferred tax assets and liabilities during the year. The amounts are different from those disclosed on the balance sheet and in the preceding table as they are presented before offsetting asset and liability balances where there is a legal right to set-off and an intention to settle on a net basis. Fixed asset timing differences £m 1,801 (92) 1,709 (353) – (118) 1,238 1,266 (28) 1,238 Available for sale investments £m 183 (141) 42 – (3) – 39 200 (161) 39 Cash flow hedges £m – (333) (333) – 262 (4) (75) 1 (76) (75) Retirement benefit obligations £m 91 – 91 (322) 49 16 (166) 52 (218) (166) Loan impairment allowance £m 151 – 151 (38) – (5) 108 108 – 108 Other provisions £m 251 – 251 (69) – (25) 157 157 – 157 Tax losses carried forward £m 503 – 503 131 – (38) 596 596 – 596 Share-based payments and deferred compensation £m 732 – 732 (307) (22) (19) 384 384 – 384 Assets Liabilities At 1 January 2017 Income statement Other comprehensive income Other movements Assets Liabilities At 31 December 2017 Assets Liabilities At 1 January 2016 Income statement Other comprehensive income Other movements Assets Liabilities At 31 December 2016 2,008 (194) 1,814 (358) – 253 1,709 1,801 (92) 1,709 28 (70) (42) 9 49 26 42 183 (141) 42 5 (239) (234) (7) (61) (31) (333) – (333) (333) 95 (144) (49) (8) 132 16 91 91 – 91 157 – 157 52 – (58) 151 151 – 151 261 – 261 17 – (27) 251 251 – 251 902 – 902 (522) – 123 503 503 – 503 623 – 623 15 20 74 732 732 – 732 Other £m 2,013 (319) 1,694 (459) 22 (125) 1,132 1,362 (230) 1,132 1,511 (570) 941 344 (6) 415 1,694 2,013 (319) 1,694 Total £m 5,725 (885) 4,840 (1,417) 308 (318) 3,413 4,126 (713) 3,413 5,590 (1,217) 4,373 (458) 134 791 4,840 5,725 (885) 4,840 Other movements include the impact of changes in foreign exchange rates as well as deferred tax amounts relating to acquisitions, disposals and transfers to held for sale. The amount of deferred tax liability expected to be settled after more than 12 months is £522m (2016: £273m). The amount of deferred tax assets expected to be recovered after more than 12 months is £3,399m (2016: £5,066m). These amounts are before offsetting asset and liability balances where there is a legal right to set-off and an intention to settle on a net basis. Unrecognised deferred tax Tax losses and temporary differences Deferred tax assets have not been recognised in respect of gross deductible temporary differences of £157m (2016: £64m) and gross tax losses of £17,919m (2016: £16,820m). The tax losses include capital losses of £3,126m (2016: £3,138m) and unused tax credits of £546m (2016: £514m). Of these tax losses, £409m (2016: £394m) expire within five years, £193m (2016: £57m) expire within six to ten years, £2,016m (2016: £358m) expire within 11 to 20 years and £15,301m (2016: £16,011m) can be carried forward indefinitely. Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profits and gains will be available against which they can be utilised. Group investments in subsidiaries, branches and associates Deferred tax is not recognised in respect of the value of Group’s investments in subsidiaries, branches and associates where the Group is able to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. The aggregate amount of these temporary differences for which deferred tax liabilities have not been recognised decreased in the period to £0.1bn (2016: £2bn) following the reduction of the Group’s holding in BAGL during 2017. 256 Barclays PLC Annual Report 2017 home.barclays/annualreport Performance/returnNotes to the financial statements11 Earnings per share (Loss)/profit attributable to ordinary equity holders of the parent in respect of continuing and discontinued operation Tax credit on profit after tax attributable to other equity instrument holders Total (loss)/profit attributable to ordinary equity holders of the parent in respect of continuing and discontinued operation Continuing operations Profit/(loss) attributable to ordinary equity holders of the parent in respect of continuing operations Tax credit on profit after tax attributable to other equity instrument holders Profit/(loss) attributable to equity holders of the parent in respect of continuing operations Discontinued operation (Loss)/profit attributable to ordinary equity holders of the parent in respect of discontinued operation Dilutive impact of convertible options in respect of discontinued operation (Loss)/profit attributable to equity holders of the parent in respect of discontinued operation including dilutive impact on convertible options (Loss)/profit attributable to equity holders of the parent in respect of continuing and discontinued operation including dilutive impact on convertible options Basic weighted average number of shares in issue Number of potential ordinary shares Diluted weighted average number of shares 2017 £m (1,922) 174 2016 £m 1,623 128 2015 £m (394) 70 (1,748) 1,751 (324) 413 174 587 1,434 128 1,562 (2,335) – (2,335) – 189 (1) 188 (696) 70 (626) 302 – 302 (1,748) 1,750 (324) 2017 million 16,996 288 17,284 2016 million 16,860 184 17,044 2015 million 16,687 367 17,054 (Loss)/earnings per ordinary share Earnings/(loss) per ordinary share in respect of continuing operations (Loss)/earnings per ordinary share in respect of discontinued operation Basic earnings per share 2017 p (10.3) 3.5 (13.8) 2016 p 10.4 9.3 1.1 2015 p (1.9) (3.7) 1.8 Diluted earnings per share 2017 p (10.1) 3.4 (13.5) 2016 p 10.3 9.2 1.1 2015 p (1.9) (3.7) 1.8 The calculation of basic earnings per share is based on the profit attributable to equity holders of the parent and the basic weighted average number of shares excluding treasury shares held in employee benefit trusts or held for trading. When calculating the diluted earnings per share, the weighted average number of shares in issue is adjusted for the effects of all dilutive potential ordinary shares held in respect of Barclays PLC, totalling 288m (2016: 184m) shares. The increase in the number of potential ordinary shares is mainly due to the widening of the spread between the average share price of £2.08 (2016: £1.74) and the average weighted strike price of £1.41 (2016: £1.88) compared to the prior year. The total number of share options outstanding, under schemes considered to be potentially dilutive, was 534m (2016: 584m). These options have strike prices ranging from £1.20 to £2.28. Of the total number of employee share options and share awards at 31 December 2017, 10m (2016: 93m) were anti-dilutive. The 136m (2016: 173m) increase in the basic weighted average number of shares since 31 December 2016 to 16,996m is primarily due to shares issued under employee share schemes and the Scrip Dividend Programme. 12 Dividends on ordinary shares The Directors have approved a final dividend in respect of 2017 of 2.0p per ordinary share of 25p each, which will be paid on 05 April 2018 to shareholders on the Share Register on 02 March 2018, resulting in a total dividend of 3.0p per share for the year. On 31 December 2017, there were 17,060m ordinary shares in issue. The financial statements for the year ended 31 December 2017 does not reflect this dividend, which will be accounted for in shareholders’ equity as an appropriation of retained profits in the year ending 31 December 2018. The 2017 financial statements include the 2017 interim dividends of £170m (2016: £169m) and final dividend declared in relation to 2016 of £339m (2016: £588m). Dividends are funded out of distributable reserves, for further detail, see page 88 (unaudited). home.barclays/annualreport Barclays PLC Annual Report 2017 257 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceThe notes included in this section focus on assets and liabilities the Group holds and recognises at fair value. Fair value refers to the price that would be received to sell an asset or the price that would be paid to transfer a liability in an arm’s-length transaction with a willing counterparty, which may be an observable market price or, where there is no quoted price for the instrument, may be an estimate based on available market data. Detail regarding the Group’s approach to managing market risk can be found on page on 129. 13 Trading portfolio Accounting for trading portfolio assets and liabilities In accordance with IAS 39, all assets and liabilities held for trading purposes are held at fair value with gains and losses in the changes in fair value taken to the income statement in net trading income (Note 5). Debt securities and other eligible bills Equity securities Traded loans Commodities Trading portfolio assets/(liabilities) 14 Financial assets designated at fair value Trading portfolio assets 2017 £m 51,200 59,338 3,140 82 113,760 2016 £m 38,789 38,329 2,975 147 80,240 Trading portfolio liabilities 2016 £m (26,842) (7,831) – (14) (34,687) 2017 £m (29,045) (8,306) – – (37,351) Accounting for financial assets designated at fair value In accordance with IAS 39, financial assets may be designated at fair value, with gains and losses taken to the income statement within net trading income (Note 5) and net investment income (Note 6). The Group has the ability to make the fair value designation when holding the instruments at fair value reduces an accounting mismatch (caused by an offsetting liability or asset being held at fair value), or is managed by the Group on the basis of its fair value, or includes terms that have substantive derivative characteristics described in Note 15. The details on how the fair value amounts are derived for financial assets designated at fair value are described in Note 18. Loans and advances Debt securities Equity securities Reverse repurchase agreements Customers' assets held under investment contracts Other financial assets Financial assets designated at fair value 2017 £m 11,037 15 4,670 100,040 – 519 116,281 2016 £m 10,519 70 4,558 63,162 37 262 78,608 Credit risk of loans and advances designated at fair value and related credit derivatives The following table shows the maximum exposure to credit risk, the changes in fair value attributable to changes in credit risk, and the cumulative changes in fair value since initial recognition together with the amount by which related credit derivatives mitigate this risk: Loans and advances designated at fair value, attributable to credit risk Value mitigated by related credit derivatives Maximum exposure as at 31 December 2017 £m 11,037 256 2016 £m 10,519 339 Changes in fair value during the year ended 2017 £m 10 1 2016 £m (42) (2) Cumulative changes in fair value from inception 2017 £m 2 (12) 2016 £m (42) (13) 258 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statements15 Derivative financial instruments Accounting for derivatives Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract. They include swaps, forward-rate agreements, futures, options and combinations of these instruments and primarily affect the Group’s net interest income, net trading income and derivative assets and liabilities. Notional amounts of the contracts are not recorded on the balance sheet. The Group applies IAS 39. All derivative instruments are held at fair value through profit or loss, except for derivatives that are in a designated cash flow or net investment hedge accounting relationship. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes terms included in a contract or other financial asset or liability (the host), which, had it been a standalone contract, would have met the definition of a derivative. If these are separated from the host i.e. when the economic characteristics of the embedded derivative are not closely related with those of the host contract and the combined instrument is not measured at fair value through profit or loss, then they are accounted for in the same way as derivatives. Hedge accounting The Group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects of its interest and currency risk management strategies. Derivatives are used to hedge interest rate, exchange rate, commodity, and equity exposures and exposures to certain indices such as house price indices and retail price indices related to non-trading positions. Where derivatives are held for risk management purposes, and when transactions meet the required criteria for documentation and hedge effectiveness, the Group applies fair value hedge accounting, cash flow hedge accounting, or hedging of a net investment in a foreign operation, as appropriate to the risks being hedged. Fair value hedge accounting Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The fair value changes adjust the carrying value of the hedged asset or liability held at amortised cost. If hedge relationships no longer meet the criteria for hedge accounting, hedge accounting is discontinued. For fair value hedges of interest rate risk, the fair value adjustment to the hedged item is amortised to the income statement over the period to maturity of the previously designated hedge relationship using the effective interest method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement. Cash flow hedge accounting For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially in other comprehensive income, and then recycled to the income statement in the periods when the hedged item will affect profit or loss. Any ineffective portion of the gain or loss on the hedging instrument is recognised in the income statement immediately. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the hedged item is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is immediately transferred to the income statement. Hedges of net investments The Group’s net investments in foreign operations, including monetary items accounted for as part of the net investment, are hedged for foreign currency risks using both derivatives and foreign currency borrowings. Hedges of net investments are accounted for similarly to cash flow hedges; the effective portion of the gain or loss on the hedging instrument is being recognised directly in other comprehensive income and the ineffective portion being recognised immediately in the income statement. The cumulative gain or loss recognised in other comprehensive income is recognised in the income statement on the disposal or partial disposal of the foreign operation, or other reductions in the Group’s investment in the operation. Total derivatives 2017 Total derivative assets/(liabilities) held for trading Total derivative assets/(liabilities) held for risk management Derivative assets/(liabilities) Notional contract amount £m 35,686,673 231,348 35,918,021 Fair value Assets £m 237,504 165 237,669 Liabilities £m Notional contract amount £m (237,236) 36,185,820 336,524 (238,345) 36,522,344 (1,109) 2016 Fair value Assets £m 345,624 1,002 346,626 Liabilities £m (339,646) (841) (340,487) Further information on netting arrangements of derivative financial instruments can be found within Note 19. Trading derivatives are managed within the Group’s market risk management policies, which are outlined on page 129. The Group’s exposure to credit risk arising from derivative contracts are outlined in the Credit risk section on page 157. home.barclays/annualreport Barclays PLC Annual Report 2017 259 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance15 Derivative financial instruments continued The fair values and notional amounts of derivative instruments held for trading are set out in the following table: Derivatives held for trading 2017 2016 Notional contract amount £m Fair value Assets £m Liabilities £m Notional contract amount £m Fair value Assets £m Liabilities £m Foreign exchange derivatives Forward foreign exchange Currency swaps OTC options bought and sold OTC derivatives Foreign exchange derivatives cleared by central counterparty Exchange traded futures and options – bought and sold Foreign exchange derivatives Interest rate derivatives Interest rate swaps Forward-rate agreements OTC options bought and sold OTC derivatives Interest rate derivatives cleared by central counterpartya Exchange traded futures and options – bought and sold Interest rate derivatives Credit derivatives OTC swaps Credit derivatives cleared by central counterparty Credit derivatives Equity and stock index derivatives OTC options bought and sold Equity swaps and forwards OTC derivatives Exchange traded futures and options – bought and sold Equity and stock index derivatives Commodity derivatives OTC options bought and sold Commodity swaps and forwards OTC derivatives Exchange traded futures and options – bought and sold Commodity derivatives Derivative assets/(liabilities) held for trading 3,131,184 1,098,587 506,156 4,735,927 59,618 24,266 4,819,811 5,680,977 268,277 2,384,453 8,333,707 13,215,545 7,644,560 29,193,812 411,160 303,841 715,001 58,456 103,283 161,739 632,662 794,401 4,465 12,755 17,220 146,428 163,648 35,686,673 26,534 23,675 4,056 54,265 607 30 54,902 121,560 87 27,235 148,882 3,675 362 152,919 7,595 4,954 12,549 5,262 2,235 7,497 7,201 14,698 32 662 694 1,742 2,436 237,504 (26,177) (22,003) (4,665) (52,845) (585) (30) (53,460) 2,308,922 1,086,552 772,031 4,167,505 43,478 18,813 4,229,796 (112,187) (88) (29,635) (141,910) 4,799,897 296,559 2,522,430 7,618,886 (3,390) 14,439,407 7,952,733 (145,658) 30,011,026 (358) (6,233) (5,319) (11,552) (9,591) (5,478) (15,069) (9,050) (24,119) 615,057 332,743 947,800 102,545 105,120 207,665 585,620 793,285 (103) (753) (856) (1,591) (2,447) 14,053 16,086 30,139 173,774 203,913 (237,236) 36,185,820 32,442 40,083 6,338 78,863 366 31 79,260 153,822 999 42,412 197,233 30,503 397 228,133 11,811 4,462 16,273 6,766 2,253 9,019 8,070 17,089 395 1,528 1,923 2,946 4,869 345,624 (30,907) (40,164) (6,762) (77,833) (388) (27) (78,248) (143,059) (968) (43,373) (187,400) (31,528) (370) (219,298) (10,513) (4,572) (15,085) (8,837) (4,435) (13,272) (8,600) (21,872) (461) (1,821) (2,282) (2,861) (5,143) (339,646) Total OTC derivatives held for trading Total derivatives cleared by central counterparty held for trading Total exchange traded derivatives held for trading Derivative assets/(liabilities) held for trading 13,659,753 218,933 (216,913) 12,639,252 298,849 (291,300) 13,579,004 8,447,916 35,686,673 9,236 9,335 237,504 (9,294) 14,815,628 (11,029) 8,730,940 (237,236) 36,185,820 35,331 11,444 345,624 (36,488) (11,858) (339,646) 260 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statements15 Derivative financial instruments continued The fair values and notional amounts of derivative instruments held for risk management are set out in the following table: Derivatives held for risk management 2017 2016 Derivatives designated as cash flow hedges Currency swaps Interest rate swaps Interest rate derivatives cleared by central counterparty Derivatives designated as cash flow hedges Derivatives designated as fair value hedges Interest rate swaps Interest rate derivatives cleared by central counterparty Derivatives designated as fair value hedges Derivatives designated as hedges of net investments Forward foreign exchange Derivatives designated as hedges of net investments Derivative assets/(liabilities) held for risk management Total OTC derivatives held for risk management Total derivatives cleared by central counterparty held for risk management Derivative assets/(liabilities) held for risk management Notional contract amount £m – 1,482 122,103 123,585 7,345 97,436 104,781 2,982 2,982 231,348 11,809 219,539 231,348 Fair value Assets £m Liabilities £m Fair value Assets £m Liabilities £m Notional contract amount £m 1,357 5,965 181,541 188,863 10,733 130,842 141,575 6,086 6,086 336,524 – (3) – (3) (1,096) – (1,096) (10) (10) (1,109) 453 154 62 669 301 – 301 32 32 1,002 (1,109) 24,141 940 – (1,109) 312,383 336,524 62 1,002 – 7 – 7 117 – 117 41 41 165 165 – 165 – (6) (27) (33) (744) – (744) (64) (64) (841) (814) (27) (841) The Group has hedged the following forecast cash flows, which primarily vary with interest rates. These cash flows are expected to impact the income statement in the following periods, excluding any hedge adjustments that may be applied: 2017 Forecast receivable cash flows Forecast payable cash flows 2016 Forecast receivable cash flows Forecast payable cash flows Total £m 2,671 – 2,616 52 Up to one year £m One to two years £m Two to three years £m Three to four years £m Four to five years £m More than five years £m 484 – 455 15 584 – 531 16 561 – 511 7 416 – 411 6 305 – 327 5 321 – 381 3 The maximum length of time over which the Group hedges exposure to the variability in future cash flows for forecast transactions, excluding those forecast transactions related to the payment of variable interest on existing financial instruments is 10 years (2016: 10 years). Amounts recognised in net interest income Gains on the hedged items attributable to the hedged risk Losses on the hedging instruments Fair value ineffectiveness Cash flow hedging ineffectiveness Net investment hedging ineffectiveness 2017 £m 550 (460) 90 (135) 2 2016 £m 1,787 (1,741) 46 28 (3) Gains and losses transferred from the cash flow hedging reserve to the income statement included a £nil (2016: £17m gain) transferred to interest income; a £632m gain (2016: £491m gain) to interest expense; a £nil (2016: £17m gain) to administration and general expenses; and a £nil (2016: £75m loss) to taxation. home.barclays/annualreport Barclays PLC Annual Report 2017 261 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance16 Financial investments Accounting for financial investments Available for sale financial assets are held at fair value with gains and losses being included in other comprehensive income. The Group uses this classification for assets that are not derivatives and are not held for trading purposes or otherwise designated at fair value through profit or loss, or at amortised cost. Dividends and interest (calculated using the effective interest method) are recognised in the income statement in net interest income (Note 3) or, net investment income (Note 6). On disposal, the cumulative gain or loss recognised in other comprehensive income is also included in net investment income. Held to maturity assets are held at amortised cost. The Group uses this classification when there is an intent and ability to hold the asset to maturity. Interest on the investments are recognised in the income statement within net interest income (Note 3). Available for sale debt securities and other eligible bills Available for sale equity securities Held to maturity debt securities Financial investments 17 Financial liabilities designated at fair value 2017 £m 52,020 1,787 5,109 58,916 2016 £m 57,703 438 5,176 63,317 Accounting for liabilities designated at fair value through profit and loss In accordance with IAS 39, financial liabilities may be designated at fair value, with gains and losses taken to the income statement within net trading income (Note 5) and net investment income (Note 6). Movements in own credit are reported through other comprehensive income from January 2017 upon early adoption of IFRS 9. The Group has the ability to make the fair value designation when holding the instruments at fair value reduces an accounting mismatch (caused by an offsetting liability or asset being held at fair value), or is managed by the Group on the basis of its fair value, or includes terms that have substantive derivative characteristics (Note 15). The details on how the fair value amounts are arrived for financial liabilities designated at fair value are described in Note 18. Debt securities Deposits Liabilities to customers under investment contracts Repurchase agreements Other financial liabilities Financial liabilities designated at fair value The cumulative own credit net loss recognised is £179m (2016: £239m loss). 18 Fair value of financial instruments 2017 2016 Contractual amount due on maturity £m 46,920 4,414 – 126,822 16 178,172 Fair value £m 42,563 4,448 – 126,691 16 173,718 Contractual amount due on maturity £m 37,034 5,303 – 55,760 30 98,127 Fair value £m 34,985 5,269 37 55,710 30 96,031 Accounting for financial assets and liabilities – fair values The Group applies IAS 39. All financial instruments are initially recognised at fair value on the date of initial recognition (including transaction costs, other than financial instruments held at fair value through profit or loss) and, depending on the classification of the asset or liability, may continue to be held at fair value either through profit or loss or other comprehensive income. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Wherever possible, fair value is determined by reference to a quoted market price for that instrument. For many of the Group’s financial assets and liabilities, especially derivatives, quoted prices are not available and valuation models are used to estimate fair value. The models calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value. These models use as their basis independently sourced market inputs including, for example, interest rate yield curves, equities and commodities prices, option volatilities and currency rates. For financial liabilities measured at fair value, the carrying amount reflects the effect on fair value of changes in own credit spreads derived from observable market data such as in primary issuance and redemption activity for structured notes. On initial recognition, it is presumed that the transaction price is the fair value unless there is observable information available in an active market to the contrary. The best evidence of an instrument’s fair value on initial recognition is typically the transaction price. However, if fair value can be evidenced by comparison with other observable current market transactions in the same instrument, or is based on a valuation technique whose inputs include only data from observable markets, then the instrument should be recognised at the fair value derived from such observable market data. For valuations that have made use of unobservable inputs, the difference between the model valuation and the initial transaction price (Day One profit) is recognised in profit or loss either: on a straight-line basis over the term of the transaction; or over the period until all model inputs will become observable where appropriate; or released in full when previously unobservable inputs become observable. 262 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statements18 Fair value of financial instruments continued Various factors influence the availability of observable inputs and these may vary from product to product and change over time. Factors include the depth of activity in the relevant market, the type of product, whether the product is new and not widely traded in the marketplace, the maturity of market modelling and the nature of the transaction (bespoke or generic). To the extent that valuation is based on models or inputs that are not observable in the market, the determination of fair value can be more subjective, dependent on the significance of the unobservable input to the overall valuation. Unobservable inputs are determined based on the best information available, for example by reference to similar assets, similar maturities or other analytical techniques. The sensitivity of valuations used in the financial statements to possible changes in significant unobservable inputs is shown on page 270. Critical accounting estimates and judgements The valuation of financial instruments often involves a significant degree of judgement and complexity, in particular where valuation models make use of unobservable inputs (‘Level 3’ assets and liabilities). This note provides information on these instruments, including the related unrealised gains and losses recognised in the period, a description of significant valuation techniques and unobservable inputs, and a sensitivity analysis. Valuation IFRS 13 Fair value measurement requires an entity to classify its assets and liabilities according to a hierarchy that reflects the observability of significant market inputs. The three levels of the fair value hierarchy are defined below. Quoted market prices – Level 1 Assets and liabilities are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis. Valuation technique using observable inputs – Level 2 Assets and liabilities classified as Level 2 have been valued using models whose inputs are observable either directly or indirectly. Valuations based on observable inputs include assets and liabilities such as swaps and forwards which are valued using market standard pricing techniques, and options that are commonly traded in markets where all the inputs to the market standard pricing models are observable. Valuation technique using significant unobservable inputs – Level 3 Assets and liabilities are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data (unobservable inputs). A valuation input is considered observable if it can be directly observed from transactions in an active market, or if there is compelling external evidence demonstrating an executable exit price. Unobservable input levels are generally determined via reference to observable inputs, historical observations or using other analytical techniques. The following table shows the Group’s assets and liabilities that are held at fair value disaggregated by valuation technique (fair value hierarchy) and balance sheet classification: Assets and liabilities held at fair value As at 31 December Trading portfolio assets Financial assets designated at fair value Derivative financial assets Available for sale investments Investment property Assets included in disposal groups classified as held for salea Total assets Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial liabilities Liabilities included in disposal groups classified as held for salea Total liabilities 2017 Valuation technique using Level 3 £m 1,977 7,747 5,334 395 116 Level 2 £m 47,858 104,187 228,549 30,571 – Level 1 £m 63,925 4,347 3,786 22,841 – Total £m 113,760 116,281 237,669 53,807 116 Level 1 £m 41,550 4,031 5,261 21,218 – 2016 Valuation technique using Level 3 £m 2,065 9,947 8,546 372 81 Level 2 £m 36,625 64,630 332,819 36,551 – Total £m 80,240 78,608 346,626 58,141 81 – 94,899 – 411,165 29 15,598 29 521,662 6,754 78,814 8,511 479,136 6,009 27,020 21,274 584,970 (20,905) – (3,631) (16,442) (173,238) (229,517) (4) (480) (5,197) (37,351) (173,718) (238,345) (20,205) (70) (5,051) (14,475) (95,121) (328,265) (7) (840) (7,171) (34,687) (96,031) (340,487) – (24,536) – (419,197) – (5,681) – (449,414) (397) (25,723) (5,224) (443,085) (6,201) (14,219) (11,822) (483,027) Note a Disposal groups held for sale and measured at fair value less cost to sell are included in the fair value table. home.barclays/annualreport Barclays PLC Annual Report 2017 263 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance 18 Fair value of financial instruments continued The following table shows the Group’s assets and liabilities that are held at fair value disaggregated by valuation technique (fair value hierarchy) and product type: Assets and liabilities held at fair value by product type Assets Valuation technique using Level 1 £m Level 2 £m As at 31 December 2017 Interest rate derivatives Foreign exchange derivatives Credit derivatives Equity derivatives Commodity derivatives Government and government sponsored debt Corporate debt Certificates of deposit, commercial paper and other money market instruments Reverse repurchase and repurchase agreements Non-asset backed loans Asset backed securities Issued debt Equity cash products Private equity investments Assets and liabilities held for sale Othera Total As at 31 December 2016 Interest rate derivatives Foreign exchange derivatives Credit derivatives Equity derivatives Commodity derivatives Government and government sponsored debt Corporate debt Certificates of deposit, commercial paper and other money market instruments Reverse repurchase and repurchase agreements Non-asset backed loans Asset backed securities Issued debt Equity cash products Private equity investments Assets and liabilities held for sale Othera Total – – – 3,786 – 34,783 – – – – – – 56,322 8 – – 94,899 – – – 4,210 1,052 31,203 46 – – – – – 35,399 23 6,754 127 78,814 150,325 54,783 11,163 9,848 2,430 49,853 15,098 1,491 100,038 5,710 1,837 – 7,690 1 – 898 411,165 222,892 79,612 14,662 11,842 3,809 49,834 11,921 994 63,162 2,888 1,956 – 6,478 110 8,511 465 479,136 Liabilities Valuation technique using Level 1 £m Level 2 £m Level 3 £m – – – (3,631) – (13,079) – – – – – – (7,826) – – – (24,536) – – – (4,058) (991) (12,761) (27) – – – – – (7,416) – (397) (73) (25,723) (143,890) (53,346) (11,312) (18,527) (2,442) (13,116) (3,580) (7,377) (126,691) – (221) (38,176) (388) – – (131) (419,197) (215,213) (78,263) (14,844) (15,808) (4,138) (11,454) (1,907) (6,936) (55,710) – (256) (31,973) (934) (18) (5,224) (407) (443,085) (2,867) (124) (240) (1,961) (5) – (4) (250) – – – (214) – (16) – – (5,681) (4,860) (51) (241) (2,007) (13) – (5) (319) – – – (298) (2) (12) (6,201) (210) (14,219) Level 3 £m 2,718 160 1,386 1,064 6 49 871 – – 6,657 626 – 112 817 29 1,103 15,598 5,759 132 1,611 1,037 8 3 969 – – 8,767 515 – 150 856 6,009 1,204 27,020 Note a Other includes commercial real estate loans, funds and fund-linked products, asset backed loans, physical commodities and investment property. Valuation techniques and sensitivity analysis Sensitivity analysis is performed on products with significant unobservable inputs (Level 3) to generate a range of reasonably possible alternative valuations. The sensitivity methodologies applied take account of the nature of the valuation techniques used, as well as the availability and reliability of observable proxy and historical data and the impact of using alternative models. Sensitivities are dynamically calculated on a monthly basis. The calculation is based on range or spread data of a reliable reference source or a scenario based on relevant market analysis alongside the impact of using alternative models. Sensitivities are calculated without reflecting the impact of any diversification in the portfolio. The valuation techniques used for the material products within Levels 2 and 3, and observability and sensitivity analysis for products within Level 3, are described below. Interest rate derivatives Description: Derivatives linked to interest rates or inflation indices. The category includes futures, interest rate and inflation swaps, swaptions, caps, floors, inflation options, balance guaranteed swaps and other exotic interest rate derivatives. Valuation: Interest rate and inflation derivatives are generally valued using curves of forward rates constructed from market data to project and discount the expected future cash flows of trades. Instruments with optionality are valued using volatilities implied from market inputs, and use industry standard or bespoke models depending on the product type. 264 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statements18 Fair value of financial instruments continued Observability: In general, inputs are considered observable up to liquid maturities which are determined separately for each input and underlying. Unobservable inputs are generally set by referencing liquid market instruments and applying extrapolation techniques or inferred via another reasonable method. Level 3 sensitivity: Sensitivity to unobservable valuation inputs is based on the dispersion of consensus data services where available, or alternatively it is based on stress scenarios or historic data. Foreign exchange derivatives Description: Derivatives linked to the foreign exchange (FX) market. The category includes FX forward contracts, FX swaps and FX options. The majority are traded as over the counter (OTC) derivatives. Valuation: FX derivatives are valued using industry standard and bespoke models depending on the product type. Valuation inputs include FX rates, interest rates, FX volatilities, interest rate volatilities, FX interest rate correlations and others as appropriate. Observability: FX correlations, forwards and volatilities are generally observable up to liquid maturities which are determined separately for each input and underlying. Unobservable inputs are set by referencing liquid market instruments and applying extrapolation techniques, or inferred via another reasonable method. Level 3 sensitivity: Sensitivity relating to unobservable valuation inputs is primarily based on the dispersion of consensus data services. Credit derivatives Description: Derivatives linked to the credit spread of a referenced entity, index or basket of referenced entities or a pool of referenced assets (e.g. a securitised product). The category includes single name and index credit default swaps (CDS), asset backed CDS and synthetic collateralised debt obligations (CDOs). Valuation: CDS are valued on industry standard models using curves of credit spreads as the principal input. Credit spreads are observed directly from broker data, third-party vendors or priced to proxies. Synthetic CDOs are valued using a model that incorporates credit spreads, recovery rates, correlations and interest rates, and is calibrated to the index tranche market. Observability: CDS contracts referencing entities that are actively traded are generally considered observable. Other valuation inputs are considered observable if products with significant sensitivity to the inputs are actively traded in a liquid market. Unobservable valuation inputs are generally determined with reference to recent transactions or inferred from observable trades of the same issuer or similar entities. Level 3 sensitivity: Sensitivity to unobservable CDS contracts is determined by applying a shift to credit spread curves based on the average range of pricing observed in the market for similar CDS. Sensitivity to unobservable synthetic CDOs is calculated using correlation levels derived from the range of contributors to a consensus bespoke service. Equity derivatives Description: Exchange traded or OTC derivatives linked to equity indices and single names. The category includes vanilla and exotic equity products. Valuation: Equity derivatives are valued using industry standard models. Valuation inputs include stock prices, dividends, volatilities, interest rates, equity repurchase curves and, for multi-asset products, correlations. Observability: In general, valuation inputs are observable up to liquid maturities which are determined separately for each input and underlying. Unobservable inputs are set by referencing liquid market instruments and applying extrapolation techniques, or inferred via another reasonable method. Level 3 sensitivity: Sensitivity is generally estimated using the dispersion of consensus data services. Commodity derivatives Description: Exchange traded and OTC derivatives based on underlying commodities such as metals, crude oil and refined products, agricultural, power and natural gas. Valuation: Commodity swaps and options are valued using models incorporating discounting of cash flows and other industry standard modelling techniques. Valuation inputs include forward curves, volatilities implied from market observable inputs and correlations. Observability: Commodity correlations, forwards and volatilities are generally observable up to liquid maturities which are determined separately for each input and underlying. Unobservable inputs are set with reference to similar observable products, or by applying extrapolation techniques to observable inputs. Level 3 sensitivity: Sensitivity is determined primarily by measuring historical variability over a period of years. Where historical data is unavailable or uncertainty is due to volumetric risk, sensitivity is measured by applying appropriate stress scenarios or using proxy bid-offer spread levels. Complex derivative instruments Valuation estimates made by counterparties with respect to complex derivative instruments, for the purpose of determining the amount of collateral to be posted, often differ, sometimes significantly, from Barclays’ own estimates. In almost all cases, Barclays has been able to successfully resolve such differences or otherwise reach an accommodation with respect to collateral posting levels, including in certain cases, by entering into compromise collateral arrangements. Due to the ongoing nature of collateral calls, Barclays will often be engaged in discussion with one or more counterparties in respect of such differences at any given time. Valuation estimates made by counterparties for collateral purposes are considered, like any other third-party valuation, when determining Barclays’ fair value estimates. Government and government sponsored debt Description: Government bonds, supra sovereign bonds and agency bonds. Valuation: Liquid bonds that are actively traded through an exchange or clearing house are marked to the levels observed in these markets. Other actively traded bonds are valued using observable market prices sourced from broker quotes, inter-dealer prices or other reliable pricing sources. Observability: Prices for actively traded bonds are considered observable. Unobservable bonds prices are generally determined by reference to bond yields for actively traded bonds from the same (or a similar) issuer. Level 3 sensitivity: Sensitivity is generally determined by using a range of observable alternative prices. home.barclays/annualreport Barclays PLC Annual Report 2017 265 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance18 Fair value of financial instruments continued Corporate debt Description: Primarily corporate bonds. Valuation: Corporate bonds are valued using observable market prices sourced from broker quotes, inter-dealer prices or other reliable pricing sources. Observability: Prices for actively traded bonds are considered observable. Unobservable bonds prices are generally determined by reference to bond yields or CDS spreads for actively traded instruments issued by or referencing the same (or a similar) issuer. Level 3 sensitivity: Sensitivity is generally determined by applying a shift to bond yields using the average ranges of external levels observed in the market for similar bonds. Certificates of deposit, commercial paper and other money market instruments Description: Certificates of deposit, commercial paper and other money market instruments. Valuation: Instruments are valued using observable market prices sourced from broker quotes, inter-dealer prices or other reliable pricing services. Observability: Prices for actively traded instruments are considered observable. Unobservable instrument prices are generally determined by reference to bond yields or CDS spreads for actively traded instruments issued by or referencing the same (or a similar) issuer. Level 3 sensitivity: Sensitivity is generally calculated by using a range of observable alternative prices. Reverse repurchase and repurchase agreements Description: Includes securities purchased under resale agreements, securities sold under repurchase agreements, and other similar secured lending agreements. The agreements are primarily short-term in nature. Valuation: Repurchase and reverse repurchase agreements are generally valued by discounting the expected future cash flows using industry standard models that incorporate market interest rates and repurchase rates, based on the specific details of the transaction. Observability: Inputs are deemed observable up to liquid maturities, and are determined based on the specific features of the transaction. Unobservable inputs are generally set by referencing liquid market instruments and applying extrapolation techniques, or inferred via another reasonable method. Level 3 sensitivity: Sensitivity is generally estimated using the dispersion of consensus data services, stress scenarios or historic data. In general, the sensitivity of unobservable inputs is not significant to the overall valuation given the predominantly short-term nature of the agreements. Non-asset backed loans Description: Largely made up of fixed rate loans. Valuation: Fixed rate loans are valued using models that discount expected future cash flows based on interest rates and loan spreads. Observability: Within this loan population, the loan spread is generally unobservable. Unobservable loan spreads are determined by incorporating funding costs, the level of comparable assets such as gilts, issuer credit quality and other factors. Level 3 sensitivity: The sensitivity of fixed rate loans is calculated by applying a shift to loan spreads. Asset backed securities Description: Securities that are linked to the cash flows of a pool of referenced assets via securitisation. The category includes residential mortgage backed securities, commercial mortgage backed securities, CDOs, collateralised loan obligations (CLOs) and other asset backed securities. Valuation: Where available, valuations are based on observable market prices sourced from broker quotes and inter-dealer prices. Otherwise, valuations are determined using industry standard discounted cash flow analysis that calculates the fair value based on valuation inputs such as constant default rate, conditional prepayment rate, loss given default and yield. These inputs are determined by reference to a number of sources including proxying to observed transactions, market indices or market research, and by assessing underlying collateral performance. Proxying to observed transactions, indices or research requires an assessment and comparison of the relevant securities’ underlying attributes including collateral, tranche, vintage, underlying asset composition (historical losses, borrower characteristics and loan attributes such as loan to value ratio and geographic concentration) and credit ratings (original and current). Observability: Where an asset backed product does not have an observable market price and the valuation is determined using a discounted cash flow analysis, the instrument is considered unobservable. Level 3 sensitivity: The sensitivity analysis for asset backed products is based on externally sourced pricing dispersion or by stressing the inputs of discount cash flow analysis. Issued debt Description: Debt notes issued by Barclays. Valuation: Issued debt is valued using discounted cash flow techniques and industry standard models incorporating various inputs observed for each instrument. Observability: Barclays issued notes are generally observable. Structured notes are debt instruments containing embedded derivatives. Where either an input to the embedded derivative or the debt instrument is deemed unobservable and significant to the overall valuation of the note, the structured note is classified as Level 3. Level 3 sensitivity: Sensitivity to the unobservable input in the embedded derivative is calculated in line with the method used for the derivative instrument concerned. 266 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statements18 Fair value of financial instruments continued Equity cash products Description: Includes listed equities, Exchange Traded Funds (ETF) and preference shares. Valuation: Valuation of equity cash products is primarily determined through market observable prices. Observability: Prices for actively traded equity cash products are considered observable. Unobservable equity prices are generally determined by reference to actively traded instruments that are similar in nature, or inferred via another reasonable method. Level 3 sensitivity: Sensitivity is generally calculated based on applying a shift to the valuation of the underlying asset. Private equity investments Description: Includes private equity holdings and principal investments. Valuation: Private equity investments are valued in accordance with the ‘International Private Equity and Venture Capital Valuation Guidelines’ which require the use of a number of individual pricing benchmarks, such as the prices of recent transactions in the same or similar entities, discounted cash flow analysis and comparison with the earnings multiples of listed companies. While the valuation of unquoted equity instruments is subjective by nature, the relevant methodologies are commonly applied by other market participants and have been consistently applied over time. Observability: Inputs are considered observable if there is active trading in a liquid market of products with significant sensitivity to the inputs. Unobservable inputs include earnings estimates, multiples of comparative companies, marketability discounts and discount rates. Level 3 sensitivity: Private equity valuation models are each sensitive to a number of key assumptions, such as projected future earnings, comparator multiples, marketability discounts and discount rates. Valuation sensitivity is generally estimated by shifting assumptions to reasonable alternative levels. Assets and liabilities held for sale Description: Assets and liabilities held for sale consist of disposal groups Barclays intend to sell. Valuation: Assets and liabilities held for sale are valued at the lower of carrying value and fair value less costs to sell. Level 3 sensitivity: The disposal groups that are measured at fair value less cost to sell are valued at the agreed price less costs to sell and are not expected to display significant sensitivity. The sensitivity of the assets and liabilities measured at carrying value is explained within the relevant product descriptions. Other Description: Other includes commercial real estate loans, funds and fund-linked products, asset backed loans, physical commodities and investment property. Assets and liabilities reclassified between Level 1 and Level 2 During the period, there were transfers of £3,807m of government bond assets and £1,023m/£(950)m of commodity derivative assets and liabilities from Level 1 to Level 2 (2016: £2,340m of government bond assets transferred from Level 2 to Level 1) to reflect the market observability of these product types. These transfers are reflected as if they had taken place at the beginning of the year. Level 3 movement analysis The following table summarises the movements in the Level 3 balances during the period. Transfers have been reflected as if they had taken place at the beginning of the year. Assets and liabilities included in disposal groups classified as held for sale and measured at fair value less cost to sell are not included as these are measured at fair value on a non-recurring basis. Asset and liability transfers between Level 2 and Level 3 are primarily due to 1) an increase or decrease in observable market activity related to an input or 2) a change in the significance of the unobservable input, with assets and liabilities classified as Level 3 if an unobservable input is deemed significant. During the year: ■■ £721m of net interest rate derivatives were transferred from Level 3 to Level 2 to reflect the market observability of the products ■■ £2,284m of non-asset backed loans were derecognised due to a substantial modification of terms on the ESHLA loans. The restructured loans are measured on an amortised cost basis. home.barclays/annualreport Barclays PLC Annual Report 2017 267 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance18 Fair value of financial instruments continued Analysis of movements in Level 3 assets and liabilities Total gains and losses in the period recognised in the income statement Trading income £m Other income £m Total gains or losses recog- nised in OCI £m As at 1 January 2017 £m Purchases £m Sales £m Issues £m 3 969 151 515 77 350 2,065 8,616 201 562 – 568 46 73 435 195 24 2 775 – (47) (187) (78) (11) (77) (400) – 27 26 – 4,675 – (25) (127) – (4,646) – – – – – – – – – – – – Settle- ments £m – (98) (221) (9) – (97) (425) (2,284) (3) (1) (1) (247) – 21 (8) 9 (19) 25 28 159 (17) (1) (7) 41 – – – – – (1) (1) – (3) 29 – 197 9,947 4,728 (4,798) – (2,536) 175 223 Government and government sponsored debt Corporate debt Non-asset backed loans Asset backed securities Equity cash products Other Trading portfolio assets Non-asset backed loans Asset backed loans Private equity investments Equity cash products Other Financial assets designated at fair value Equity cash products Private equity investments Other Available for sale investments 73 294 5 372 – 15 36 51 – (78) – (78) Investment property 81 114 (69) Trading portfolio liabilities (7) (4) 1 Certificates of deposit, commercial paper and other money market instruments Issued debt Other Financial liabilities designated at fair value Interest rate derivatives Foreign exchange derivatives Credit derivatives Equity derivatives Commodity derivatives Net derivative financial instrumentsa Assets and liabilities held for sale Total Net assets held for sale measured at fair value on non-recurring basis Total (319) (298) (223) (840) 899 81 1,370 (970) (5) – – – – 58 – 5 (220) – 69 84 – 153 (1) – (2) (14) – 1,375 574 13,567 (157) – 5,507 (17) (574) (5,782) 1 (5) – (4) (10) – 9 – (6) 3 – – – – – – – – – – – – – – – – – – – – – – – – – (2) (2) – – – – 204 204 (208) (12) (29) 374 – 125 – (2,634) – – – – – 2 – – – – (166) 27 (128) (43) 4 (306) – (101) – – – – – – – – – – – – – 2 37 1 40 – – – – – – – – – – – Transfers In £m – 6 1 – – 3 10 – 6 21 16 16 59 5 60 – 65 – (1) As at 31 December 2017 £m 49 871 166 627 68 196 1,977 6,491 155 498 8 595 Out £m – (53) (5) (5) (3) (9) (75) – (31) (11) – (9) (51) 7,747 (45) (4) – (49) – 5 36 319 40 395 116 (4) (104) – – 95 – 9 (250) (214) (16) (104) 104 (480) (11) (13) (69) (16) 1 (721) (46) (1) (7) – (775) – (841) (150) 37 1,146 (896) – 137 – 9,888 29 9,917 13,567 5,507 (5,782) – (2,634) (101) 211 40 (79) (841) Note a The derivative financial instruments are represented on a net basis. On a gross basis, derivative financial assets are £5,334m (2016: £8,546m) and derivative financial liabilities are £5,197m (2016: £7,171m). 268 Barclays PLC Annual Report 2017 home.barclays/annualreport – – 211 – – 40 (108) – (79) Assets and liabilities held at fair valueNotes to the financial statements 18 Fair value of financial instruments continued Analysis of movements in Level 3 assets and liabilities Total gains and losses in the period recognised in the income statement Trading income £m Other income £m Total gains or losses recog- nised in OCI £m As at 1 January 2016 £m 320 2,843 507 743 121 374 4,908 Purchases £m Sales £m Issues £m – 38 173 129 4 55 399 (317) (48) (498) (295) (4) (89) (1,251) – (225) (51) (26) (2,729) – – – – – – – – – – – – 15,963 256 457 26 595 – 48 38 – 2,658 Settle- ments £m – (5) (4) (171) – (1) (181) – 206 (38) 111 (15) 30 294 (8,602) (20) (3) – (33) 1,155 30 16 – 37 – – – – – – – 100 – 120 – 85 17,297 2,744 (3,031) – (8,658) 1,238 305 24 877 20 921 82 – (272) (538) (244) (1,054) 418 (104) 1,685 (857) (506) 52 15 1 68 – – – – – – (7) (254) (7) (268) (3) (9) – – – – 45 – 2 196 – 3 30 (306) 7 – – – – – – – – (407) (16) (423) – – (19) – – 48 231 83 (19) 362 – 2 – (83) – (6) 40 (119) (34) 91 – – – – – (1) 2 – (48) (46) 228 6 111 (98) (3) 3 – 1 4 2 – (7) 9 (2) – – – – – – 636 424 23,214 243 126 3,580 (266) (166) (4,994) (81) (116) (216) (28) 85 (8,843) 244 – 1,729 – 172 483 – – 70 – – – – – – – – – – – – – 2 63 5 70 – – – – – – – – – – – Transfers As at 31 December 2016 £m Out £m In £m – 32 18 1 – 1 52 – 112 6 – 41 – (2,097) (7) (3) (29) (20) (2,156) – – (21) – (86) 3 969 151 515 77 350 2,065 8,616 201 562 – 568 159 (107) 9,947 – – 1 1 – – (1) – – (1) – 3 73 294 5 372 81 (7) (301) – (50) 230 – 38 (319) (298) (223) (351) 268 (840) 294 55 3 (15) – 337 – 198 (83) 52 (6) (86) 413 899 81 1,370 (970) (5) 290 49 1,375 574 (1,654) 13,567 Government and government sponsored debt Corporate debt Non-asset backed loans Asset backed securities Equity cash products Other Trading portfolio assets Non-asset backed loans Asset backed loans Private equity investments Equity cash products Other Financial assets designated at fair value Equity cash products Private equity investments Other Available for sale investments Investment property Trading portfolio liabilities Certificates of deposit, commercial paper and other money market instruments Issued debt Other Financial liabilities designated at fair value Interest rate derivatives Foreign exchange derivatives Credit derivatives Equity derivatives Commodity derivatives Net derivative financial instrumentsa Assets and liabilities held for sale Total Net liabilities held for sale measured at fair value on non-recurring basis Total 23,214 3,580 (4,994) (216) (8,843) 1,729 483 70 198 (766) (1,654) 12,801 Note a The derivative financial instruments are represented on a net basis. On a gross basis, derivative financial assets are £5,334m (2016: £8,546m) and derivative financial liabilities are £5,197m (2016: £7,171m). home.barclays/annualreport Barclays PLC Annual Report 2017 269 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance18 Fair value of financial instruments continued Unrealised gains and losses on Level 3 financial assets and liabilities The following table discloses the unrealised gains and losses recognised in the year arising on Level 3 financial assets and liabilities held at year end: Unrealised gains and losses recognised during the period on Level 3 assets and liabilities held at year end As at 31 December Trading portfolio assets Financial assets designated at fair value Available for sale investments Investment property Trading portfolio liabilities Financial liabilities designated at fair value Net derivative financial instruments Assets and liabilities held for sale Total Income statement 2017 Trading income £m (34) 147 – – 3 58 (301) – (127) Other income £m – 200 (4) (10) – 10 – – 196 Other compre- hensive income £m – – 29 – – – – – 29 Income statement 2016 Total £m (34) 347 25 (10) 3 68 (301) – 98 Trading income £m 243 227 – – (1) 96 175 – 740 Other income £m – 271 6 2 – (6) – 128 401 Other compre- hensive income £m – – 70 – – – – – 70 Totala £m 243 498 76 2 (1) 90 175 128 1,211 Note a The unrealised gain of £1,211m on Level 3 assets in 2016 is largely offset by losses on related Level 2 and Level 1 portfolio hedges. Sensitivity analysis of valuations using unobservable inputs As at 31 December Interest rate derivatives Foreign exchange derivatives Credit derivatives Equity derivatives Commodity derivatives Corporate debt Certificates of deposit, commercial paper and other money market instruments Non-asset backed loans Asset backed securities Issued debt Equity cash products Private equity investments Assets and liabilities held for sale Othera Total 2017 2016 Favourable changes Income statement £m 114 6 106 99 3 4 Equity £m – – – – – – – 243 1 – 12 133 – 5 726 – – – – 24 13 – – 37 Unfavourable changes Income statement £m (138) (6) (79) (99) (3) (3) – (468) – – (8) (138) – (5) (947) Equity £m – – – – – – – – – – (24) (13) – – (37) Favourable changes Income statement £m 209 15 127 163 5 7 Equity £m – – – – – – – 462 1 – 12 104 3 155 1,263 – – – – 26 18 – – 44 Unfavourable changes Income statement £m (249) (15) (133) (164) (5) (2) (1) (597) (1) – (11) (104) (3) (113) (1,398) Equity £m – – – – – – – – – – (26) (21) – – (47) Note a Other includes commercial real estate loans, funds and fund-linked products, asset backed loans, physical commodities and investment property. The effect of stressing unobservable inputs to a range of reasonably possible alternatives, alongside considering the impact of using alternative models, would be to increase fair values by up to £763m (2016: £1,307m) or to decrease fair values by up to £984m (2016: £1,445m) with substantially all the potential effect impacting profit and loss rather than reserves. 270 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statements 18 Fair value of financial instruments continued Significant unobservable inputs The following table discloses the valuation techniques and significant unobservable inputs for assets and liabilities recognised at fair value and classified as Level 3 along with the range of values used for those significant unobservable inputs: Valuation technique(s) Significant unobservable inputs 2017 Range 2016 Range Min Max Min Max Unitsa Derivative financial instrumentsb Interest rate derivatives Discounted cash flows Comparable pricing Option model Credit derivatives Equity derivatives Discounted cash flows Option model Non-derivative financial instruments Non-asset backed loans Corporate debt Asset backed securities Private equity investments Discounted cash flow Discounted cash flows Comparable pricing Comparable pricing Discounted cash flows Comparable pricing EBITDA multiple Inflation forwards Credit spread Price Inflation volatility IR – IR correlation FX – IR correlation Interest rate volatility Credit spread Equity volatility Equity – equity correlation Equity – FX correlation Discounted margin Loan spread Price Price Price Credit spread Price EBITDA multiple 1 45 – 35 (24) (30) 5 122 3 (100) (100) (105) 30 – – – 140 – 8 3 1,320 100 201 99 24 353 190 92 100 45 301 596 50 100 100 190 99 13 (1) 25 – 35 (26) (15) 9 133 1 (90) (80) (130) 30 – – – 145 – 5 8 1,669 100 207 98 81 295 274 150 100 25 331 1,495 99 100 121 190 270 17 % bps points bps vol % % bps vol bps % % % bps bps points points points bps points multiple Notes a The units used to disclose ranges for significant unobservable inputs are percentages, points and basis points. Points are a percentage of par; for example, 100 points equals 100% of par. A basis point equals 1/100th of 1%; for example, 150 bps equals 1.5%. b Certain derivative instruments are classified as Level 3 due to a significant unobservable credit spread input into the calculation of the Credit Valuation Adjustment for the instruments. The range of significant unobservable credit spreads is between 31-596bps (2016: 65-874bps). The following section describes the significant unobservable inputs identified in the table above, and the sensitivity of fair value measurement of the instruments categorised as Level 3 assets or liabilities to increases in significant unobservable inputs. Where sensitivities are described, the inverse relationship will also generally apply. Where reliable interrelationships can be identified between significant unobservable inputs used in fair value measurement, a description of those interrelationships is included below. Forwards A price or rate that is applicable to a financial transaction that will take place in the future. In general, a significant increase in a forward in isolation will result in a fair value increase for the contracted receiver of the underlying (currency, bond, commodity, etc.), but the sensitivity is dependent on the specific terms of the instrument. Credit spread Credit spreads typically represent the difference in yield between an instrument and a benchmark security or reference rate. Credit spreads reflect the additional yield that a market participant demands for taking on exposure to the credit risk of an instrument and form part of the yield used in a discounted cash flow calculation. In general, a significant increase in credit spread in isolation will result in a movement in a fair value decrease for a cash asset. For a derivative instrument, a significant increase in credit spread in isolation can result in a fair value increase or decrease depending on the specific terms of the instrument. Volatility Volatility is a measure of the variability or uncertainty in return for a given derivative underlying. It is an estimate of how much a particular underlying instrument input or index will change in value over time. In general, volatilities are implied from observed option prices. For unobservable options the implied volatility may reflect additional assumptions about the nature of the underlying risk, and the strike/maturity profile of a specific contract. In general, a significant increase in volatility in isolation will result in a fair value increase for the holder of a simple option, but the sensitivity is dependent on the specific terms of the instrument. There may be interrelationships between unobservable volatilities and other unobservable inputs (e.g. when equity prices fall, implied equity volatilities generally rise) but these are generally specific to individual markets and may vary over time. home.barclays/annualreport Barclays PLC Annual Report 2017 271 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance18 Fair value of financial instruments continued Correlation Correlation is a measure of the relationship between the movements of two variables. Correlation can be a significant input into valuation of derivative contracts with more than one underlying instrument. Credit correlation generally refers to the correlation between default processes for the separate names that make up the reference pool of a CDO structure. A significant increase in correlation in isolation can result in a fair value increase or decrease depending on the specific terms of the instrument. Comparable price Comparable instrument prices are used in valuation by calculating an implied yield (or spread over a liquid benchmark) from the price of a comparable observable instrument, then adjusting that yield (or spread) to account for relevant differences such as maturity or credit quality. Alternatively, a price-to-price basis can be assumed between the comparable and unobservable instruments in order to establish a value. In general, a significant increase in comparable price in isolation will result in an increase in the price of the unobservable instrument. For derivatives, a change in the comparable price in isolation can result in a fair value increase or decrease depending on the specific terms of the instrument. Loan spread Loan spreads typically represent the difference in yield between an instrument and a benchmark security or reference rate. Loan spreads typically reflect credit quality, the level of comparable assets such as gilts and other factors, and form part of the yield used in a discounted cash flow calculation. The ESHLA portfolio primarily consists of long-dated fixed rate loans extended to counterparties in the UK Education, Social Housing and Local Authority sectors. The loans are categorised as Level 3 in the fair value hierarchy due to their illiquid nature and the significance of unobservable loan spreads to the valuation. Valuation uncertainty arises from the long-dated nature of the portfolio, the lack of secondary market in the loans and the lack of observable loan spreads. The majority of ESHLA loans are to borrowers in heavily regulated sectors that are considered extremely low credit risk, and have a history of zero defaults since inception. While the overall loan spread range is from 30bps to 596bps (2016: 30bps to 1,495bps), the vast majority of spreads are concentrated towards the bottom end of this range, with 99% of the loan notional being valued with spreads less than 200bps consistently for both years. In general, a significant increase in loan spreads in isolation will result in a fair value decrease for a loan. Loss given default Loss given default represents the expected loss upon liquidation of the collateral as a percentage of the balance outstanding. In general, a significant increase in the loss given default in isolation will translate to lower recovery and lower projected cash flows to pay to the securitisation, resulting in a movement in fair value that is unfavourable for the holder of the securitised product. EBITDA multiple EBITDA multiple is the ratio of the valuation of the investment to the earnings before interest, taxes, depreciation and amortisation. In general, a significant increase in the multiple will result in a fair value increase for an investment. Fair value adjustments Key balance sheet valuation adjustments are quantified below: Exit price adjustments derived from market bid-offer spreads Uncollateralised derivative funding Derivative credit valuation adjustments Derivative debit valuation adjustments 2017 £m (391) (45) (103) 131 2016 £m (475) (82) (237) 242 Exit price adjustments derived from market bid-offer spreads The Group uses mid-market pricing where it is a market maker and has the ability to transact at, or better than, mid price (which is the case for certain equity, bond and vanilla derivative markets). For other financial assets and liabilities, bid-offer adjustments are recorded to reflect the exit level for the expected close out strategy. The methodology for determining the bid-offer adjustment for a derivative portfolio involves calculating the net risk exposure by offsetting long and short positions by strike and term in accordance with the risk management and hedging strategy. Bid-offer levels are generally derived from market quotes such as broker data. Less liquid instruments may not have a directly observable bid-offer level. In such instances, an exit price adjustment may be derived from an observable bid-offer level for a comparable liquid instrument, or determined by calibrating to derivative prices, or by scenario or historical analysis. Exit price adjustments derived from market bid-offer spreads have reduced by £84m to £391m as a result of risk reduction and spread tightening. Discounting approaches for derivative instruments Collateralised In line with market practice, the methodology for discounting collateralised derivatives takes into account the nature and currency of the collateral that can be posted within the relevant credit support annex (CSA). The CSA aware discounting approach recognises the ‘cheapest to deliver’ option that reflects the ability of the party posting collateral to change the currency of the collateral. 272 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statements18 Fair value of financial instruments continued Uncollateralised A fair value adjustment of £45m is applied to account for the impact of incorporating the cost of funding into the valuation of uncollateralised and partially collateralised derivative portfolios and collateralised derivatives where the terms of the agreement do not allow the rehypothecation of collateral received. This adjustment is referred to as the Funding Fair Value Adjustment (FFVA). FFVA has decreased by £37m to £45m mainly as a result of material trade unwinds. FFVA is determined by calculating the net expected exposure at a counterparty level and applying a funding rate to the exposure that reflects the market cost of funding. Barclays’ internal Treasury rates are used as an input to the calculation. The approach takes into account the probability of default of each counterparty, as well as any mandatory break clauses. FFVA incorporates a scaling factor which is an estimate of the extent to which the cost of funding is incorporated into observed traded levels. On calibrating the scaling factor, it is with the assumption that Credit Valuation Adjustments (CVA) and Debit Valuation Adjustments (DVA) are retained as valuation components incorporated into such levels. The effect of incorporating this scaling factor at 31 December 2017 was to reduce FFVA by £138m (2016: £246m). The approach outlined above has been in use since 2012 with no significant changes. Barclays continues to monitor market practices and activity to ensure the approach to uncollateralised derivative valuation remains appropriate. The above approach has been in use since 2012 with no significant changes. Derivative credit and debit valuation adjustments CVA and DVA are incorporated into derivative valuations to reflect the impact on fair value of counterparty credit risk and Barclays’ own credit quality respectively. These adjustments are calculated for uncollateralised and partially collateralised derivatives across all asset classes. CVA and DVA are calculated using estimates of exposure at default, probability of default and recovery rates, at a counterparty level. Counterparties include (but are not limited to) corporates, sovereigns and sovereign agencies and supranationals. Exposure at default is generally estimated through the simulation of underlying risk factors through approximating with a more vanilla structure, or by using current or scenario-based mark to market as an estimate of future exposure. Probability of default and recovery rate information is generally sourced from the CDS markets. Where this information is not available, or considered unreliable, alternative approaches are taken based on mapping internal counterparty ratings onto historical or market-based default and recovery information. In particular, this applies to sovereign related names where the effect of using the recovery assumptions implied in CDS levels would imply a £50m (2016: £95m) increase in CVA. Correlation between counterparty credit and underlying derivative risk factors, termed ‘wrong-way,’ or ‘right-way’ risk, is not systematically incorporated into the CVA calculation but is adjusted where the underlying exposure is directly related to the counterparty. CVA decreased by £134m to £103m, primarily due to reductions in the average maturity of the portfolio driven by trade unwinds. DVA reduced by £111m to £131m, primarily as a result of Barclays’ credit spreads tightening and trade unwinds. Portfolio exemptions The Group uses the portfolio exemption in IFRS 13 Fair Value Measurement to measure the fair value of groups of financial assets and liabilities. Instruments are measured using the price that would be received to sell a net long position (i.e. an asset) for a particular risk exposure or to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants at the balance sheet date under current market conditions. Accordingly, the Group measures the fair value of the group of financial assets and liabilities consistently with how market participants would price the net risk exposure at the measurement date. Unrecognised gains as a result of the use of valuation models using unobservable inputs For instruments where fair value cannot be evidenced by reference to observable market data, initial recognition occurs at the transaction price. This is achieved by recognising a reserve for the difference between unobservable fair value and transaction price. For financial instruments measured at fair value on an ongoing basis the reserve was £109m (2016: £179m). During 2017 there were additions of £34m (2016: £29m) and amortisation and releases of £104m (2016: £37m). Third party credit enhancements Structured and brokered certificates of deposit issued by Barclays are insured up to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC) in the US. The FDIC is funded by premiums that Barclays and other banks pay for deposit insurance coverage. The carrying value of these issued certificates of deposit that are designated under the IAS 39 fair value option includes this third party credit enhancement. The on-balance sheet value of these brokered certificates of deposit amounted to £4,070m (2016: £3,905m). home.barclays/annualreport Barclays PLC Annual Report 2017 273 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance18 Fair value of financial instruments continued Comparison of carrying amounts and fair values for assets and liabilities not held at fair value The following table summarises the fair value of financial assets and liabilities measured at amortised cost on the Group’s balance sheet: As at 31 December Financial assets Held to maturity Loans and advances to banks Loans and advances to customers: – Home loans – Credit cards, unsecured and other retail lending – Finance lease receivablesa – Corporate loans Reverse repurchase agreements and other similar secured lending Assets included in disposal groups classified as held for saleb Financial liabilities Deposits from banks Customer accounts: – Current and demand accounts – Savings accounts – Other time deposits Debt securities in issue Repurchase agreements and other similar secured borrowing Subordinated liabilities Liabilities included in disposal groups classified as held for saleb 2017 2016 Carrying amount £m Fair value £m Level 1 £m Level 2 £m Level 3 £m Carrying amount £m Fair value £m Level 1 £m Level 2 £m Level 3 £m 5,109 35,663 5,285 35,660 5,285 3,701 – 31,959 – – 5,176 43,251 5,347 43,228 5,347 7,256 – 34,987 – 985 – 655 147,002 145,262 55,767 2,854 55,106 2,964 159,929 157,890 12,546 12,546 1,164 1,195 – 145,262 144,765 141,155 – – 141,155 – 54,451 57,699 57,808 1,598 1,602 48,750 188,609 186,715 737 42 56,920 126,979 59,736 – 109,140 – – 12,546 – 13,454 13,454 – 13,454 – – 1,195 43,593 44,838 1,070 4,614 39,154 (37,723) (37,729) (4,375) (33,354) – (48,214) (48,212) (5,256) (42,895) (61) – (145,950) (145,927) (145,927) (134,339) (134,369) (134,369) – (148,832) (148,897) (62,750) (80,296) (72,431) (73,314) (74,752) – – (138,204) (138,197) (127,258) – (133,344) (133,370) (120,471) (48,853) (196) (5,851) (151,630) (151,632) (76,971) (75,932) (2,321) (10,921) (12,891) (96,240) (74,712) (18) (8) (6,539) (2,063) (40,338) (40,338) (23,826) (25,084) – – – – – (40,338) (25,084) – – – – (19,760) (23,383) (19,760) (24,547) – – (19,760) (24,547) – – (51,775) (51,788) (22,264) (28,998) (526) Notes a The fair value hierarchy for finance lease receivables is not required as part of the standard. b Disposal groups held for sale and measured at fair value less cost to sell are included in the fair value table. The fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As a wide range of valuation techniques are available, it may not be appropriate to directly compare this fair value information to independent market sources or other financial institutions. Different valuation methodologies and assumptions can have a significant impact on fair values which are based on unobservable inputs. Financial assets The carrying value of financial assets held at amortised cost is determined in accordance with the relevant accounting policy in Note 20. Loans and advances to banks The fair value of loans and advances, for the purpose of this disclosure, is derived from discounting expected cash flows in a way that reflects the current market price for lending to issuers of similar credit quality. Where market data or credit information on the underlying borrowers is unavailable, a number of proxy/extrapolation techniques are employed to determine the appropriate discount rates. There is minimal difference between the fair value and carrying amount due to the short-term nature of the lending, i.e. predominantly overnight deposit, and the high credit quality of counterparties. Loans and advances to customers The fair value of loans and advances to customers, for the purpose of this disclosure, is derived from discounting expected cash flows in a way that reflects the current market price for lending to issuers of similar credit quality. For retail lending, i.e. home loans and credit cards, tailored discounted cash flow models are predominantly used to estimate the fair value of different product types. For example, for home loans different models are used to estimate fair values of tracker, offset and fixed rate mortgage products. Key inputs to these models are the differentials between historic and current product margins and estimated prepayment rates. The discount of fair value to carrying amount for home loans has reduced to 1.2% (2016: 2.5%) due to changes in product mix across the loan portfolio and movements in product margins. The fair value of corporate loans is calculated by the use of discounted cash flow techniques where the gross loan values are discounted at a rate of difference between contractual margins and hurdle rates or spreads where Barclays charges a margin over LIBOR depending on credit quality and loss given default and years to maturity. The discount between the carrying and fair value has increased to 1.3% (2016: 1.0%). 274 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statements 18 Fair value of financial instruments continued Reverse repurchase agreements The fair value of reverse repurchase agreements approximates carrying amount as these balances are generally short dated and fully collateralised. Financial liabilities The carrying value of financial liabilities held at amortised cost is determined in accordance with the accounting policy in Note 22. Deposits from banks and customer accounts In many cases, the fair value disclosed approximates carrying value because the instruments are short term in nature or have interest rates that reprice frequently, such as customer accounts and other deposits and short-term debt securities. The fair value for deposits with longer-term maturities mainly time deposits, are estimated using discounted cash flows applying either market rates or current rates for deposits of similar remaining maturities. Consequently, the fair value discount is minimal. There were transfers of £34,163m of deposits from banks and customers from Level 2 to Level 1 to reflect the market observability of these product types. Debt securities in issue Fair values of other debt securities in issue are based on quoted prices where available, or where the instruments are short dated, carrying amount approximates fair value. The fair value difference has increased to 2.0% (2016: 1.4%). Repurchase agreements The fair value of repurchase agreements approximates carrying amounts as these balances are generally short dated. Subordinated liabilities Fair values for dated and undated convertible and non-convertible loan capital are based on quoted market rates for the issuer concerned or issuers with similar terms and conditions. 19 Offsetting financial assets and financial liabilities In accordance with IAS 32 Financial Instruments: Presentation, the Group reports financial assets and financial liabilities on a net basis on the balance sheet only if there is a legally enforceable right to set-off the recognised amounts and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. The following table shows the impact of netting arrangements on: ■■ all financial assets and liabilities that are reported net on the balance sheet ■■ all derivative financial instruments and reverse repurchase and repurchase agreements and other similar secured lending and borrowing agreements that are subject to enforceable master netting arrangements or similar agreements, but do not qualify for balance sheet netting. The table identifies the amounts that have been offset in the balance sheet and also those amounts that are covered by enforceable netting arrangements (offsetting arrangements and financial collateral) but do not qualify for netting under the requirements of IAS 32 described above. The ‘Net amounts’ presented on the next page are not intended to represent the Group’s actual exposure to credit risk, as a variety of credit mitigation strategies are employed in addition to netting and collateral arrangements. home.barclays/annualreport Barclays PLC Annual Report 2017 275 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance19 Offsetting financial assets and financial liabilities continued As at 31 December 2017 Derivative financial assets Reverse repurchase agreements and other similar secured lendinge Total assets Derivative financial liabilities Repurchase agreements and other similar secured borrowinge Total liabilities As at 31 December 2016 Derivative financial assets Reverse repurchase agreements and other similar secured lending Total assets Derivative financial liabilities Repurchase agreements and other similar secured borrowinge Total liabilities Amounts subject to enforceable netting arrangements Effects of offsetting on-balance sheet Related amounts not offseta Gross amounts £m 256,881 Amounts offsetb £m (21,638) Net amounts reported on the balance sheet £m 235,243 Financial instruments £m (184,265) Financial collateral £m (39,262) Net amount £m 11,716 Amounts not subject to enforceable netting arrange- mentsc £m 2,426 Balance sheet totald £m 237,669 326,340 583,221 (253,030) (223,495) (245,133) 21,065 102,845 338,088 (231,965) – (184,265) 184,265 (102,380) (141,642) 36,444 465 12,181 (11,256) 112,586 9,741 12,167 350,255 (6,380) (238,345) (374,616) (627,646) 223,495 244,560 (151,121) (383,086) – 184,265 151,073 187,517 (48) (11,304) (15,908) (167,029) (22,288) (405,374) 353,078 (11,934) 341,144 (273,602) (49,923) 17,619 5,482 346,626 257,430 610,508 (345,752) (187,262) (199,196) 10,962 70,168 411,312 (334,790) – (273,602) 273,602 (69,932) (119,855) 47,383 236 17,855 (13,805) 6,448 11,930 (5,697) 76,616 423,242 (340,487) (257,854) (603,606) 187,262 198,224 (70,592) (405,382) – 273,602 68,897 116,280 (1,695) (15,500) (4,878) (10,575) (75,470) (415,957) Notes a Financial collateral of £39,262m (2016: £49,923m) was received in respect of derivative assets, including £33,092m (2016: £41,641m) of cash collateral and £6,170m (2016: £8,282m) of non-cash collateral. Financial collateral of £36,444m (2016: £47,383m) was placed in respect of derivative liabilities, including £32,575m (2016: £43,763m) of cash collateral and £3,869m (2016: £3,620m) of non-cash collateral. The collateral amounts are limited to net balance sheet exposure so as to not include over-collateralisation. Of the £33,092m (2016: £41,641m) cash collateral held, £19,351m (2016: £26,834m) was included in deposits from banks and £13,741m (2016: £14,807m), was included in customer accounts. Of the £32,575m (2016: £43,763m) cash collateral placed, £14,493m (2016: £17,587m) was included in loans and advances to banks and £18,082m (2016: £26,176m) was included in loans and advances to customers. b Amounts offset for derivative financial assets include cash collateral netted of £2,393m (2016: £972m). Amounts offset for derivative financial liabilities include cash collateral netted of £1,820m (2016: £nil). Settlements assets and liabilities have been offset amounting to £13,241m (2016: £10,486m). No other significant recognised financial assets and liabilities were offset in the balance sheet. Therefore, the only balance sheet categories necessary for inclusion in the table are those shown above. c This column includes contractual rights of set-off that are subject to uncertainty under the laws of the relevant jurisdiction. d The balance sheet total is the sum of ‘Net amounts reported on the balance sheet’ that are subject to enforceable netting arrangements and ‘Amounts not subject to enforceable netting arrangements’. e Repurchase and reverse repurchase agreements include instruments at amortised cost and instruments designated at fair value through profit and loss. Reverse repurchase agreements and other similar secured lending of £112,586m (2016: £76,616m) is split by fair value £100,040m (2016: £63,162m) and amortised cost £12,546m (2016: £13,454m). Repurchase agreements and other similar secured borrowing of £167,029m (2016: £75,470m) is split by fair value £126,691m (2016: £55,710m) and amortised cost £40,338m (2016: £19,760m). Derivative assets and liabilities The ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set-off under netting agreements, such as the ISDA Master Agreement or derivative exchange or clearing counterparty agreements, whereby all outstanding transactions with the same counterparty can be offset and close-out netting applied across all outstanding transactions covered by the agreements if an event of default or other predetermined events occur. Financial collateral refers to cash and non-cash collateral obtained, typically daily or weekly, to cover the net exposure between counterparties by enabling the collateral to be realised in an event of default or if other predetermined events occur. Repurchase and reverse repurchase agreements and other similar secured lending and borrowing The ‘Amounts offset’ column identifies financial assets and liabilities that are subject to set-off under netting agreements, such as Global Master Repurchase Agreements and Global Master Securities Lending Agreements, whereby all outstanding transactions with the same counterparty can be offset and close-out netting applied across all outstanding transactions covered by the agreements if an event of default or other predetermined events occur. Financial collateral typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default. These offsetting and collateral arrangements and other credit risk mitigation strategies used by the Group are further explained in the Credit risk mitigation section on page 128. 276 Barclays PLC Annual Report 2017 home.barclays/annualreport Assets and liabilities held at fair valueNotes to the financial statementsNotes to the financial statements Financial instruments held at amortised cost The notes included in this section focus on assets that are held at amortised cost arising from the Group’s retail and wholesale lending including loans and advances, finance leases, repurchase and reverse repurchase agreements and similar secured lending. Details regarding the Group’s liquidity and capital position can be found on pages 166 to 187. 20 Loans and advances to banks and customers Accounting for financial instruments held at amortised cost Loans and advances to customers and banks, customer accounts, debt securities and most financial liabilities, are held at amortised cost. That is, the initial fair value (which is normally the amount advanced or borrowed) is adjusted for repayments and the amortisation of coupon, fees and expenses to represent the effective interest rate of the asset or liability. Balances deferred on-balance sheet as effective interest rate adjustments are amortised to interest income over the life of the financial instrument to which they relate. In accordance with IAS 39, where the Group no longer intends to trade in financial assets it may transfer them out of the held for trading classification and measure them at amortised cost if they meet the definition of a loan. The initial value used for the purposes of establishing amortised cost is fair value on the date of the transfer. As at 31 December Gross loans and advances to banks Less: allowance for impairment Loans and advances to banks Gross loans and advances to customers Less: allowance for impairment Loans and advances to customers 21 Finance leases 2017 £m 35,663 – 35,663 2016 £m 43,251 – 43,251 370,204 (4,652) 365,552 397,404 (4,620) 392,784 Accounting for finance leases The Group applies IAS 17 Leases in accounting for finance leases, both where it is the lessor or the lessee. A finance lease is a lease which confers substantially all the risks and rewards of the leased assets on the lessee. Where the Group is the lessor, the leased asset is not held on the balance sheet; instead a finance lease receivable is recognised representing the minimum lease payments receivable under the terms of the lease, discounted at the rate of interest implicit in the lease. Where the Group is the lessee, the leased asset is recognised in property, plant and equipment and a finance lease liability is recognised, representing the minimum lease payments payable under the lease, discounted at the rate of interest implicit in the lease. Interest income or expense is recognised in interest receivable or payable, allocated to accounting periods to reflect a constant periodic rate of return. Finance lease receivables Finance lease receivables are included within loans and advances to customers. The Group specialises in the provision of leasing and other asset finance facilities across a broad range of asset types to business customers. Gross investment in finance lease receivables £m 1,130 1,750 284 3,164 2017 2016 Present value of minimum lease payments receivable £m 1,039 1,615 252 2,906 Un- guaranteed residual values £m 69 156 21 246 Gross investment in finance lease receivables £m 646 986 73 1,705 Future finance income £m (91) (135) (32) (258) Present value of minimum lease payments receivable £m 609 929 69 1,607 Un- guaranteed residual values £m 60 132 19 211 Future finance income £m (37) (57) (4) (98) Not more than one year Over one year but not more than five years Over five years Total Following a review in 2017, a portfolio of assets within loans and advances to customers has been identified as finance leases. This has resulted in an increase in the finance lease receivables balance of £1,537m in 2017 as reflected in the table above. The impairment allowance for uncollectable finance lease receivables amounted to £57m (2016: £6m). Finance lease liabilities The Group leases items of property, plant and equipment on terms that meet the definition of finance leases. Finance lease liabilities are included within Note 26. As at 31 December 2017, the total future minimum payments under finance leases were £20m (2016: £15m). The carrying amount of assets held under finance leases was £9m (2016: £15m). home.barclays/annualreport Barclays PLC Annual Report 2017 277 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance22 Reverse repurchase and repurchase agreements including other similar lending and borrowing Reverse repurchase agreements (and stock borrowing or similar transaction) are a form of secured lending whereby the Group provides a loan or cash collateral in exchange for the transfer of collateral, generally in the form of marketable securities subject to an agreement to transfer the securities back at a fixed price in the future. Repurchase agreements are where the Group obtains such loans or cash collateral, in exchange for the transfer of collateral. Accounting for reverse repurchase and repurchase agreements including other similar lending and borrowing The Group purchases (a reverse repurchase agreement) or borrows securities subject to a commitment to resell or return them. The securities are not included in the balance sheet as the Group does not acquire the risks and rewards of ownership. Consideration paid (or cash collateral provided) is accounted for as a loan asset at amortised cost, unless it is designated at fair value through profit and loss. The Group may also sell (a repurchase agreement) or lend securities subject to a commitment to repurchase or redeem them. The securities are retained on the balance sheet as the Group retains substantially all the risks and rewards of ownership. Consideration received (or cash collateral provided) is accounted for as a financial liability at amortised cost, unless it is designated at fair value through profit and loss. As at 31 December Assets Banks Customers Reverse repurchase agreements and other similar secured lending at amortised cost Liabilities Banks Customers Repurchase agreements and other similar secured borrowing at amortised cost 2017 £m 2016 £m 7,374 5,172 12,546 2,769 10,685 13,454 30,105 10,233 40,338 12,820 6,940 19,760 278 Barclays PLC Annual Report 2017 home.barclays/annualreport Financial instruments held at amortised costNotes to the financial statementsNotes to the financial statements Non-current assets and other investments The notes included in this section focus on the Group’s non-current tangible and intangible assets and property, plant and equipment, which provide long-term future economic benefits. 23 Property, plant and equipment Accounting for property, plant and equipment The Group applies IAS 16 Property Plant and Equipment and IAS 40 Investment Properties. Property, plant and equipment is stated at cost, which includes direct and incremental acquisition costs less accumulated depreciation and provisions for impairment, if required. Subsequent costs are capitalised if these result in the enhancement to the asset. Depreciation is provided on the depreciable amount of items of property, plant and equipment on a straight-line basis over their estimated useful economic lives. Depreciation rates, methods and the residual values underlying the calculation of depreciation of items of property, plant and equipment are kept under review to take account of any change in circumstances. The Group uses the following annual rates in calculating depreciation: Annual rates in calculating depreciation Freehold land Freehold buildings and long leasehold property (more than 50 years to run) Leasehold property over the remaining life of the lease (less than 50 years to run) Costs of adaptation of freehold and leasehold property Equipment installed in freehold and leasehold property Computers and similar equipment Fixtures and fittings and other equipment Depreciation rate Not depreciated 2-3.3% Over the remaining life of the lease 6-10% 6-10% 17-33% 9-20% Where leasehold property has a remaining useful life of less than 17 years, costs of adaptation and installed equipment are depreciated over the remaining life of the lease. Investment property The Group initially recognises investment property at cost, and subsequently at fair value at each balance sheet date, reflecting market conditions at the reporting date. Gains and losses on remeasurement are included in the income statement. Cost As at 1 January 2017 Additions Disposals Change in fair value of investment properties Exchange and other movements As at 31 December 2017 Accumulated depreciation and impairment As at 1 January 2017 Depreciation charge Impairment Disposals Exchange and other movements As at 31 December 2017 Net book value Cost As at 1 January 2016 Additions Disposals Change in fair value of investment properties Exchange and other movementsa As at 31 December 2016 Accumulated depreciation and impairment As at 1 January 2016 Depreciation charge Disposals Exchange and other movementsa As at 31 December 2016 Net book value Investment property £m Property £m Equipment £m Leased assets £m 81 114 (69) (5) (5) 116 – – – – – 116 140 – (6) – (53) 81 – – – – – 81 3,429 220 (18) – (138) 3,493 (1,483) (171) (28) – 14 (1,668) 1,825 3,919 167 (761) – 104 3,429 (1,697) (186) 635 (235) (1,483) 1,946 3,840 299 (1.082) – (309) 2,748 (3,043) (275) – 972 229 (2,117) 631 4,259 370 (631) – (158) 3,840 (3,177) (327) 405 56 (3,043) 797 10 – (1) – – 9 (9) – – – – (9) – 62 – – – (52) 10 (38) – – 29 (9) 1 Total £m 7,360 633 (1,170) (5) (452) 6,366 – (4,535) (446) (28) 972 243 (3,794) 2,572 8,380 537 (1,398) – (159) 7,360 – (4,912) (513) 1,040 (150) (4,535) 2,825 Notes a Includes property, plant and equipment relating to BAGL of £627m (cost of £1,066m less accumulated depreciation of £439m) which was reclassified to held for sale. home.barclays/annualreport Barclays PLC Annual Report 2017 279 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceNotes to the financial statements 23 Property, plant and equipment continued Property rentals of £2m (2016: £7m) and £8m (2016: £6m) have been included in net investment income and other income respectively. The fair value of investment property is determined by reference to current market prices for similar properties, adjusted as necessary for condition and location, or by reference to recent transactions updated to reflect current economic conditions. Discounted cash flow techniques may be employed to calculate fair value where there have been no recent transactions, using current external market inputs such as market rents and interest rates. Valuations are carried out by management with the support of appropriately qualified independent valuers. Refer to Note 18 for further details. 24 Goodwill and intangible assets Accounting for goodwill and intangible assets Goodwill The carrying value of goodwill is determined in accordance with IFRS 3 Business Combinations and IAS 36 Impairment of Assets. Goodwill arising on the acquisition of subsidiaries represents the excess of the fair value of the purchase consideration over the fair value of the Group’s share of the assets acquired and the liabilities and contingent liabilities assumed on the date of the acquisition. Goodwill is reviewed annually for impairment, or more frequently when there are indications that impairment may have occurred. The test involves comparing the carrying value of goodwill with the present value of the pre-tax cash flows, discounted at a rate of interest that reflects the inherent risks, of the cash generating unit (CGU) to which the goodwill relates, or the CGU’s fair value if this is higher. Intangible assets Intangible assets other than goodwill are accounted for in accordance with IAS 38 Intangible Assets. Intangible assets are initially recognised when they are separable or arise from contractual or other legal rights, the cost can be measured reliably and, in the case of intangible assets not acquired in a business combination, where it is probable that future economic benefits attributable to the assets will flow from their use. Intangible assets are stated at cost (which is, in the case of assets acquired in a business combination, the acquisition date fair value) less accumulated amortisation and provisions for impairment, if any, and are amortised over their useful lives in a manner that reflects the pattern to which they contribute to future cash flows, generally using the amortisation periods set out below: Annual rates in calculating amortisation Goodwill Internally generated softwarea Other software Customer lists Licences and other Amortisation period Not amortised 12 months to 6 years 12 months to 6 years 12 months to 25 years 12 months to 25 years Intangible assets are reviewed for impairment when there are indications that impairment may have occurred. Note a Exceptions to the above rate relate to useful lives of certain core banking platforms that are assessed individually and, if appropriate, amortised over longer periods ranging from 10 to 15 years. 280 Barclays PLC Annual Report 2017 home.barclays/annualreport Non-current assets and other investmentsNotes to the financial statements24 Goodwill and intangible assets continued 2017 Cost As at 1 January 2017 Additions and disposals Exchange and other movements As at 31 December 2017 Accumulated amortisation and impairment As at 1 January 2017 Disposals Amortisation charge Impairment charge Exchange and other movements As at 31 December 2017 Net book value 2016 Cost As at 1 January 2016 Additions and disposals Exchange and other movements As at 31 December 2016 Accumulated amortisation and impairment As at 1 January 2016 Disposals Amortisation charge Impairment charge Exchange and other movements As at 31 December 2016 Net book value Internally generated software £m Goodwill £m Other software £m Customer lists £m Licences and other £m Total £m 4,847 – (88) 4,759 (930) – – – 70 (860) 3,899 5,603 (77) (679) 4,847 (998) 77 – – (9) (930) 3,917 4,927 662 (88) 5,501 (1,864) 207 (546) (52) 60 (2,195) 3,306 4,112 955 (140) 4,927 (1,634) 46 (476) (72) 272 (1,864) 3,063 204 16 207 427 (143) 10 (32) – (148) (313) 114 542 2 (340) 204 (212) 1 (36) (1) 105 (143) 61 1,708 (15) (146) 1,547 (1,231) 15 (101) – 108 (1,209) 338 1,665 59 (16) 1,708 (1,081) 14 (129) – (35) (1,231) 477 551 13 (45) 519 (343) 24 (36) – 28 (327) 192 703 78 (230) 551 (478) 12 (29) (1) 153 (343) 208 12,237 676 (160) 12,753 (4,511) 256 (715) (52) 118 (4,904) 7,849 12,625 1,017 (1,405) 12,237 (4,403) 150 (670) (74) 486 (4,511) 7,726 2017 £m 3,574 325 3,899 2016 £m 3,556 361 3,917 Goodwill Goodwill is allocated to business operations according to business segments as follows: Barclays UK Barclays International Total net book value of goodwill Goodwill Testing goodwill for impairment involves a significant amount of judgement. This includes the identification of independent CGUs and the allocation of goodwill to these units based on which units are expected to benefit from the acquisition. The allocation is reviewed following business reorganisations. Cash flow projections necessarily take into account changes in the market in which a business operates including the level of growth, competitive activity, and the impacts of regulatory change. Determining both the expected pre-tax cash flows and the risk adjusted interest rate appropriate to the operating unit requires the exercise of judgement. The estimation of pre-tax cash flows is sensitive to the periods for which detailed forecasts are available and to assumptions regarding long-term sustainable cash flows. Other intangible assets Determining the estimated useful lives of intangible assets (such as those arising from contractual relationships) requires an analysis of circumstances. The assessment of whether an asset is exhibiting indicators of impairment as well as the calculation of impairment, which requires the estimate of future cash flows and fair values less costs to sell, also requires the preparation of cash flow forecasts and fair values for assets that may not be regularly bought and sold. Impairment testing of goodwill During 2017, the Group recognised an impairment charge of £nil (2016: £nil). Key assumptions The key assumptions used for impairment testing are set out below for each significant goodwill balance. Other goodwill of £769m (2016: £787m) was allocated to multiple CGUs which are not considered individually significant. home.barclays/annualreport Barclays PLC Annual Report 2017 281 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance24 Goodwill and intangible assets continued Barclays UK Goodwill relating to Woolwich in Personal Banking and Business Banking was £3,130m (2016: £3,130m) of the total Barclays UK balance. The carrying value of the CGU has been determined by using net asset value. The recoverable amount of the CGU, calculated as value in use, has been determined using cash flow predictions based on financial budgets approved by management and covering a five-year period, with a terminal growth rate of 2.0% (2016: 2.0%) applied thereafter. The forecast cash flows have been discounted at a pre-tax rate of 13.9% (2016: 14.6%). Based on these assumptions, the recoverable amount exceeded the carrying amount including goodwill by £5,262m (2016: £4,130m). A one percentage point change in the discount rate or terminal growth rate would increase or decrease the recoverable amount by £1,128m (2016: £988m) and £734m (2016: £615m) respectively. A reduction in the forecast cash flows of 10% per annum would reduce the recoverable amount by £1,409m (2016: £1,293m). The increase in headroom in 2017 reflects changes in discount rate and future cash flow projections. 25 Operating leases Accounting for operating leases The Group applies IAS 17 Leases, for operating leases. An operating lease is a lease where substantially all of the risks and rewards of the leased assets remain with the lessor. Where the Group is the lessor, lease income is recognised on a straight-line basis over the period of the lease unless another systematic basis is more appropriate. The Group holds the leased assets on-balance sheet within property, plant and equipment. Where the Group is the lessee, rentals payable are recognised as an expense in the income statement on a straight-line basis over the lease term unless another systematic basis is more appropriate. Operating lease receivables The Group acts as lessor, whereby items of plant and equipment are purchased and then leased to third parties under arrangements qualifying as operating leases. The future minimum lease payments expected to be received under non-cancellable operating leases was £nil (2016: £nil). Operating lease commitments The Group leases various offices, branches and other premises under non-cancellable operating lease arrangements. With such operating lease arrangements, the asset is kept on the lessor’s balance sheet and the Group reports the future minimum lease payments as an expense over the lease term. The leases have various terms, escalation and renewal rights. There are no contingent rents payable. Operating lease rentals of £342m (2016: £560m) have been included in administration and general expenses. The future minimum lease payments by the Group under non-cancellable operating leases are as follows: Not more than one year Over one year but not more than five years Over five years Total 2017 2016 Property £m 332 844 1,337 2,513 Equipment £m 2 21 – 23 Property £m 364 974 1,520 2,858 Equipment £m – 23 – 23 Total future minimum sublease payments to be received under non-cancellable subleases was £53m (2016: £2m). 282 Barclays PLC Annual Report 2017 home.barclays/annualreport Non-current assets and other investmentsNotes to the financial statementsNotes to the financial statements Accruals, provisions, contingent liabilities and legal proceedings The notes included in this section focus on the Group’s accruals, provisions and contingent liabilities. Provisions are recognised for present obligations arising as consequences of past events where it is probable that a transfer of economic benefit will be necessary to settle the obligation, and it can be reliably estimated. Contingent liabilities reflect potential liabilities that are not recognised on the balance sheet. 26 Accruals, deferred income and other liabilities Accruals and deferred income Other creditors Obligations under finance leases (refer to Note 21) Insurance contract liabilities, including unit-linked liabilities Accruals, deferred income and other liabilities 27 Provisions 2017 £m 3,951 4,563 20 31 8,565 2016 £m 4,422 4,382 15 52 8,871 Accounting for provisions The Group applies IAS 37 Provisions, Contingent Liabilities and Contingent Assets in accounting for non-financial liabilities. Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefit will be necessary to settle the obligation, which can be reliably estimated. Provision is made for the anticipated cost of restructuring, including redundancy costs when an obligation exists; for example, when the Group has a detailed formal plan for restructuring a business and has raised valid expectations in those affected by the restructuring by announcing its main features or starting to implement the plan. Provision is made for undrawn loan commitments if it is probable that the facility will be drawn and result in the recognition of an asset at an amount less than the amount advanced. Critical accounting estimates and judgements The financial reporting of provisions involves a significant degree of judgement and is complex. Identifying whether a present obligation exists and estimating the probability, timing, nature and quantum of the outflows that may arise from past events requires judgements to be made based on the specific facts and circumstances relating to individual events and often requires specialist professional advice. When matters are at an early stage, accounting judgements and estimates can be difficult because of the high degree of uncertainty involved. Management continues to monitor matters as they develop to re-evaluate on an ongoing basis whether provisions should be recognised, however there can remain a wide range of possible outcomes and uncertainties, particularly in relation to legal, competition and regulatory matters, and as a result it is often not practicable to make meaningful estimates even when matters are at a more advanced stage. The complexity of such matters often requires the input of specialist professional advice in making assessments to produce estimates. Customer redress and legal, competition and regulatory matters are areas where a higher degree of professional judgement is required. The amount that is recognised as a provision can also be very sensitive to the assumptions made in calculating it. This gives rise to a large range of potential outcomes which require judgement in determining an appropriate provision level. See below for information on payment protection redress and Note 29 for more detail of legal, competition and regulatory matters. As at 1 January 2017 Additions Amounts utilised Unused amounts reversed Exchange and other movements As at 31 December 2017 Onerous contracts £m 385 81 Redundancy and restructuring £m 206 163 (210) (33) 2 225 (124) (85) (1) 159 Undrawn contractually committed facilities and guarantees £m 67 73 (1) (60) – 79 Customer redress Payment Protection Insurance £m 1,979 709 (1,094) – 12 1,606 Other customer redress £m 712 369 (345) (83) (14) 639 Legal, competition and regulatory matters £m 455 398 (341) (55) (22) 435 Sundry provisions £m 330 182 (99) (30) 17 400 Total £m 4,134 1,975 (2,214) (346) (6) 3,543 Provisions expected to be recovered or settled within no more than 12 months after 31 December 2017 were £2,394m (2016: £2,045m). Onerous contracts Onerous contract provisions comprise an estimate of the costs involved with fulfilling the terms and conditions of contracts net of any expected benefits to be received. Redundancy and restructuring These provisions comprise the estimated cost of restructuring, including redundancy costs where an obligation exists. Additions made during the year relate to formal restructuring plans and have either been utilised, or reversed, where total costs are now expected to be lower than the original provision amount. Undrawn contractually committed facilities and guarantees Provisions are made if it is probable that a facility will be drawn and the resulting asset is expected to have a realisable value that is less than the amount advanced. home.barclays/annualreport Barclays PLC Annual Report 2017 283 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance 27 Provisions continued Customer redress Customer redress provisions comprise the estimated cost of making redress payments to customers, clients and counterparties for losses or damages associated with inappropriate judgement in the execution of Barclays’ business activities. Provisions for other customer redress include £211m (2016: £264m) in respect of historic pricing practices associated with Foreign Exchange transactions for certain customers between 2005 and 2012 and smaller provisions across the retail and corporate businesses which are likely to be utilised in the next 12 months. Included within provisions for UK customer redress on the face of the consolidated income statement is PPI and material additions in respect of historic pricing practices associated with Foreign Exchange transactions for certain customers between 2005 and 2012 and Packaged Bank Accounts. Legal, competition and regulatory matters The Group is engaged in various legal proceedings, both in the UK and a number of other overseas jurisdictions, including the US. For further information in relation to legal proceedings and discussion of the associated uncertainties, please refer to Note 29. Sundry provisions This category includes provisions that do not fit into any of the other categories, such as fraud losses and dilapidation provisions. Payment Protection Insurance Redress As at 31 December 2017, Barclays had recognised cumulative provisions totalling £9.2bn (2016: £8.4bn) against the cost of Payment Protection Insurance (PPI) redress and associated processing costs with utilisation of £7.6bn (2016: £6.4bn), leaving a residual provision of £1.6bn (2016: £2.0bn). Through to 31 December 2017, 2.1m (2016: 1.8m) customer initiated claimsa had been received and processed. The volume of claims received during 2017 increased 16% from 2016. This increase may have been impacted by a FCA advertising campaign launched in H2 2017. The current provision reflects the estimated costs of PPI redress primarily relating to customer initiated complaints and ongoing remediation programmes, based on information at year end. This also includes liabilities managed by third parties arising from portfolios previously sold where Barclays remains liable, based on information at year end. As at 31 December 2017, the provision of £1.6bn represents Barclays’ best estimate of expected PPI redress reflecting the complaints deadline implemented by the FCA of 29 August 2019. However, it is possible the eventual outcome may differ from the current estimate. We will continue to review the adequacy of provision level in respect of the future impacts. The PPI provision is calculated using a number of key assumptions which continue to involve significant modelling and management judgement: ■■ Customer initiated claim volumes – claims received but not yet processed plus an estimate of future claims initiated by customers, where the volume is anticipated to cease after the PPI deadline. ■■ Average claim redress – the expected average payment to customers for upheld claims based on the type and age of the policy/policies. ■■ Processing cost per claim – the cost to Barclays of assessing and processing each valid claim. These assumptions remain subjective, mainly due to the uncertainty associated with future claims levels, which include complaints driven by CMC activity and the FCA advertising campaign. The following table details actual data through to 31 December 2017, key forecast assumptions used in the provision calculation and a sensitivity analysis illustrating the impact on the provision if the future expected assumptions prove too high or too low. Assumption Customer initiated claims received and processed (thousands)a Average uphold rate per claim (%)b Average redress per valid claim (£)c Cumulative actual to 31.12.17 2,130 87 2,036 Future expected 570 87 1,989 Sensitivity analysis increase/ decrease in provision 50k=£104m 1%=£11m £100=£50m Notes a Total claims received directly by Barclays to date, including those received via claims management companies but excluding those for which no PPI policy exists and excluding responses to proactive mailing. The sensitivity analysis has been calculated to show the impact a 50,000 increase or decrease in the number of customer initiated claims would have on the provision level. b Average uphold rate per customer initiated claims received directly by Barclays and proactive mailings, excluding those for which no PPI policy exists. The sensitivity analysis has been calculated to show the impact a 1% change in the average uphold rate per claim would have on the provision level. c Average redress stated on a per policy basis for future customer initiated complaints received directly by Barclays. The sensitivity analysis has been calculated to show the impact a £100 increase or decrease in the average redress per claim would have on the provision level. 284 Barclays PLC Annual Report 2017 home.barclays/annualreport Accruals, provisions, contingent liabilities and legal proceedingsNotes to the financial statements28 Contingent liabilities and commitments Accounting for contingent liabilities Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events, and present obligations where the transfer of economic resources is uncertain or cannot be reliably measured. Contingent liabilities are not recognised on the balance sheet but are disclosed unless the outflow of economic resources is remote. The following table summarises the nominal principal amount of contingent liabilities and commitments which are not recorded on-balance sheet: Guarantees and letters of credit pledged as collateral security Performance guarantees, acceptances and endorsements Total contingent liabilities Documentary credits and other short-term trade related transactions Standby facilities, credit lines and other commitments Total commitments 2017 £m 14,275 4,737 19,012 2016 £m 15,303 4,636 19,939 812 314,761 315,573 1,005 302,681 303,686 The Financial Services Compensation Scheme The Financial Services Compensation Scheme (the FSCS) is the UK’s government-backed compensation scheme for customers of authorised institutions that are unable to pay claims. The compensation paid out to customers is funded through loan facilities provided by HM Treasury to the FSCS which at 31 December 2017 stood at approximately £4.7bn (2016: £15.7bn). During 2017, the HM Treasury loan facility has reduced by the Bradford and Bingley repayment of £10.9bn, following the sale from UK Asset Resolution. Barclays’ liability is restricted to the proportionate outstanding amount that the FSCS is unable to repay to Treasury. The FSCS levy on UK licensed deposit-taking institutions has been recognised in 2017. Barclays has included an accrual of £2.7m in other liabilities as at 31 December 2017 (2016: £55m) in respect of the Barclays portion of the Interest Levy. Further details on contingent liabilities relating to legal and competition and regulatory matters can be found in Note 29. 29 Legal, competition and regulatory matters Barclays PLC, Barclays Bank PLC and the Group face legal, competition and regulatory challenges, many of which are beyond our control. The extent of the impact on Barclays PLC, Barclays Bank PLC and the Group of these matters cannot always be predicted but may materially impact our operations, financial results, condition and prospects. Matters arising from a set of similar circumstances can give rise to either a contingent liability or a provision, or both, depending on the relevant facts and circumstances. The recognition of provisions in relation to such matters involves critical accounting estimates and judgments in accordance with the relevant accounting policies as described in Note 27. The Group has not disclosed an estimate of the potential financial effect on the Group of contingent liabilities where it is not currently practicable to do so. Investigations into certain advisory services agreements and other matters and civil action The UK Serious Fraud Office (SFO), the Financial Conduct Authority (FCA), the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) have been conducting investigations into certain advisory services agreements entered into by Barclays Bank PLC. Background Information Barclays Bank PLC entered into two advisory services agreements with Qatar Holding LLC (Qatar Holding) in June and October 2008 (the Agreements). The FCA commenced an investigation into whether the Agreements may have related to Barclays PLC’s capital raisings in June and November 2008 (the Capital Raisings). The existence of the June 2008 advisory services agreement was disclosed, but the entry into the advisory services agreement in October 2008 and the fees payable under the Agreements, which amounted to a total of £322m payable over a period of five years, were not disclosed in the announcements or public documents relating to the Capital Raisings. The SFO also commenced an investigation into the Agreements and into a $3bn loan (the Loan) provided by Barclays Bank PLC in November 2008 to the State of Qatar. SFO Proceedings In June 2017, the SFO charged Barclays PLC with two offences of conspiring with certain former senior officers and employees of Barclays to commit fraud by false representations relating to the Agreements and one offence of unlawful financial assistance contrary to section 151 of the Companies Act 1985 in relation to the Loan. In February 2018, the SFO also charged Barclays Bank PLC with the same offence in respect of the Loan. Barclays PLC and Barclays Bank PLC intend to defend the respective charges brought against them (the Charges). The trial of the Charges has been scheduled to begin in January 2019. FCA Proceedings and other investigations In September 2013, the FCA issued warning notices (the Notices) finding that, while Barclays PLC and Barclays Bank PLC believed at the time of the execution of the Agreements that there should be at least some unspecified and undetermined value to be derived from them, the primary purpose of the Agreements was not to obtain advisory services but to make additional payments, which would not be disclosed, for the Qatari participation in the Capital Raisings. The Notices concluded that Barclays PLC and Barclays Bank PLC were in breach of certain disclosure-related listing rules and Barclays PLC was also in breach of Listing Principle 3 (the requirement to act with integrity towards holders and potential holders of the Company’s shares). In this regard, the FCA considers that Barclays PLC and Barclays Bank PLC acted recklessly. The financial penalty provided in the Notices against the Group is £50m. Barclays PLC and Barclays Bank PLC continue to contest the findings. The FCA action has been stayed due to the SFO proceedings. In addition, the DOJ and the SEC have been conducting investigations relating to the Agreements. home.barclays/annualreport Barclays PLC Annual Report 2017 285 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceAccruals, provisions, contingent liabilities and legal proceedings 29 Legal, competition and regulatory matters continued Civil Action In January 2016, PCP Capital Partners LLP and PCP International Finance Limited (PCP) served a claim on Barclays Bank PLC seeking damages of £721.4m plus interest and costs for fraudulent misrepresentation and deceit, arising from alleged statements made by Barclays Bank PLC to PCP in relation to the terms on which securities were to be issued to potential investors, allegedly including PCP, in the November 2008 capital raising. Following amendment of their claim in November 2017, PCP now seeks damages of up to £1,477m (plus interest from November 2017) and costs. Barclays Bank PLC is defending the claim and trial is scheduled to commence in October 2019. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. PCP has made a claim against Barclays Bank PLC for damages of up to £1,477m plus interest and costs. This amount does not necessarily reflect Barclays Bank PLC’s potential financial exposure if a ruling were to be made against it in that matter. Investigations into certain business relationships In 2012, the DOJ and SEC commenced investigations in relation to whether certain relationships with third parties who assist Barclays PLC to win or retain business are compliant with the US Foreign Corrupt Practices Act. Various regulators in other jurisdictions are also being briefed on the investigations. Separately, the Group is cooperating with the DOJ and SEC in relation to an investigation into certain of its hiring practices in Asia and elsewhere and is keeping certain regulators in other jurisdictions informed. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. Investigations relating to whistleblowing systems and controls The FCA and Prudential Regulation Authority (PRA) are conducting investigations in relation to the Group Chief Executive Officer (CEO) and Barclays Bank PLC in connection with certain whistleblowing issues. Background Information In April 2017, the FCA and PRA commenced investigations into the CEO as to his individual conduct and senior manager responsibilities relating to Barclays’ whistleblowing programme and to his attempt in 2016 to identify the author of a letter that was treated by Barclays Bank PLC as a whistleblow; and Barclays Bank PLC, as to its responsibilities relating to the attempt by the CEO to identify the author of the letter, as well as Barclays’ systems and controls and culture relating to whistleblowing. The attempt to identify the author of the letter first came to the attention of the Barclays PLC Board (Board) early in 2017. The Board instructed an external law firm to conduct a focussed investigation into the matter and also notified the FCA and PRA and other relevant authorities. The investigation found, and the Board concluded, that the CEO honestly, but mistakenly, believed that it was permissible to identify the author. However, the Board concluded that the CEO made an error in becoming involved with, and not applying appropriate governance around the matter, and in taking action to attempt to identify the author of the letter. Barclays and the CEO are cooperating fully with the FCA and PRA investigations. Barclays is also providing information to, and cooperating with, authorities in the US with respect to these matters. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. Investigations relating to retail structured deposits and capital protected structured notes The FCA is conducting enforcement investigations in relation to certain structured deposits and notes provided by Barclays in the past. Background Information In 2015, the FCA commenced an enforcement investigation relating to the design, manufacture and sale of structured deposits by Barclays from November 2009. The investigation is at an advanced stage. In January 2018, the FCA also commenced an enforcement investigation relating to the design, manufacture and sale of capital protected structured notes by Barclays from June 2008 to July 2014. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. Investigation into collections and recoveries relating to unsecured lending In February 2018, the FCA commenced an enforcement investigation in relation to whether or not Barclays Bank PLC, from July 2015, implemented effective systems and controls with respect to collections and recoveries and whether or not it paid due consideration to the interests of customers in default and arrears. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the investigation on the Group or what effect that it might have upon the Group’s operating results, cash flows or financial position in any particular period. 286 Barclays PLC Annual Report 2017 home.barclays/annualreport Notes to the financial statements29 Legal, competition and regulatory matters continued Investigation into Americas Wealth & Investment Management advisory business The SEC has carried out an investigation into certain practices in Barclays’ former Wealth Americas investment advisory business relating to certain due diligence failures, fee and billing practices and mutual fund fee waivers and related disclosures. In May 2017, the SEC announced a settlement pursuant to which Barclays Capital Inc. (BCI) agreed to resolve this matter for USD97m, consisting of a penalty of USD30m paid to the SEC and USD67m paid to the clients, in remediation and disgorgement. Investigation into suspected money laundering related to foreign exchange transactions in South African operation Absa Bank Limited, a subsidiary of Barclays Africa Group Limited, which was a subsidiary of Barclays at the relevant time, identified potentially fraudulent activity by certain of its customers using advance payments for imports in 2014 and 2015 to effect foreign exchange transfers from South Africa to beneficiary accounts located in East Asia, UK, Europe and the US. As a result, the Group conducted a review of relevant activity, processes, systems and controls. The Group is continuing to provide information to relevant authorities as part of the Group’s ongoing cooperation. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. Investigations into LIBOR and other benchmarks Regulators and law enforcement agencies, including certain competition authorities, from a number of governments have been conducting investigations relating to Barclays Bank PLC’s involvement in manipulating certain financial benchmarks, such as LIBOR and EURIBOR. Background Information In 2012, Barclays Bank PLC announced that it had reached settlements with the Financial Services Authority (FSA) (as predecessor to the FCA), the US Commodity Futures Trading Commission (CFTC) and the DOJ in relation to their investigations concerning certain benchmark interest rate submissions, and Barclays Bank PLC paid total penalties of £290m. The settlement with the DOJ was made by entry into a Non-Prosecution Agreement (NPA) which has now expired. Barclays PLC, Barclays Bank PLC and BCI have reached settlements with certain other regulators and law enforcement agencies. Barclays Bank PLC continues to respond to requests for information from the SFO in relation to its ongoing LIBOR investigation, including in respect of Barclays Bank PLC. The investigation by the prosecutor’s office in Trani, Italy also remains pending. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. LIBOR and other benchmark civil actions A number of individuals and corporates in a range of jurisdictions have threatened or brought civil actions against the Group and other banks in relation to LIBOR and/or other benchmarks. Background Information Following settlement of the investigations referred to above in ‘Investigations into LIBOR and other Benchmarks’ various individuals and corporates in a range of jurisdictions have threatened or brought civil actions against the Group. While certain cases have been dismissed or settled subject to approval from the court (and in the case of class actions, the right of class members to opt out of the settlement and to seek to file their own claims), other actions remain pending and their ultimate impact is unclear. USD LIBOR Cases in MDL Court The majority of the USD LIBOR cases, which have been filed in various US jurisdictions, have been consolidated for pre-trial purposes before a single judge in the US District Court in the Southern District of New York (SDNY) (MDL Court). The complaints are substantially similar and allege, amongst other things, that Barclays Bank PLC and the other banks individually and collectively violated provisions of the US Sherman Antitrust Act (Antitrust Act), the US Commodity Exchange Act (CEA), the US Racketeer Influenced and Corrupt Organizations Act (RICO) and various state laws by manipulating USD LIBOR rates. The proposed class actions purported to be brought on behalf of (amongst others) plaintiffs that (i) engaged in USD LIBOR-linked over-the- counter transactions (OTC Class); (ii) purchased USD LIBOR-linked financial instruments on an exchange (Exchange-Based Class); (iii) purchased USD LIBOR-linked debt securities (Debt Securities Class); (iv) purchased adjustable-rate mortgages linked to USD LIBOR (Homeowner Class); or (v) issued loans linked to USD LIBOR (Lender Class). The lawsuits seek unspecified damages with the exception of five lawsuits, in which the plaintiffs are seeking a combined total in excess of $1.25bn in actual damages against all defendants, including Barclays Bank PLC, plus punitive damages. Some of the lawsuits also seek trebling of damages under the Antitrust Act and RICO. Between 2013 and 2016, the MDL Court issued a series of decisions effectively dismissing the majority of claims, including antitrust claims, against Barclays Bank PLC and other foreign defendants in both class actions and individual actions. In May 2016, the appeal court reversed the MDL Court’s decision and remanded the antitrust claims to the MDL Court for further consideration. Following further consideration, the MDL Court dismissed the majority of antitrust claims against foreign defendants, including Barclays Bank PLC, for lack of personal jurisdiction. Plaintiffs in a number of individual actions and class actions are appealing the MDL Court’s personal jurisdiction ruling. In 2014, the MDL Court granted preliminary approval for the settlement of the Exchange-Based Class claims for $20m, of which $5m was paid in October 2014 and the remaining $15m in September 2017. The settlement remains subject to court approval and the right of class members to opt out of the settlement and to seek to file their own claims. In 2015, the OTC Class claims were settled for $120m which was paid in 2017. The settlement remains subject to final approval. In November 2016, $7.1m was paid in settlement of the Debt Securities Class claims. The settlement has been preliminarily approved by the court but remains subject to final approval and the right of class members to opt out of the settlement and seek to file their own claims. home.barclays/annualreport Barclays PLC Annual Report 2017 287 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceAccruals, provisions, contingent liabilities and legal proceedings 29 Legal, competition and regulatory matters continued EURIBOR Case in the SDNY In 2015, $94m was paid in settlement of a EURIBOR-related class action. The settlement has been preliminarily approved by the court but remains subject to final approval and the right of class members to opt out of the settlement and to seek to file their own claims. Additional USD LIBOR Case in the SDNY In 2015, an individual action against Barclays Bank PLC and other panel bank defendants was dismissed by the SDNY. The plaintiff alleged that the panel bank defendants conspired to increase USD LIBOR, which caused the value of bonds pledged as collateral for a loan to decrease, ultimately resulting in the sale of the bonds at a low point in the market. The plaintiff ’s motion to file a further amended complaint is pending. Sterling LIBOR Case in SDNY In 2015, a putative class action was filed in the SDNY against Barclays Bank PLC and other Sterling LIBOR panel banks by a plaintiff involved in exchange-traded and over-the-counter derivatives that were linked to Sterling LIBOR. The complaint alleges, among other things, that defendants manipulated the Sterling LIBOR rate between 2005 and 2010 and, in so doing, committed CEA, Antitrust Act, and RICO violations. In early 2016, this class action was consolidated with an additional putative class action making similar allegations against Barclays Bank PLC and BCI and other Sterling LIBOR panel banks. Defendants have filed a motion to dismiss. Japanese Yen LIBOR Cases in SDNY In 2012, a putative class action was filed in the SDNY against Barclays Bank PLC and other Japanese Yen LIBOR panel banks by a plaintiff involved in exchange-traded derivatives. The complaint also names members of the Japanese Bankers Association’s Euroyen Tokyo Interbank Offered Rate (Euroyen TIBOR) panel, of which Barclays Bank PLC is not a member. The complaint alleges, amongst other things, manipulation of the Euroyen TIBOR and Yen LIBOR rates and breaches of the CEA and Antitrust Act between 2006 and 2010. In 2014, the court dismissed the plaintiff ’s antitrust claims in full, but the plaintiff ’s CEA claims remain pending. Discovery is ongoing. In March 2017, a second putative class action concerning Yen LIBOR filed in the SDNY against Barclays PLC, Barclays Bank PLC and BCI was dismissed in full. The complaint makes similar allegations to the 2012 class action. Plaintiffs have appealed the dismissal. SIBOR/SOR Case in the SDNY A putative class action filed in the SDNY against Barclays PLC, Barclays Bank PLC, BCI, and other defendants, alleging manipulation of the Singapore Interbank Offered Rate (SIBOR) and Singapore Swap Offer Rate (SOR) was dismissed by the court in relation to claims against Barclays for failure to state a claim. Plaintiffs amended their complaint in September 2017, and defendants have filed a motion to dismiss. Non-US Benchmarks Cases In addition to US actions, legal proceedings have been brought or threatened against the Group in connection with alleged manipulation of LIBOR and EURIBOR and other benchmarks in a number of jurisdictions in Europe and Argentina. Additional proceedings in non-US jurisdictions may be brought in the future. Claimed Amounts/Financial Impact Aside from the settlements discussed above, it is not currently practicable to provide an estimate of any further financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. Foreign Exchange investigations Various regulatory and enforcement authorities across multiple jurisdictions have been investigating a range of issues associated with Foreign Exchange sales and trading, including electronic trading. Background Information In 2015 the Group reached settlements with the CFTC, the DOJ, the New York State Department of Financial Services (NYDFS), the Board of Governors of the Federal Reserve System (Federal Reserve) and the FCA (together, the 2015 Resolving Authorities) in relation to investigations into certain sales and trading practices in the Foreign Exchange market. In connection with these settlements, the Group paid total penalties of approximately $2.38bn and agreed to undertake certain remedial actions. Under the plea agreement with the DOJ, in addition to a criminal fine, Barclays PLC agreed to a term of probation of three years during which Barclays PLC must, amongst other things, (i) commit no crime whatsoever in violation of the federal laws of the US, (ii) implement and continue to implement a compliance program designed to prevent and detect the conduct that gave rise to the plea agreement, (iii) report credible evidence of criminal violations of US antitrust or fraud laws to the relevant US authority, and (iv) strengthen its compliance and internal controls as required by relevant regulatory or enforcement agencies. In January 2017, the US District Court for the District of Connecticut accepted the plea agreement and in accordance with the agreement sentenced Barclays PLC to pay $650m as a fine and $60m for violating the NPA (which amounts are part of the $2.38bn referred to above) and to serve three years of probation from the date of the sentencing order. The Group also continues to provide relevant information to certain of the 2015 Resolving Authorities. The full text of the DOJ plea agreement, the orders of the CFTC, NYDFS and Federal Reserve, and the Final Notice issued by the FCA related to the settlements referred to above are publicly available on the 2015 Resolving Authorities’ respective websites. The European Commission is one of several authorities conducting an investigation into certain trading practices in the Foreign Exchange market. The DOJ is also conducting an investigation into conduct relating to certain trading activities in connection with certain transactions during 2011 and 2012. Barclays is providing information to the DOJ and other relevant authorities reviewing this conduct. In January 2018, a Barclays employee currently under suspension was indicted in US federal court in connection with this matter. In February 2017 the South African Competition Commission (SACC) referred Barclays Bank PLC, BCI and Absa Bank Limited, a subsidiary of Barclays Africa Group Limited, which at the relevant time was a subsidiary of Barclays Bank PLC, among other banks, to the Competition Tribunal to be prosecuted for breaches of South African antitrust law related to Foreign Exchange trading of South African Rand. Barclays was the first to bring the conduct to the attention of the SACC under its leniency programme. The SACC is therefore not seeking an order from the Tribunal to impose any fine on Barclays Bank PLC, BCI or Absa Bank Limited. 288 Barclays PLC Annual Report 2017 home.barclays/annualreport Notes to the financial statements29 Legal, competition and regulatory matters continued Claimed Amounts/Financial Impact Aside from the settlements discussed above, and a provision of £240m recognised in Q4 2017, it is not currently practicable to provide an estimate of any further financial impact of the actions described on the Group or what effect they might have on the Group’s operating results, cash flows or financial position in any particular period. Civil actions in respect of Foreign Exchange A number of individuals and corporates in a range of jurisdictions have threatened or brought civil actions against the Group and other banks in relation to Foreign Exchange. Background Information Following settlement of certain investigations referred to above in ‘Foreign Exchange Investigations’ a number of individuals and corporates in a range of jurisdictions have threatened or brought civil actions against the Group and other banks in relation to Foreign Exchange or may do so in future. Certain of these cases have been dismissed or have been settled subject to final approval from the relevant court (and in the case of class actions, the right of class members to opt out of the settlement and to seek to file their own claims). Consolidated FX Action In 2014, a number of civil actions filed in the SDNY on behalf of proposed classes of plaintiffs alleging manipulation of Foreign Exchange markets under the Antitrust Act and New York state law and naming several international banks as defendants, including Barclays Bank PLC, were combined into a single consolidated action (Consolidated FX Action). In 2015, Barclays Bank PLC and BCI settled the Consolidated FX Action and paid $384m. Certain class members have opted out of the settlement to seek to file their own claims. The settlement is also subject to final court approval. ERISA FX Action Since 2015, several civil actions have been filed in the SDNY on behalf of proposed classes of plaintiffs purporting to allege different legal theories of injury (other than those alleged in the Consolidated FX Action) related to alleged manipulation of Foreign Exchange rates, including claims under the US Employee Retirement Income Security Act (ERISA) statute (ERISA Claims), and naming several international banks as defendants, including Barclays PLC, Barclays Bank PLC and BCI. The Court has dismissed the ERISA Claims, and the plaintiffs have appealed this decision. Retail Basis Action A putative action was filed in the Northern District of California (and subsequently transferred to the SDNY) against several international banks, including Barclays PLC and BCI, on behalf of a putative class of individuals that exchanged currencies on a retail basis at bank branches (Retail Basis Claims). The Court has ruled that the Retail Basis Claims are not covered by the settlement agreement in the Consolidated FX Action. The Court subsequently dismissed all Retail Basis Claims against Barclays and all other defendants. Plaintiffs amended their complaint and defendants (including Barclays) have moved to dismiss the amended complaint. Last Look Actions In 2015, two putative class actions were filed in the SDNY on behalf of proposed classes of plaintiffs alleging injuries based on Barclays’ purported improper rejection of customer trades through Barclays Last Look functionality in Barclays’ FX e-trading platforms In 2016, Barclays Bank PLC and BCI paid $50m and settled one of the actions on a class-wide basis. (The other action was voluntarily dismissed.) The deadline for opting out of the class has expired (a small number of class members have opted out), and the Court has granted final approval of the settlement. State Law FX Action In 2016, a putative class action was filed in the SDNY under federal, New York and California law on behalf of proposed classes of stockholders of Exchange Traded Funds and others who supposedly were indirect investors in FX Instruments. The defendants (including Barclays) moved to dismiss the action. Plaintiffs’ counsel then amended the complaint to bring claims on behalf of a proposed class of investors under federal and various state laws who traded FX Instruments through FX dealers or brokers not alleged to have manipulated Foreign Exchange Rates. A different group of plaintiffs subsequently filed another action based on the same theories and asserted substantively similar claims. These two actions have been consolidated and a consolidated complaint was filed in June 2017. Defendants (including Barclays) have moved to dismiss the action. Canadian FX Action Civil actions similar to the Consolidated FX Action have been filed in Canadian courts on behalf of proposed classes of plaintiffs containing similar factual allegations of manipulation of Foreign Exchange rates and of damages resulting from such manipulation, in violation of Canadian law. The parties’ settlement for $14.8m has been approved by the court. Claimed Amounts/Financial Impact Aside from the settlements discussed above, it is not currently practicable to provide an estimate of any further financial impact of the actions described above on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. Civil actions in respect of ISDAFIX In 2014, a number of ISDAFIX related civil actions were filed in the SDNY on behalf of proposed class of plaintiffs, alleging that Barclays Bank PLC, a number of other banks and one broker violated the Antitrust Act and several state laws by engaging in a conspiracy to manipulate the USD ISDAFIX. In 2016, Barclays Bank PLC and BCI entered into a settlement agreement with plaintiffs to resolve the consolidated action and paid $30m, fully resolving all ISDAFIX-related claims that were or could have been brought by the class. The court has preliminarily approved the settlement, which remains subject to final approval and to the right of class members to opt out of the settlement and to seek to file their own claims. Claimed Amounts/Financial Impact The principal financial impact of the actions described on the Group is reflected in the settlement described above. Metals investigations Barclays Bank PLC has provided information to the DOJ, the CFTC and other authorities in connection with investigations into metals and metals-based financial instruments. home.barclays/annualreport Barclays PLC Annual Report 2017 289 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceAccruals, provisions, contingent liabilities and legal proceedings 29 Legal, competition and regulatory matters continued Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. Civil actions in respect of the gold and silver fix Various civil actions have been filed against Barclays Bank PLC and others alleging manipulation of the prices of gold and silver. Background Information A number of civil complaints, each on behalf of a proposed class of plaintiffs, have been consolidated and transferred to the SDNY. The complaints allege that Barclays Bank PLC and other members of The London Gold Market Fixing Ltd. manipulated the prices of gold and gold derivative contracts in violation of the CEA, the Antitrust Act, and state antitrust and consumer protection laws. Also in the US, a proposed class of plaintiffs has filed a complaint against a number of banks, including Barclays Bank PLC, BCI and Barclays Capital Services Ltd., alleging manipulation of the price of silver in violation of the CEA and antitrust laws. Defendants have moved to dismiss these actions. Civil actions have also been filed in Canadian courts against Barclays PLC, Barclays Bank PLC, Barclays Capital Canada Inc., BCI and Barclays Capital PLC on behalf of proposed classes of plaintiffs alleging manipulation of gold and silver prices in violation of Canadian law. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. US residential and commercial mortgage-related activity and litigation There have been various investigations and civil litigation relating to secondary market trading of US residential mortgage-backed securities (RMBS) and US commercial mortgage-backed securities (CMBS). Background Information The Group’s activities within the US residential mortgage sector during the period from 2005 through 2008 included: ■■ sponsoring and underwriting of approximately $39bn of private-label securitisations; ■■ economic underwriting exposure of approximately $34bn for other private-label securitisations; ■■ sales of approximately $0.2bn of loans to government sponsored enterprises (GSEs); ■■ sales of approximately $3bn of loans to others; and ■■ sales of approximately $19.4bn of loans (net of approximately $500m of loans sold during this period and subsequently repurchased) that were originated and sold to third parties by mortgage originator affiliates of an entity that the Group acquired in 2007 (Acquired Subsidiary). DOJ Civil Action In December 2016, the DOJ filed a civil complaint against Barclays Bank PLC, Barclays PLC, BCI, Barclays Group US Inc., Barclays US LLC, BCAP LLC, Securitized Asset Backed Receivables LLC and Sutton Funding LLC, as well as two former employees, in the US District Court in the Eastern District of New York (EDNY) containing a number of allegations, including mail and wire fraud, relating to mortgage-backed securities sold between 2005 and 2007. The DOJ complaint seeks, amongst other relief, unspecified monetary penalties. Barclays is defending the complaint and has filed a motion to dismiss. RMBS Repurchase Requests The Group was the sole provider of various loan-level representations and warranties (R&Ws) with respect to: ■■ approximately $5bn of Group sponsored securitisations; ■■ approximately $0.2bn of sales of loans to GSEs; and ■■ approximately $3bn of loans sold to others. In addition, the Acquired Subsidiary provided R&Ws on all of the $19.4bn of loans it sold to third parties. R&Ws on the remaining Group sponsored securitisations were primarily provided by third-party originators directly to the securitisation trusts with a Group subsidiary, such as the depositor for the securitisation, providing more limited R&Ws. There are no stated expiration provisions applicable to most R&Ws made by the Group, the Acquired Subsidiary or these third parties. Under certain circumstances, the Group and/or the Acquired Subsidiary may be required to repurchase the related loans or make other payments related to such loans if the R&Ws are breached. The unresolved repurchase requests received on or before 31 December 2017 associated with all R&Ws made by the Group or the Acquired Subsidiary on loans sold to GSEs and others and private-label activities had an original unpaid principal balance of approximately $2.1bn at the time of such sale. The unresolved repurchase requests discussed above relate to civil actions that have been commenced by the trustees for certain RMBS securitisations in which the trustees allege that the Group and/or the Acquired Subsidiary must repurchase loans that violated the operative R&Ws. Such trustees and other parties making repurchase requests have also alleged that the operative R&Ws may have been violated with respect to a greater (but unspecified) amount of loans than the amount of loans previously stated in specific repurchase requests made by such trustees. Cumulative realised losses reported at 31 December 2017 on loans covered by R&Ws made by the Group or the Acquired Subsidiary are approximately $1.3bn. This litigation is ongoing. In addition, the Acquired Subsidiary is subject to a more advanced civil action seeking, among other things, indemnification for losses allegedly suffered by a loan purchaser as a result of alleged breaches of R&Ws provided by the Acquired Subsidiary in connection with loan sales to the purchaser during the period 1997 to 2007. This litigation is ongoing. 290 Barclays PLC Annual Report 2017 home.barclays/annualreport Notes to the financial statements29 Legal, competition and regulatory matters continued RMBS Securities Claims As a result of some of the RMBS activities described above, the Group has been party to a number of lawsuits filed by purchasers of RMBS sponsored and/or underwritten by the Group between 2005 and 2008. As a general matter, these lawsuits alleged, among other things, that the RMBS offering materials allegedly relied on by such purchasers contained materially false and misleading statements and/or omissions and generally demanded rescission and recovery of the consideration paid for the RMBS and recovery of monetary losses arising out of their ownership. The Group has resolved the majority of these claims, and only one action currently remains pending. Approximately $0.1bn of the original face amount of RMBS related to the remaining pending action was outstanding as at 31 December 2017. There were virtually no cumulative realised losses reported on these RMBS as at 31 December 2017. The Group does not expect that, if it were to lose the remaining pending action, any such loss to be material. Secondary Trading Investigation The Group has received requests for information and subpoenas from the SEC, the US Attorney’s Office for the District of Connecticut and the Special Inspector General for the US Troubled Asset Relief Program related to trading practices in the secondary market for both RMBS and CMBS. A settlement was announced in May 2017 pursuant to which BCI agreed to resolve this matter for $16.56m. Claimed Amounts/Financial Impact Save for the remaining pending action described under ‘RMBS Securities Claims’ and the May 2017 settlement above, it is not currently practicable to provide an estimate of any further financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. The cost of resolving these actions could individually or in aggregate prove to be substantial. Alternative trading systems and high-frequency trading The SEC, the New York State Attorney General (NYAG) and regulators in certain other jurisdictions have been investigating a range of issues associated with alternative trading systems (ATSs), including dark pools, and the activities of high-frequency traders. Background Information In 2014, the NYAG filed a complaint (NYAG Complaint) against Barclays PLC and BCI in the Supreme Court of the State of New York alleging, amongst other things, that Barclays PLC and BCI engaged in fraud and deceptive practices in connection with LX, the Group’s SEC-registered ATS. In February 2016, Barclays reached separate settlement agreements with the SEC and the NYAG to resolve those agencies’ claims against Barclays PLC and BCI relating to the operation of LX and paid $35m to each. Barclays PLC and BCI have been named in a purported class action by an institutional financial services firm under California law based on allegations similar to those in the NYAG Complaint. In October 2016, the federal court in California granted the motion of Barclays PLC and BCI to dismiss the entire complaint and plaintiffs have appealed the court’s decision. Following the filing of the NYAG Complaint, Barclays PLC and BCI were also named in a putative shareholder securities class action along with certain of its former CEOs, and its current and a former CFO, as well as an employee (Shareholder Class Action). The plaintiffs claim that holders of Barclays American Depository Receipts (ADRs) suffered damages when the ADRs declined in value as a result of the allegations in the NYAG Complaint. A motion to dismiss the complaint filed by the defendants (including Barclays PLC and BCI), was granted in part and denied in part by the court. In February 2016, the court certified the action as a class action. In November 2017, the appellate court affirmed the class certification. Barclays has petitioned the appellate court to stay the action pending review by the US Supreme Court of the class certification. Claimed Amounts/Financial Impact The class actions seek unspecified monetary damages and injunctive relief. It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect they might have upon the Group’s operating results, cash flows or financial position in any particular period. FERC and other civil actions The US Federal Energy Regulatory Commission (FERC) filed a civil action against Barclays Bank PLC and certain of its former traders in connection with allegations that Barclays Bank PLC manipulated the electricity markets in the Western US. Background Information In 2012, FERC issued an Order to Show Cause and Notice of Proposed Penalties (Order and Notice) against Barclays Bank PLC and four of its former traders asserting that Barclays Bank PLC and its former traders violated FERC’s Anti-Manipulation Rule by manipulating the electricity markets in and around California from 2006 to 2008, and proposed civil penalties and profit disgorgement to be paid by Barclays Bank PLC. In 2013, FERC filed a civil action against Barclays Bank PLC and its former traders in the US District Court in California seeking to collect a $435m civil penalty and disgorgement of $34.9m of profits, plus interest. The action was settled for $105m ($70m penalty and $35m disgorgement) which was paid in 2017. In 2015, a civil class action complaint seeking damages of $139.3m was filed in the US District Court for the SDNY against Barclays Bank PLC by Merced Irrigation District, a California utility company, asserting antitrust allegations in connection with Barclays Bank PLC’s purported manipulation of the electricity markets in and around California. The action has been settled in principle for $29m (subject to court approval and to the right of class members to opt out of the settlement and to seek to file their own claims). Claimed Amounts/Financial Impact Apart from the settlement amounts referred to above, Barclays does not expect the financial impact of the actions described above to be material to the Group’s operating results, cash flows or financial position. Treasury auction securities civil actions and related matters Various civil actions have been filed against Barclays Bank PLC, BCI and other financial institutions alleging violations of anti-trust and other laws relating to the markets for US Treasury securities and Supranational, Sovereign and Agency securities. Certain governmental authorities are also conducting investigations relating to trading of certain government securities in various markets. home.barclays/annualreport Barclays PLC Annual Report 2017 291 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceAccruals, provisions, contingent liabilities and legal proceedings 29 Legal, competition and regulatory matters continued Background information Numerous putative class action complaints have been filed in US Federal Court against Barclays Bank PLC, BCI and other financial institutions that have served as primary dealers in US Treasury securities. Those actions have been consolidated and in November 2017, plaintiffs in the putative class action filed a consolidated amended complaint in the US Federal Court in New York against the defendants as well as certain corporations that operate electronic trading platforms on which US Treasury securities are traded. The complaint purports to assert claims under US federal antitrust laws and state common law based on allegations that defendants (i) conspired to manipulate the US Treasury securities market and/or (ii) conspired to prevent the creation of certain platforms by boycotting or threatening to boycott such trading platforms. Defendants intend to move to dismiss the action. In addition, certain plaintiffs have filed a related, direct action against BCI and certain other financial institutions that have served as primary dealers in US Treasury securities. This complaint alleges that defendants conspired to fix and manipulate the US Treasury securities market in violation of US federal antitrust laws, the CEA and state common law. In 2017, Barclays PLC, Barclays Bank PLC, BCI, Barclays Services Limited, Barclays Capital Securities Limited and certain other financial institutions were named as defendants in a civil anti-trust complaint that alleges that the defendants engaged in a conspiracy to fix prices and restrain competition in the market for US Dollar-denominated Supranational, Sovereign and Agency bonds from 2005 through 2015. Defendants have moved to dismiss the action. Certain governmental authorities are conducting investigations into activities relating to the trading of certain government securities in various markets and Barclays has been providing information to various authorities on an ongoing basis. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. American Depositary Shares Barclays PLC, Barclays Bank PLC and various former members of Barclays Bank PLC’s Board of Directors have been named as defendants in a securities class action consolidated in the SDNY. Background Information The securities class action against Barclays PLC, Barclays Bank PLC and various former members of Barclays Bank PLC’s Board of Directors alleges misstatements and omissions in offering documents for certain American Depositary Shares issued by Barclays Bank PLC in April 2008 with an original face amount of approximately $2.5bn (the April 2008 Offering). The plaintiffs assert claims under the Securities Act of 1933, alleging misstatements and omissions concerning (amongst other things) Barclays Bank PLC’s portfolio of mortgage-related (including US subprime- related) securities, Barclays Bank PLC’s exposure to mortgage and credit market risk, and Barclays Bank PLC’s financial condition. The plaintiffs have not specifically alleged the amount of their damages. In June 2016, the SDNY certified the action as a class action. In September 2017, the SDNY granted the defendants’ motion for summary judgment. Plaintiffs are appealing this decision. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the action described on the Group or what effect that it might have upon the Group’s operating results, cash flows or financial position in any particular period. BDC Finance L.L.C. BDC Finance L.L.C. (BDC) has filed a complaint against Barclays Bank PLC alleging breach of contract in connection with a portfolio of total return swaps governed by an ISDA Master Agreement (collectively, the Agreement). Background Information In 2008, BDC filed a complaint in the NY Supreme Court alleging that Barclays Bank PLC breached the Agreement when it failed to transfer approximately $40m of alleged excess collateral in response to BDC’s 2008 demand (Demand). BDC asserts that under the Agreement Barclays Bank PLC was not entitled to dispute the Demand before transferring the alleged excess collateral and that even if the Agreement entitled Barclays Bank PLC to dispute the Demand before making the transfer, Barclays Bank PLC failed to dispute the Demand. BDC demands damages totalling $298m plus attorneys’ fees, expenses, and pre-judgement interest. A trial on liability issues concluded in April 2017 and the court’s decision is pending. In 2011, BDC’s investment advisor, BDCM Fund Adviser, L.L.C. and its parent company, Black Diamond Capital Holdings, L.L.C. also sued Barclays Bank PLC and BCI in Connecticut State Court for unspecified damages allegedly resulting from Barclays Bank PLC’s conduct relating to the Agreement, asserting claims for violation of the Connecticut Unfair Trade Practices Act and tortious interference with business and prospective business relations. The parties agreed to stay this case. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. BDC has made claims against the Group totalling $298m plus attorneys’ fees, expenses, and pre-judgement interest. This amount does not necessarily reflect the Group’s potential financial exposure if a ruling were to be made against it. Civil actions in respect of the US Anti-Terrorism Act Civil complaints against Barclays Bank PLC and other banks allege engagement in a conspiracy and violation of the US Anti-Terrorism Act (ATA). Background Information In 2015, an amended civil complaint was filed in the US Federal Court in the EDNY by a group of approximately 250 plaintiffs, alleging that Barclays Bank PLC and a number of other banks engaged in a conspiracy and violated the ATA by facilitating US Dollar-denominated transactions for the Government of Iran and various Iranian banks, which in turn funded Hezbollah and other attacks that injured or killed the plaintiffs’ family members. Plaintiffs seek to recover for pain, suffering and mental anguish pursuant to the provisions of the ATA, which allows for the tripling 292 Barclays PLC Annual Report 2017 home.barclays/annualreport Notes to the financial statements29 Legal, competition and regulatory matters continued of any proven damages and attorneys’ fees. Plaintiffs filed a second amended complaint in July 2016 (the Second Amended Complaint), which, among other things, added various plaintiffs, bringing the total number of plaintiffs to approximately 350. Defendants have moved to dismiss the Second Amended Complaint. In November 2017, a separate civil complaint was filed in the US Federal Court in the SDNY by a group of approximately 160 plaintiffs, alleging claims under the ATA against Barclays Bank PLC and a number of other banks substantially similar to those in the Second Amended Complaint. Defendants intend to move to dismiss this complaint. In November 2016, a civil complaint was filed alleging claims under the ATA against Barclays Bank PLC (and a number of other banks) substantially similar to those in the Second Amended Complaint. In October 2017, plaintiffs voluntarily dismissed the case, without prejudice. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect that they might have upon the Group’s operating results, cash flows or financial position in any particular period. Interest rate swap and credit default swap US civil actions Barclays PLC, Barclays Bank PLC, and BCI, together with other financial institutions are defendants in interest rate swap and credit default swap antitrust civil actions in the SDNY. Background Information Barclays PLC, Barclays Bank PLC, and BCI, together with other financial institutions that act as market makers for interest rate swaps (IRS), Trade Web, and ICAP, are named as defendants in several antitrust class actions which were consolidated in the SDNY in 2016. The complaints allege defendants conspired to prevent the development of exchanges for IRS and demand unspecified money damages, treble damages and legal fees. Plaintiffs include certain swap execution facilities, as well as buy-side investors. The buy-side investors claim to represent a class that transacted in fixed-for-floating IRS with defendants in the US from 2008 to the present, including, for example, US retirement and pension funds, municipalities, university endowments, corporations, insurance companies and investment funds. The case is in discovery. In June 2017, a separate suit was filed in the US District Court in the SDNY against the same financial institution defendants in the IRS cases, including Barclays PLC, Barclays Bank PLC, and BCI, claiming that certain conduct alleged in the IRS cases also caused plaintiff to suffer harm with respect to the Credit Default Swaps market. Defendants have moved to dismiss this action. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the actions described on the Group or what effect they might have upon the Group’s operating results, cash flows or financial position in any particular period. CCUK Finance Limited and CIAC Corporation In May 2017, Barclays Bank PLC was served with a civil claim by CCUK Finance Limited and CIAC Corporation issued in the English High Court alleging breach of a contractual indemnity, fraudulent misrepresentation and breach of warranty arising out of the sale of a portfolio of credit cards in 2007. Barclays Bank PLC has filed a defence and counterclaim. Claimed Amounts/Financial Impact The claim seeks damages of not less than £1bn plus interest and costs. The damages claimed do not necessarily reflect Barclays Bank PLC’s potential financial exposure if a ruling were to be made against it. It is not currently practicable to provide an estimate of the financial impact of the action described or what effect it might have upon operating results, cash flows or the Group’s financial position in any particular period. Portuguese Competition Authority investigation The Portuguese Competition Authority is investigating whether competition law was infringed by the exchange of information about retail credit products amongst 15 banks in Portugal, including the Group, over a period of 11 years with particular reference to mortgages, consumer lending and lending to small and medium enterprises. The Group is cooperating with the investigation. Claimed Amounts/Financial Impact It is not currently practicable to provide an estimate of the financial impact of the action described or what effect it might have upon operating results, cash flows or the Group’s financial position in any particular period. General The Group is engaged in various other legal, competition and regulatory matters in the UK and US and a number of other overseas jurisdictions. It is subject to legal proceedings by and against the Group which arise in the ordinary course of business from time to time, including (but not limited to) disputes in relation to contracts, securities, debt collection, consumer credit, fraud, trusts, client assets, competition, data protection, money laundering, financial crime, employment, environmental and other statutory and common law issues. The Group is also subject to enquiries and examinations, requests for information, audits, investigations and legal and other proceedings by regulators, governmental and other public bodies in connection with (but not limited to) consumer protection measures, compliance with legislation and regulation, wholesale trading activity and other areas of banking and business activities in which the Group is or has been engaged. The Group is cooperating with the relevant authorities and keeping all relevant agencies briefed as appropriate in relation to these matters and others described in this note on an ongoing basis. At the present time, the Group does not expect the ultimate resolution of any of these other matters to have a material adverse effect on its financial position. However, in light of the uncertainties involved in such matters and the matters specifically described in this note, there can be no assurance that the outcome of a particular matter or matters will not be material to the Group’s results of operations or cash flow for a particular period, depending on, amongst other things, the amount of the loss resulting from the matter(s) and the amount of income otherwise reported for the reporting period. home.barclays/annualreport Barclays PLC Annual Report 2017 293 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceThe notes included in this section focus on the Group’s loan capital and shareholders’ equity including issued share capital, retained earnings, other equity balances and interests of minority shareholders in our subsidiary entities (non-controlling interests). For more information on capital management and how the Group maintains sufficient capital to meet our regulatory requirements refer to page 130. 30 Subordinated liabilities Accounting for subordinated debt Subordinated debt is measured at amortised cost using the effective interest method under IAS 39. Opening balance as at 1 January Issuances Redemptions Other Total subordinated liabilities 2017 £m 23,383 3,041 (1,378) (1,220) 23,826 2016 £m 21,467 1,457 (1,143) 1,602 23,383 Issuances totalling £3,041m made up of $2,000m 4.836% Fixed Rate Subordinated Callable Notes (£1,547m), €1,500m 2% Fixed Rate Subordinated Callable Notes (£1,384m) and SGD 200m 3.75% Fixed Rate Resetting Subordinated Callable Notes (£110m). Redemptions totalling £1,378m include £133m 6.375% Undated Subordinated Notes, $1,556m 6.05% Fixed Rate Subordinated Notes (£1,151m), $117m 7.434% Step-up Callable Perpetual Reserve Capital Instruments (£87m) and instruments issued by other subsidiaries (£7m). Other movements include a decrease of £1,220m largely due to the depreciation of period end USD against GBP. Subordinated liabilities include accrued interest and comprise undated and dated loan capital as follows: Undated subordinated liabilities Dated subordinated liabilities Total subordinated liabilities None of the Group’s loan capital is secured. Undated subordinated liabilities Barclays Bank PLC issued Tier One Notes (TONs) 6% Callable Perpetual Core Tier One Notes 6.86% Callable Perpetual Core Tier One Notes (USD 179m) Reserve Capital Instruments (RCIs) 7.434% Step-up Callable Perpetual Reserve Capital Instruments (USD 117m) 6.3688% Step-up Callable Perpetual Reserve Capital Instruments 14% Step-up Callable Perpetual Reserve Capital Instruments 5.3304% Step-up Callable Perpetual Reserve Capital Instruments Undated Notes 6.375% Undated Subordinated Notes 7.7% Undated Subordinated Notes (USD 99m) 8.25% Undated Subordinated Notes 7.125% Undated Subordinated Notes 6.125% Undated Subordinated Notes Junior Undated Floating Rate Notes (USD 38m) Undated Floating Rate Primary Capital Notes Series 3 Bonds 9.25% Perpetual Subordinated Bonds (ex-Woolwich Plc) 9% Permanent Interest Bearing Capital Bonds Loans 5.03% Reverse Dual Currency Undated Subordinated Loan (JPY 8,000m) 5% Reverse Dual Currency Undated Subordinated Loan (JPY 12,000m) Total undated subordinated liabilities 2017 £m 4,191 19,635 23,826 2016 £m 4,495 18,888 23,383 2017 £m 16 197 – 36 3,142 52 – 74 144 182 43 28 21 87 45 2016 £m 17 232 100 37 3,124 54 140 84 148 193 45 31 21 91 47 Initial call date 2032 2032 2017 2019 2019 2036 2017 2018 2018 2020 2027 Any interest payment date Any interest payment date 2021 At any time 2028 2028 51 73 4,191 54 77 4,495 294 Barclays PLC Annual Report 2017 home.barclays/annualreport Capital instruments, equity and reservesNotes to the financial statements 30 Subordinated liabilities continued Undated loan capital Undated loan capital is issued by the Bank and its subsidiaries for the development and expansion of the business and to strengthen the capital bases. The principal terms of the undated loan capital are described below: Subordination All undated loan capital ranks behind the claims against the bank of depositors and other unsecured unsubordinated creditors and holders of dated loan capital in the following order: Junior Undated Floating Rate Notes; other issues of Undated Notes, Bonds and Loans ranking pari passu with each other; followed by TONs and RCIs ranking pari passu with each other. Interest All undated loan capital bears a fixed rate of interest until the initial call date, with the exception of the 9% Bonds which are fixed for the life of the issue, and the Junior and Series 3 Undated Notes which are floating rate. After the initial call date, in the event that they are not redeemed, the 7.125%, 6.125% Undated Notes and the 9.25% Bonds will bear interest at rates fixed periodically in advance for five-year periods based on market rates. All other undated loan capital except the two floating rate Undated Notes will bear interest, and the two floating rate Undated Notes currently bear interest, at rates fixed periodically in advance based on London interbank rates. Payment of interest The Bank is not obliged to make a payment of interest on its Undated Notes, Bonds and Loans excluding the 7.7% Undated Notes, 8.25% Undated Notes and 9.25% Bonds if, in the preceding six months, a dividend has not been declared or paid on any class of shares of Barclays PLC or, in certain cases, any class of preference shares of the Bank. The Bank is not obliged to make a payment of interest on its 9.25% Perpetual Subordinated Bonds if, in the immediately preceding 12 month interest period, a dividend has not been paid on any class of its share capital. Interest not so paid becomes payable in each case if such a dividend is subsequently paid or in certain other circumstances. During the year, the Bank declared and paid dividends on its ordinary shares and on all classes of preference shares. No payment of principal or any interest may be made unless the Bank satisfies a specified solvency test. The Bank may elect to defer any payment of interest on the 7.7% Undated Notes and 8.25% Undated Notes. Until such time as any deferred interest has been paid in full, neither the Bank nor Barclays PLC may declare or pay a dividend, subject to certain exceptions, on any of its ordinary shares, preference shares, or other share capital or satisfy any payments of interest or coupons on certain other junior obligations. The Bank may elect to defer any payment of interest on the RCIs. Any such deferred payment of interest must be paid on the earlier of: 1) the date of redemption of the RCIs, 2) the coupon payment date falling on or nearest to the tenth anniversary of the date of deferral of such payment, and 3) in respect of the 14% RCIs only, substitution. While such deferral is continuing, neither the Bank nor Barclays PLC may declare or pay a dividend, subject to certain exceptions, on any of its ordinary shares or preference shares. The Bank may elect to defer any payment of interest on the TONs if it determines that it is, or such payment would result in it being, in non- compliance with capital adequacy requirements and policies of the PRA. Any such deferred payment of interest will only be payable on a redemption of the TONs. Until such time as the Bank next makes a payment of interest on the TONs, neither the Bank nor Barclays PLC may 1) declare or pay a dividend, subject to certain exceptions, on any of their respective ordinary shares or preference shares, or make payments of interest in respect of the Bank’s Reserve Capital Instruments and 2) certain restrictions on the redemption, purchase or reduction of their respective share capital and certain other securities also apply. Repayment All undated loan capital is repayable at the option of the Bank, generally in whole, at the initial call date and on any subsequent coupon or interest payment date or in the case of the 7.125%, 6.125% Undated Notes and the 9.25% Bonds on any fifth anniversary after the initial call date. In addition, each issue of undated loan capital is repayable, at the option of the Bank in whole in the event of certain changes in the tax treatment of the notes, either at any time, or on an interest payment date. There are no events of default except non-payment of principal or mandatory interest. Any repayments require the prior approval of the PRA. Other All issues of undated subordinated liabilities are non-convertible. home.barclays/annualreport Barclays PLC Annual Report 2017 295 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance30 Subordinated liabilities continued Dated subordinated liabilities Barclays PLC issued 2.625% Fixed Rate Subordinated Callable Notes (EUR 1,250m) 2% Fixed Rate Subordinated Callable Notes (EUR 1,500m) 4.375% Fixed Rate Subordinated Notes (USD 1,250m) 3.75% Fixed Rate Resetting Subordinated Callable Notes (SGD 200m) 5.20% Fixed Rate Subordinated Notes (USD 2,050m) 4.836% Fixed Rate Subordinated Callable Notes (USD 2,000m) Barclays Bank PLC issued 6.05% Fixed Rate Subordinated Notes (USD 1,556m) Floating Rate Subordinated Notes (EUR 40m) 6% Fixed Rate Subordinated Notes (EUR 1,750m) CMS-Linked Subordinated Notes (EUR 100m) CMS-Linked Subordinated Notes (EUR 135m) Fixed/Floating Rate Subordinated Callable Notes 7.75% Contingent Capital Notes (USD 1,000m) Floating Rate Subordinated Notes (EUR 50m) 5.14% Lower Tier 2 Notes (USD 1,094m) 6% Fixed Rate Subordinated Notes (EUR 1,500m) 9.5% Subordinated Bonds (ex-Woolwich Plc) Subordinated Floating Rate Notes (EUR 100m) 10% Fixed Rate Subordinated Notes 10.179% Fixed Rate Subordinated Notes (USD 1,521m) Subordinated Floating Rate Notes (EUR 50m) 6.625% Fixed Rate Subordinated Notes (EUR 1,000m) 7.625% Contingent Capital Notes (USD 3,000m) Subordinated Floating Rate Notes (EUR 50m) 5.75% Fixed Rate Subordinated Notes 5.4% Reverse Dual Currency Subordinated Loan (JPY 15,000m) 6.33% Subordinated Notes Subordinated Floating Rate Notes (EUR 68m) Issuances by other subsidiaries Total dated subordinated liabilities Initial call date Maturity date 2020 2023 2025 2027 2018 2018 2025 2028 2024 2030 2026 2028 2017 2018 2018 2018 2018 2023 2023 2019 2020 2021 2021 2021 2021 2021 2022 2022 2022 2023 2026 2027 2032 2040 2018–2019 2017 £m 1,119 1,325 947 111 1,439 1,471 – 36 1,643 93 124 533 747 44 841 1,484 273 88 2,261 1,118 44 1,043 2,163 44 366 97 62 60 59 19,635 2016 £m 1,084 – 1,054 – 1,590 – 1,316 34 1,590 90 120 548 822 42 956 1,444 286 85 2,345 1,285 43 1,042 2,390 43 384 103 64 58 70 18,888 Dated loan capital Dated loan capital is issued by the Company, the Bank and respective subsidiaries for the development and expansion of their business and to strengthen their respective capital bases. The principal terms of the dated loan capital are described below: Subordination Dated loan capital issued by the Company ranks behind the claims against the Company of unsecured unsubordinated creditors but before the claims of the holders of its equity. All dated loan capital issued by the Bank ranks behind the claims against the Bank of depositors and other unsecured unsubordinated creditors but before the claims of the undated loan capital and the holders of its equity. The dated loan capital issued by other subsidiaries is similarly subordinated. Interest Interest on the Floating Rate Notes is fixed periodically in advance, based on the related interbank or local central bank rates. Interest on the 7.75% Contingent Capital Notes, 2.625% Fixed Rate Subordinated Callable Notes, 4.836% Fixed Rate Subordinated Callable Notes, 2% Fixed Rate Subordinated Callable Notes and the 3.75% Fixed Rate Resetting Subordinated Callable Notes are fixed until the call date. After the respective call dates, in the event that they are not redeemed, the interest rates will be reset and fixed until maturity based on a market rate. Repayment Those Notes with a call date are repayable at the option of the issuer, on conditions governing the respective debt obligations, some in whole or in part, and some only in whole. The remaining dated loan capital outstanding at 31 December 2017 is redeemable only on maturity, subject in particular cases to provisions allowing an early redemption in the event of certain changes in tax law, or to certain changes in legislation or regulations. Any repayments prior to maturity require, in the case of the Company and the Bank, the prior approval of the PRA, or in the case of the overseas issues, the approval of the local regulator for that jurisdiction and of the PRA in certain circumstances. There are no committed facilities in existence at the balance sheet date which permit the refinancing of debt beyond the date of maturity. 296 Barclays PLC Annual Report 2017 home.barclays/annualreport Capital instruments, equity and reservesNotes to the financial statements30 Subordinated liabilities continued Other The 7.625% Contingent Capital Notes will be automatically transferred from investors to Barclays PLC (or another entity within the Group) for nil consideration in the event the Barclays PLC consolidated CRD IV CET1 ratio (FSA October 2012 transitional statement) falls below 7.0%. The 7.75% Contingent Capital Notes will be automatically written-down and investors will lose their entire investment in the notes in the event the Barclays PLC consolidated CRD IV CET1 ratio (FSA October 2012 transitional statement) falls below 7.0%. 31 Ordinary shares, share premium, and other equity Called up share capital, allotted and fully paid As at 1 January 2017 Issued to staff under share incentive plans Issuances relating to Scrip Dividend Programme AT1 securities issuance Other movements As at 31 December 2017 As at 1 January 2016 Issued to staff under share incentive plans Issuances relating to Scrip Dividend Programme AT1 securities issuance Other movements As at 31 December 2016 Number of shares m 16,963 46 51 – – 17,060 16,805 116 42 – – 16,963 Ordinary shares £m 4,241 12 12 – – 4,265 4,201 30 10 – – 4,241 Total share capital and share premium £m 21,842 86 117 – – 22,045 Other equity instruments £m 6,449 – – 2,490 2 8,941 21,586 188 68 – – 21,842 5,305 – – 1,132 12 6,449 Share premium £m 17,601 74 105 – – 17,780 17,385 158 58 – – 17,601 Called up share capital Called up share capital comprises 17,060m (2016: 16,963m) ordinary shares of 25p each. Share repurchase At the 2017 AGM on 10 May 2017, Barclays PLC was authorised to repurchase up to an aggregate of 1,696m of its ordinary shares of 25p. The authorisation is effective until the AGM in 2018 or the close of business on 30 June 2018, whichever is the earlier. No share repurchases were made during either 2017 or 2016. Other equity instruments Other equity instruments of £8,941m (2016: £6,449m) include AT1 securities issued by Barclays PLC. In 2017, there were two issuances of Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities (2016: one issuance), with principal amounts totalling £2.5bn (2016: £1.1bn). The AT1 securities are perpetual securities with no fixed maturity and are structured to qualify as AT1 instruments under CRD IV. The principal terms of the AT1 securities are described below: ■■ AT1 securities rank behind the claims against Barclays PLC of 1) unsubordinated creditors; 2) claims which are expressed to be subordinated to the claims of unsubordinated creditors of Barclays PLC but not further or otherwise; or 3) claims which are, or are expressed to be, junior to the claims of other creditors of Barclays PLC, whether subordinated or unsubordinated, other than claims which rank, or are expressed to rank, pari passu with, or junior to, the claims of holders of the AT1 securities. ■■ AT1 securities bear a fixed rate of interest until the initial call date. After the initial call date, in the event that they are not redeemed, the AT1 securities will bear interest at rates fixed periodically in advance for five-year periods based on market rates. ■■ Interest on the AT1 securities will be due and payable only at the sole discretion of Barclays PLC, and Barclays PLC has sole and absolute discretion at all times and for any reason to cancel (in whole or in part) any interest payment that would otherwise be payable on any interest payment date. ■■ AT1 securities are undated and are repayable, at the option of Barclays PLC, in whole at the initial call date, or on any fifth anniversary after the initial call date. In addition, the AT1 securities are repayable, at the option of Barclays PLC, in whole in the event of certain changes in the tax or regulatory treatment of the securities. Any repayments require the prior consent of the PRA. All AT1 securities will be converted into ordinary shares of Barclays PLC, at a pre-determined price, should the fully loaded CET1 ratio of the Barclays PLC Group fall below 7.0%. 32 Reserves Currency translation reserve The currency translation reserve represents the cumulative gains and losses on the retranslation of the Group’s net investment in foreign operations, net of the effects of hedging. Available for sale reserve The available for sale reserve represents the unrealised change in the fair value of available for sale investments since initial recognition. Cash flow hedging reserve The cash flow hedging reserve represents the cumulative gains and losses on effective cash flow hedging instruments that will be recycled to the income statement when the hedged transactions affect profit or loss. home.barclays/annualreport Barclays PLC Annual Report 2017 297 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance32 Reserves continued Own credit reserve As a result of the early adoption of the own credit provisions of IFRS 9 on 1 January 2017, own credit on financial liabilities designated at fair value through profit and loss which was previously recorded in the income statement is now recognised within other comprehensive income. Amounts in the own credit reserve is not recycled to profit or loss in future periods. Other reserves and treasury shares Other reserves relate to redeemed ordinary and preference shares issued by the Group. Treasury shares relate to Barclays PLC shares held in relation to the Group’s various share schemes. These schemes are described in Note 34. Treasury shares are deducted from shareholders’ equity within other reserves. A transfer is made to retained earnings in line with the vesting of treasury shares held for the purposes of share-based payments. Currency translation reserve Available for sale reserve Cash flow hedging reserve Own credit reservea Other reserves and treasury shares Total 2017 £m 3,054 364 1,161 (179) 983 5,383 2016 £m 3,051 (74) 2,105 – 969 6,051 Note a As at 31 December 2017, the amount of own credit recognised in the Group’s other comprehensive income was a debit balance of £179m. Upon adoption of IFRS 9, an opening debit balance of £175m was recognised, with a further £4m loss (net of tax) recorded during 2017. 33 Non-controlling interests Barclays Bank PLC issued: – Preference shares – Upper Tier 2 instruments Barclays Africa Group Limited Other non-controlling interests Total Profit attributable to non-controlling interest Equity attributable to non-controlling interest Dividends paid to non-controlling interest 2017 £m 242 3 140 4 389 2016 £m 340 3 402 3 748 2017 £m 1,838 272 – 1 2,111 2016 £m 2,698 272 3,507 15 6,492 2017 £m 242 – 173 – 415 2016 £m 340 – 235 – 575 Barclays Bank PLC Barclays PLC holds 100% of the voting rights of Barclays Bank PLC. As at 31 December 2017, Barclays Bank PLC has in issue preference shares and Upper Tier 2 instruments, representing 11% (2016: 11%) of its equity. Preference share dividends and redemption are typically at the discretion of Barclays Bank PLC. The payment of Upper Tier 2 instrument coupons and principal are typically at the discretion of Barclays Bank PLC, except for coupon payments that become compulsory where Barclays PLC has declared or paid a dividend on ordinary shares in the preceding six-month period. Preference share and Upper Tier 2 instrument holders typically only have rights to redeem in the event of insolvency. Instrument Preference Shares: 6.00% non-cumulative callable preference shares 6.278% non-cumulative callable preference shares 4.75% non-cumulative callable preference shares 7.1% non-cumulative callable preference shares 8.125% non-cumulative callable preference shares Total Barclays Bank PLC Preference Shares Barclays Africa Group Limited Total Upper Tier 2 Instruments: Undated Floating Rate Primary Capital Notes Series 1 Undated Floating Rate Primary Capital Notes Series 2 Total Upper Tier 2 Instruments 2017 £m – 318 211 – 1,309 1,838 – 1,838 93 179 272 2016 £m 203 318 211 657 1,309 2,698 277 2,975 93 179 272 Protective rights of non-controlling interests Barclays Africa Group Limited Barclays’ shareholding in BAGL has reduced from 50.1% in 2016 to 14.9% in 2017. Following the disposal BAGL is not considered as a subsidiary of the Group and has been deconsolidated for accounting purposes and is accounted for as an available for sale asset. Barclays Bank PLC Barclays Bank PLC also has in issue preference shares which are non-controlling interests to the Group. Under the terms of these instruments, Barclays PLC may not pay dividends on ordinary shares until a dividend is next paid on these instruments or the instruments are redeemed or purchased by Barclays Bank PLC. There are no restrictions on Barclays Bank PLC’s ability to remit capital to the Parent as a result of these issued instruments. 298 Barclays PLC Annual Report 2017 home.barclays/annualreport Capital instruments, equity and reservesNotes to the financial statementsNotes to the financial statements Employee benefits The notes included in this section focus on the costs and commitments associated with employing our staff. 34 Share-based payments Accounting for share-based payments The Group applies IFRS 2 Share-based Payments in accounting for employee remuneration in the form of shares. Employee incentives include awards in the form of shares and share options, as well as offering employees the opportunity to purchase shares on favourable terms. The cost of the employee services received in respect of the shares or share options granted is recognised in the income statement over the period that employees provide services. The overall cost of the award is calculated using the number of shares and options expected to vest and the fair value of the shares or options at the date of grant. The number of shares and options expected to vest takes into account the likelihood that performance and service conditions included in the terms of the awards will be met. Failure to meet the non-vesting condition is treated as a cancellation, resulting in an acceleration of recognition of the cost of the employee services. The fair value of shares is the market price ruling on the grant date, in some cases adjusted to reflect restrictions on transferability. The fair value of options granted is determined using option pricing models to estimate the numbers of shares likely to vest. These take into account the exercise price of the option, the current share price, the risk-free interest rate, the expected volatility of the share price over the life of the option and other relevant factors. Market conditions that must be met in order for the award to vest are also reflected in the fair value of the award, as are any other non-vesting conditions – such as continuing to make payments into a share-based savings scheme. The charge for the year arising from share-based payment schemes was as follows: Share Value Plan Deferred Share Value Plan Others Total equity settled Cash settled Total share-based payments The terms of the main current plans are as follows: Charge for the year 2017 £m 153 166 186 505 3 508 2016 £m 473 – 192 665 1 666 2015 £m 442 – 86 528 4 532 Share Value Plan (SVP) The SVP was introduced in March 2010 and approved by shareholders (for executive Director participation and use of new issue shares) at the AGM in April 2011. SVP awards are granted to participants in the form of a conditional right to receive Barclays PLC shares or provisional allocations of Barclays PLC shares which vest or are considered for release over a period of three, five or seven years. Participants do not pay to receive an award or to receive a release of shares. The grantor may also make a dividend equivalent payment to participants on release of a SVP award. SVP awards are also made to eligible employees for recruitment purposes. All awards are subject to potential forfeiture in certain leaver scenarios. Deferred Share Value Plan (DSVP) The DSVP was introduced in February 2017. The terms of the DSVP are materially the same as the terms of the SVP as described above, save that executive Directors are not eligible to participate in the DSVP and the DSVP operates over market purchase shares only. The accounting policies for employee benefits are included in Note 8. Other schemes In addition to the SVP and DSVP, the Group operates a number of other schemes including schemes operated by, and settled in, the shares of subsidiary undertakings, none of which is individually or in aggregate material in relation to the charge for the year or the dilutive effect of outstanding share options. Included within other schemes are Sharesave (both UK and overseas), Sharepurchase (both UK and overseas), the Barclays’ Long Term Incentive Plan, the Share Incentive Award and the Executive Share Award Scheme. Share option and award plans The weighted average fair value per award granted, weighted average share price at the date of exercise/release of shares during the year, weighted average contractual remaining life and number of options and awards outstanding (including those exercisable) at the balance sheet date are as follows: home.barclays/annualreport Barclays PLC Annual Report 2017 299 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance34 Share-based payments continued SVPa,b DSVPa,b Othersa 2017 2016 Weighted average fair value per award granted in year £ 2.30 2.26 Weighted average share price at exercise/ release during year £ 2.29 2.06 0.41-2.30 1.99-2.30 Weighted average remaining contractual life years 1 1 0–3 Weighted average fair Number of value per options/ award awards granted outstanding in year (000s) £ 1.66 191,610 125,399 – 210,160 0.61-1.67 Weighted average share price at exercise/ release during year £ 1.66 – 1.65-1.88 Weighted average remaining contractual life years 1 – 0–3 Number of options/ awards outstanding (000s) 406,016 – 205,129 SVP and DSVP are nil cost awards on which the performance conditions are substantially completed at the date of grant. Consequently, the fair value of these awards is based on the market value at that date. Movements in options and awards The movement in the number of options and awards for the major schemes and the weighted average exercise price of options was: SVPa,b DSVPa,b Othersa,c Number (000s) Number (000s) Number (000s) 2017 2016 2017 2016 2017 2016 Weighted average ex. price (£) 2017 2016 Outstanding at beginning of year/acquisition date Granted in the year Exercised/released in the year Less: forfeited in the year Less: expired in the year Outstanding at end of year Of which exercisable: 406,016 943 386,470 229,371 (200,350) (191,623) (18,202) – 406,016 – (14,999) – 191,610 18 – 132,316 (2,275) (4,642) – 125,399 – – – – – – – – 205,129 118,222 (90,324) (17,733) (5,134) 210,160 24,569 166,975 154,069 (60,912) (47,342) (7,661) 205,129 24,435 1.38 1.66 1.52 1.42 2.03 1.41 1.59 1.75 1.20 1.39 1.95 1.83 1.38 1.78 Notes a Options/award granted over Barclays PLC shares. b Nil cost award and therefore the weighted average exercise price was nil. c The number of awards within Others at the end of the year principally relates to Sharesave (number of awards exercisable at end of year was 10,121,109). The weighted average exercise price relates to Sharesave. Certain of the Group’s share option plans enable certain Directors and employees to subscribe for new ordinary shares of Barclays PLC. For accounting for treasury shares refer to Note 32. There were no significant modifications to the share-based payments arrangements in 2017 and 2016. As at 31 December 2017, the total liability arising from cash-settled share-based payments transactions was £2m (2016: £nil). Holdings of Barclays PLC shares Various employee benefit trusts established by the Group hold shares in Barclays PLC to meet obligations under the Barclays share-based payment schemes. The total number of Barclays shares held in these employee benefit trusts at 31 December 2017 was 9.9 million (2016: 6.6 million). Dividend rights have been waived on all these shares. The total market value of the shares held in trust based on the year end share price of £2.03 (2016: £2.23) was £20.1m (2016: £14.7m). 300 Barclays PLC Annual Report 2017 home.barclays/annualreport Employee benefitsNotes to the financial statements35 Pensions and post-retirement benefits Accounting for pensions and post-retirement benefits The Group operates a number of pension schemes and post-employment benefit schemes. Defined contribution schemes – the Group recognises contributions due in respect of the accounting period in the income statement. Any contributions unpaid at the balance sheet date are included as a liability. Defined benefit schemes – the Group recognises its obligations to members of each scheme at the period end, less the fair value of the scheme assets after applying the asset ceiling test. The Group will keep the developments on the proposed amendments to IFRIC 14 under review. Each scheme’s obligations are calculated using the projected unit credit method. Scheme assets are stated at fair value as at the period end. Changes in pension scheme liabilities or assets (remeasurements) that do not arise from regular pension cost, net interest on net defined benefit liabilities or assets, past service costs, settlements or contributions to the scheme, are recognised in other comprehensive income. Remeasurements comprise experience adjustments (differences between previous actuarial assumptions and what has actually occurred), the effects of changes in actuarial assumptions, return on scheme assets (excluding amounts included in the interest on the assets) and any changes in the effect of the asset ceiling restriction (excluding amounts included in the interest on the restriction). Post-employment benefit schemes – the cost of providing healthcare benefits to retired employees is accrued as a liability in the financial statements over the period that the employees provide services to the Group, using a methodology similar to that for defined benefit pension schemes. Pension schemes UK Retirement Fund (UKRF) The UKRF is the Group’s main scheme, representing 96% of the Group’s total retirement benefit obligations. The UKRF was closed to new entrants on 1 October 2012, and comprises 10 sections, the two most significant of which are: ■■ Afterwork, which comprises a contributory cash balance defined benefit element, and a voluntary defined contribution element. The cash balance element is accrued each year and revalued until Normal Retirement Age in line with the increase in Retail Price Index (RPI) (up to a maximum of 5% p.a.). An increase of up to 2% a year may also be added at Barclays’ discretion. Between 1 October 2003 and 1 October 2012 the majority of new UK employees (except for the employees of the investment banking business within Barclays International) were eligible to join this section. The costs of ill-health retirements and death in service benefits for Afterwork members are borne by the UKRF. The main risks that Barclays runs in relation to Afterwork are limited although additional contributions are required if pre-retirement investment returns are not sufficient to provide for the benefits. ■■ The 1964 Pension Scheme. Most employees recruited before July 1997 built up benefits in this non-contributory defined benefit scheme in respect of service up to 31 March 2010. Pensions were calculated by reference to service and pensionable salary. From 1 April 2010, members became eligible to accrue future service benefits in either Afterwork or the Pension Investment Plan (PIP), a historic defined contribution section which is now closed to future contributions. The risks that Barclays runs in relation to the 1964 section are typical of final salary pension schemes, principally that investment returns fall short of expectations, that inflation exceeds expectations, and that retirees live longer than expected. Barclays Pension Savings Plan (BPSP) From 1 October 2012, a new UK pension scheme, the BPSP, was established to satisfy Auto Enrolment legislation. The BPSP is a defined contribution scheme (Group Personal Pension) providing benefits for all new Barclays UK hires from 1 October 2012, employees of the investment banking business within Barclays International who were in PIP as at 1 October 2012, and also all UK employees who were not members of a pension scheme at that date. As a defined contribution scheme, BPSP is not subject to the same investment return, inflation or life expectancy risks for Barclays that defined benefit schemes are. Members’ benefits reflect contributions paid and the level of investment returns achieved. Other Apart from the UKRF and the BPSP, Barclays operates a number of smaller pension and long-term employee benefits and post-retirement healthcare plans globally, the largest of which are the US defined benefit schemes. Many of the schemes are funded, with assets backing the obligations held in separate legal vehicles such as trusts. Others are operated on an unfunded basis. The benefits provided, the approach to funding, and the legal basis of the schemes, reflect local environments. Governance The UKRF operates under trust law and is managed and administered on behalf of the members in accordance with the terms of the Trust Deed and Rules and all relevant legislation. The Corporate Trustee is Barclays Pension Funds Trustees Limited, a private limited company and a wholly owned subsidiary of Barclays Bank PLC. The Trustee is the legal owner of the assets of the UKRF which are held separately from the assets of the Group. The Trustee Board comprises six Management Directors selected by Barclays, of whom three are independent Directors with no relationship with Barclays (and who are not members of the UKRF), plus three Member Nominated Directors selected from eligible active staff and pensioner members who apply for the role. The BPSP is a Group Personal Pension arrangement which operates as a collection of personal pension plans. Each personal pension plan is a direct contract between the employee and the BPSP provider (Legal & General Assurance Society Limited), and is regulated by the FCA. Similar principles of pension governance apply to the Group’s other pension schemes, depending on local legislation. home.barclays/annualreport Barclays PLC Annual Report 2017 301 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance35 Pensions and post-retirement benefits continued Amounts recognised The following tables include amounts recognised in the income statement and an analysis of benefit obligations and scheme assets for all Group defined benefit schemes. The net position is reconciled to the assets and liabilities recognised on the balance sheet. The tables include funded and unfunded post-retirement benefits. Income statement charge Current service cost Net finance cost Past service cost Other movements Total 2017 £m 265 (12) (3) – 250 2016 £m 243 (32) – 2 213 2015 £m 255 41 (432) 1 (135) Past service costs includes a £3m (2016: £nil; 2015: £429m) gain on valuation of a component of the defined retirement benefit liability. Balance sheet reconciliation 2017 2016 Benefit obligation at beginning of the year Current service cost Interest costs on scheme liabilities Past service cost Remeasurement loss – financial Remeasurement (loss)/gain – demographic Remeasurement (loss)/gain – experience Employee contributions Benefits paid Exchange and other movements Benefit obligation at end of the year Fair value of scheme assets at beginning of the year Interest income on scheme assets Employer contribution Remeasurement – return on scheme assets greater than discount rate Employee contributions Benefits paid Exchange and other movements Fair value of scheme assets at the end of the year Net surplus/(deficit) Retirement benefit assets Retirement benefit liabilities Net retirement benefit assets/(liabilities) Of which relates to UKRF £m (31,847) (245) (810) – (330) (240) (614) (1) 4,927 – (29,160) 31,820 831 1,124 1,263 1 (4,927) – 30,112 952 952 – 952 Total £m (33,033) (265) (843) 3 (387) (228) (612) (5) 4,970 132 (30,268) 32,657 855 1,152 1,333 5 (4,970) (110) 30,922 654 966 (312) 654 Of which relates to UKRF £m (26,027) (220) (980) – (7,170) 390 490 (1) 1,800 (129) (31,847) 26,829 1,023 634 5,002 1 (1,800) 131 31,820 (27) – (27) (27) Total £m (28,279) (243) (1,016) – (7,214) 413 525 (4) 1,852 933 (33,033) 28,752 1,048 720 5,009 4 (1,852) (1,024) 32,657 (376) 14 (390) (376) Included within the benefit obligation was £895m (2016: £979m) relating to overseas pensions and £213m (2016: £207m) relating to other post-employment benefits. As at 31 December 2017, the UKRF’s scheme assets were in surplus versus IAS 19 obligations by £952m (2016: deficit of £27m). The movement for the UKRF is mainly due to payment of deficit contributions, higher than assumed asset returns, updated mortality assumptions, and lower expected future price inflation, offset by a decrease in discount rate, transfers out of the scheme, and the introduction of an assumption for future transfers out. Of the £4,927m (2016: £1,800m) UKRF benefits paid out, £4,151m (2016: £1,029m) related to transfers out of the fund. Where a scheme’s assets exceed its obligation, an asset is recognised to the extent that it does not exceed the present value of future contribution holidays or refunds of contributions (the asset ceiling). In the case of the UKRF the asset ceiling is not applied as, in certain specified circumstances such as wind-up, Barclays expects to be able to recover any surplus. The Trustee does not have a substantive right to augment benefits, nor do they have the right to wind up the plan except in the dissolution of the Group or termination of contributions by the Group. The application of the asset ceiling to other plans is considered on an individual plan basis. 302 Barclays PLC Annual Report 2017 home.barclays/annualreport Employee benefitsNotes to the financial statements 35 Pensions and post-retirement benefits continued Critical accounting estimates and judgements Actuarial valuation of the schemes’ obligation is dependent upon a series of assumptions. Below is a summary of the main financial and demographic assumptions adopted for the UKRF. Key UKRF financial assumptions Discount rate Inflation rate (RPI) 2017 % p.a. 2.46 3.22 2016 % p.a. 2.62 3.35 The UKRF discount rate assumption for 2017 was based on a variant of the standard Willis Towers Watson RATE Link model. This variant includes all bonds rated AA by at least one of the four major ratings agencies, and assumes that yields after year 30 are flat. The RPI inflation assumption for 2017 was set by reference to the Bank of England’s implied inflation spot curve, assuming the spot curve remains flat after 30 years. The inflation assumption incorporates a deduction of 20 basis points as an allowance for an inflation risk premium. The methodology used to derive the discount rate and price inflation assumptions is consistent with that used at the prior year end, except the inflation spot curve was held flat after 25 years at 2016. The UKRF’s post-retirement mortality assumptions are based on a best estimate assumption derived from an analysis in 2016 of Barclays own post-retirement mortality experience, and taking account of recent evidence from published mortality surveys. An allowance has been made for future mortality improvements based on the 2016 core projection model published by the Continuous Mortality Investigation Bureau subject to a long-term trend of 1.25% per annum in future improvements. The methodology used is consistent with the prior year end, except that the 2015 core projection model was used at 2016. The table below shows how the assumed life expectancy at 60, for members of the UKRF, has varied over the past three years: Assumed life expectancy Life expectancy at 60 for current pensioners (years) – Males – Females Life expectancy at 60 for future pensioners currently aged 40 (years) – Males – Females 2017 2016 2015 27.8 29.4 29.3 31.0 27.9 29.7 29.7 31.7 28.4 30.0 30.2 32.0 An assumption for future transfers out has been introduced at 2017, increasing the benefit obligation by about 2%, as numbers of deferred members transferring out were at higher levels in 2017 than previously experienced. The assumption introduced is that 20% of the benefit obligations in respect of deferred members will transfer out during 2018, 15% in 2019, 10% in 2020, 5% in 2021, tapering down to 0% from 2022 onwards. The assumption used at 2016 was nil transfers out. Sensitivity analysis on actuarial assumptions The sensitivity analysis has been calculated by valuing the UKRF liabilities using the amended assumptions shown in the table below and keeping the remaining assumptions the same as disclosed in the table above, except in the case of the inflation sensitivity where other assumptions that depend on assumed inflation have also been amended correspondingly. The difference between the recalculated liability figure and that stated in the balance sheet reconciliation table above is the figure shown. The selection of these movements to illustrate the sensitivity of the defined benefit obligation to key assumptions should not be interpreted as Barclays expressing any specific view of the probability of such movements happening. Change in key assumptions Discount rate 0.5% p.a. increase 0.25% p.a. increase 0.25% p.a. decrease 0.5% p.a. decrease Assumed RPI 0.5% p.a. increase 0.25% p.a. increase 0.25% p.a. decrease 0.5% p.a. decrease Life expectancy at 60 One year increase One year decrease 2017 (Decrease)/ Increase in UKRF defined benefit obligation £bn 2016 (Decrease)/ Increase in UKRF defined benefit obligation £bn (2.4) (1.2) 1.3 2.8 1.6 0.8 (0.7) (1.5) 1.0 (1.0) (2.8) (1.4) 1.5 3.2 1.9 0.9 (0.9) (2.0) 1.1 (1.1) The weighted average duration of the benefit payments reflected in the defined benefit obligation for the UKRF is 20 years. home.barclays/annualreport Barclays PLC Annual Report 2017 303 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance35 Pensions and post-retirement benefits continued Assets A long-term investment strategy has been set for the UKRF, with its asset allocation comprising a mixture of equities, bonds, property and other appropriate assets. This recognises that different asset classes are likely to produce different long-term returns and some asset classes may be more volatile than others. The long-term investment strategy ensures, among other aims, that investments are adequately diversified. Asset managers are permitted some flexibility to vary the asset allocation from the long-term investment strategy within control ranges agreed with the Trustee from time to time. The UKRF also employs derivative instruments, where appropriate, to achieve a desired exposure or return, or to match assets more closely to liabilities. The value of assets shown reflects the assets held by the scheme, with any derivative holdings reflected on a fair value basis. The value of the assets of the schemes and their percentage in relation to total scheme assets were as follows: Analysis of scheme assets As at 31 December 2017 Equities – quoted Equities – non-quoted Bonds – fixed governmenta Bonds – index-linked governmenta Bonds – corporate and othera Property – commercialb Derivativesb Otherc Fair value of scheme assets As at 31 December 2016 Equities – quoted Equities – non-quoted Bonds – fixed governmenta Bonds – index-linked governmenta Bonds – corporate and othera Property – commercialb Derivativesb Otherc Fair value of scheme assets Notes a Assets held are predominantly quoted. b Assets held are predominantly non-quoted. c Assets held are predominantly in Infrastructure Funds. Total Of which relates to UKRF % of total fair value of scheme assets % 14.1 6.5 7.9 42.3 16.8 6.2 2.6 3.6 100.0 24.9 6.3 4.1 40.3 16.0 5.0 2.7 0.7 100.0 Value £m 4,377 2,001 2,433 13,089 5,195 1,911 816 1,100 30,922 8,123 2,043 1,330 13,173 5,222 1,630 870 266 32,657 % of total fair value of scheme assets % 13.8 6.6 7.3 43.4 16.6 6.3 2.7 3.3 100.0 24.6 6.4 3.4 41.4 15.9 5.1 2.7 0.5 100.0 Value £m 4,151 2,001 2,184 13,078 4,999 1,902 816 981 30,112 7,840 2,042 1,072 13,165 5,054 1,622 870 155 31,820 Included within the fair value of scheme assets were: £0.1m (2016: £0.2m) relating to shares in Barclays PLC and £0.6m (2016: £0.1m) relating to bonds issued by Barclays PLC. The UKRF also invests in pooled investment vehicles which may hold shares or debt issued by Barclays PLC. The UKRF scheme assets also include £15m (2016: £32m) relating to UK private equity investments and £1,986m (2016: £2,009m) relating to overseas private equity investments. These are disclosed above within Equities – non-quoted. Approximately 48% of the UKRF assets are invested in liability-driven investment strategies; primarily UK gilts as well as interest rate and inflation swaps. These are used to better match the assets to its liabilities. The swaps are used to reduce the scheme’s inflation and duration risks against its liabilities. Funding The Scheme Actuary prepares an annual update of the UKRF funding position in addition to the full triennial actuarial valuation. The latest annual update was carried out as at 30 September 2017 and showed a deficit of £4.8bn and a funding level of 86.8%. The last triennial actuarial valuation of the UKRF had an effective date of 30 September 2016 and was completed in July 2017. This valuation showed a funding deficit of £7.9bn and a funding level of 81.5%, versus £6.0bn funding deficit at the 30 September 2015 update. The improvement in funding position between 30 September 2016 and 30 September 2017 was largely due to payment of deficit contributions, higher than assumed asset returns, higher Government bond yields, and transfers out of the scheme. 304 Barclays PLC Annual Report 2017 home.barclays/annualreport Employee benefitsNotes to the financial statements35 Pensions and post-retirement benefits continued At the 2016 triennial actuarial valuation the Group and UKRF Trustee agreed a revised scheme-specific funding target, statement of funding principles, schedule of contributions, a recovery plan to seek to eliminate the deficit relative to the funding target and some additional support measures. The agreement with the UKRF Trustee also takes into account the changes to the Group structure that will be implemented as a result of ring-fencinga. Barclays Bank PLC will remain as the principal employer of the UKRF. The main differences between the funding and IAS 19 assumptions were a different approach to setting the discount rate and a more conservative longevity assumption for funding. The deficit reduction contributions agreed with the UKRF Trustee as part of the 30 September 2016 valuation recovery plan are shown alongside the deficit recovery contributions agreed in 2014 for the prior 30 September 2013 valuation. Year 2017 2018 2019 2020 2021 2022 to 2026 Deficit contributions 30 September 2016 valuation £m 740 500 500 500 1,000 1,000 each year Deficit contributions 30 September 2013 valuation £m 1,240b 740 740 740 240b – Note a Refer to page 204 of the Annual Report for further information on structural reform (unaudited). b The 2017 deficit contributions from the 30 September 2013 valuation included up to £500m payable if the deficit in 2017 exceeded a certain level. Of this £500m, £250m was paid during the first half of 2017. Following the agreement of the 30 September 2016 valuation recovery plan, in July 2017, the remaining payments were no longer required. The deficit reduction contributions are in addition to the regular contributions to meet the Group’s share of the cost of benefits accruing over each year. The next funding valuation of the UKRF is due to be completed in 2020 with an effective date of 30 September 2019. Other support measures agreed at the same time as the valuation Collateral – The UKRF Trustee and Barclays Bank PLC have entered into an arrangement whereby a collateral pool has been put in place to provide security for the UKRF funding deficit as it increases or decreases over time, and associated deficit recovery contributions. The collateral pool is currently made up of government securities and high-quality securitisations of credit cards, mortgages and corporate loans. Agreement has been made with the Trustee to increase the proportion of the deficit covered from 88.5% to 100% effective from 26 March 2018 with an overall cap remaining of £9.0bn, at which date the collateral pool will consist of government securities only (the Trustee and Barclays Bank PLC may agree alternative eligible collateral in the future). The arrangement provides the UKRF Trustee with dedicated access to the pool of assets in the event of Barclays Bank PLC not paying a deficit reduction contribution to the UKRF or in the event of Barclays Bank PLC’s insolvency. These assets are included within Note 40. Support from Barclays PLC – In the event of Barclays Bank PLC not paying a deficit reduction contribution payment required under the 2016 valuation recovery plan by a specified pre-payment date, Barclays PLC has entered into an arrangement whereby it will be required to use, in first priority, dividends received from Barclays Bank UK PLC (if any) to invest the proceeds in Barclays Bank PLC (up to the maximum amount of the deficit reduction contribution unpaid by Barclays Bank PLC). The proceeds of the investment will be used to discharge Barclays Bank PLC’s unpaid deficit reduction contribution. Participation – As permitted under the Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015, Barclays Bank UK PLC is a participating employer in the UKRF and will remain so during a transitional phase until September 2025 as set out in a deed of participation. Barclays Bank UK PLC will make contributions for the future service of its employees who are currently Afterwork members and, in the event of Barclays Bank PLC’s insolvency during this period provision has been made to require Barclays Bank UK PLC to become the principal employer of the UKRF. Barclays Bank PLC’s Section 75 debt would be triggered by the insolvency (the debt would be calculated after allowing for the payment to the UKRF of the collateral above). Defined benefit contributions paid with respect to the UKRF were as follows: Contributions paid 2017 2016 2015 £m 1,124 634 586 Included within the Group’s contributions paid were £153m (2016: £112m; 2015: £nil) Section 75 contributions. The Group’s expected contribution to the UKRF in respect of defined benefits in 2018 is £716m (2017: £1,585m). In addition, the expected contributions to UK defined contribution schemes in 2018 is £35m (2017: £36m) to the UKRF and £146m (2017: £124m) to the BPSP. home.barclays/annualreport Barclays PLC Annual Report 2017 305 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernanceThe section presents information on the Group’s investments in subsidiaries, joint ventures and associates and its interests in structured entities. Detail is also given on securitisation transactions the Group has entered into and arrangements that are held off-balance sheet. 36 Principal subsidiaries Barclays applies IFRS 10 Consolidated Financial Statements. The consolidated financial statements combine the financial statements of Barclays PLC and all its subsidiaries. Subsidiaries are entities over which the Group has control. Under IFRS 10, this is when the Group is exposed or has rights to variable returns from its involvement in the entity and has the ability to affect those returns through its power over the entity. The Group reassesses whether it controls an entity if facts and circumstances indicate that there have been changes to its power, its rights to variable returns or its ability to use its power to affect the amount of its returns. Intra-group transactions and balances are eliminated on consolidation and consistent accounting policies are used throughout the Group for the purposes of the consolidation. Changes in ownership interests in subsidiaries are accounted for as equity transactions if they occur after control has been obtained and they do not result in loss of control. The significant judgements used in applying this policy are set out below. Accounting for investment in subsidiaries In the individual financial statements of Barclays PLC, investments in subsidiaries are stated at cost less impairment. Principal subsidiaries for the Group are set out below. This includes those subsidiaries that are most significant in the context of the Group’s business, results or financial position. Company name Barclays Bank PLC Barclays Capital Securities Limited Barclays Securities Japan Limited Barclays Capital Inc Barclays Services Limited Barclays Bank Delaware Principal place of business or incorporation England England Japan United States England United States Nature of business Banking, holding Company Securities dealing Securities dealing Securities dealing Service Company Credit card issuer Non-controlling interests – proportion of ownership interests % 11 – – – – – Non-controlling interests – proportion of voting interests % – – – – – – Percentage of voting rights held % 100 100 100 100 100 100 The country of registration or incorporation is also the principal area of operation of each of the above subsidiaries. Ownership interests are in some cases different to voting interests due to the existence of non-voting equity interests, such as preference shares. Refer to Note 33 for more information. Barclays Africa Group Limited was considered a principal subsidiary in 2016. During 2017 Barclays reduced its shareholding in BAGL. This resulted in the deconsolidation of BAGL from the Group as of 1 June 2017, with the residual holding recognised as an available for sale investment. Determining whether the Group has control of an entity is generally straightforward based on ownership of the majority of the voting capital. However, in certain instances, this determination will involve judgement, particularly in the case of structured entities where voting rights are often not the determining factor in decisions over the relevant activities. This judgement may involve assessing the purpose and design of the entity. It will also often be necessary to consider whether the Group, or another involved party with power over the relevant activities, is acting as a principal in its own right or as an agent on behalf of others. There is also often considerable judgement involved in the ongoing assessment of control over structured entities. In this regard, where market conditions have deteriorated such that the other investors’ exposures to the structure’s variable returns have been substantively eliminated, the Group may conclude that the managers of the structured entity are acting as its agent and therefore will consolidate the structured entity. An interest in equity voting rights exceeding 50% would typically indicate that the Group has control of an entity. However, the entity set out below is excluded from consolidation because the Group does not have exposure to its variable returns. Country of registration or incorporation Cayman Islands Company name Palomino Limited Percentage of voting rights held % 100 Equity shareholders’ funds £m 9 Retained profit for the year £m 7 This entity is managed by an external counterparty and consequently is not controlled by the Group. Interests relating to this entity are included in Note 37. 306 Barclays PLC Annual Report 2017 home.barclays/annualreport Scope of consolidationNotes to the financial statements36 Principal subsidiaries continued Significant restrictions As is typical for a Group of its size and international scope, there are restrictions on the ability of Barclays PLC to obtain distributions of capital, access the assets or repay the liabilities of members of its Group due to the statutory, regulatory and contractual requirements of its subsidiaries and due to the protective rights of non-controlling interests. These are considered below. Regulatory requirements Barclays’ principal subsidiary companies have assets and liabilities before intercompany eliminations of £1,407bn (2016: £1,553bn) and £1,341bn (2016: £1,480bn) respectively. The assets and liabilities are subject to prudential regulation and regulatory capital requirements in the countries in which they are regulated. These require entities to maintain minimum capital levels which cannot be returned to the Parent company, Barclays PLC on a going concern basis. In order to meet capital requirements, subsidiaries may hold certain equity-accounted and debt-accounted issued financial instruments and non-equity instruments such as Tier 1 and Tier 2 capital instruments and other forms of subordinated liabilities. Refer to Note 33 and Note 30 for particulars of these instruments. These instruments may be subject to cancellation clauses or preference share restrictions that would limit the ability of the entity to repatriate the capital on a timely basis. Liquidity requirements Regulated subsidiaries of the Group are required to meet PRA and local regulatory requirements pertaining to liquidity. Some of the subsidiaries affected are Barclays Bank PLC and Barclays Capital Inc which must maintain daily compliance with the regulatory minimum. See pages 166 to 178 for further details of liquidity requirements, including those of our significant subsidiaries. Statutory requirements The Group’s subsidiaries are subject to statutory requirements not to make distributions of capital and unrealised profits and generally to maintain solvency. These requirements restrict the ability of subsidiaries to make remittances of dividends to Barclays PLC, the ultimate parent, except in the event of a legal capital reduction or liquidation. In most cases, the regulatory restrictions referred to above exceed the statutory restrictions. Contractual requirements Asset encumbrance The Group uses its financial assets to raise finance in the form of securitisations and through the liquidity schemes of central banks. Once encumbered, the assets are not available for transfer around the Group. The assets typically affected are disclosed in Note 40. Assets held by consolidated structured entities None of the assets (2016: £99m) included in the Group’s balance sheet relate to consolidated investment funds, held to pay return and principal to the holders of units in the funds. Any assets held in these funds cannot be transferred to other members of the Group. The decrease since 2016 is due to the sale of the French Funds Business. Other restrictions The Group is required to maintain balances with central banks and other regulatory authorities, and these amounted to £3,360m (2016: £4,254m). 37 Structured entities A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are generally created to achieve a narrow and well-defined objective with restrictions around their ongoing activities. Depending on the Group’s power over the activities of the entity and its exposure to and ability to influence its own returns, it may consolidate the entity. In other cases, it may sponsor or have exposure to such an entity but not consolidate it. Consolidated structured entities The Group has contractual arrangements which may require it to provide financial support to the following types of consolidated structured entities: Securitisation vehicles The Group uses securitisation as a source of financing and a means of risk transfer. Refer to Note 39 for further detail. The Group, in previous periods, has provided liquidity facilities to certain securitisation vehicles. At 31 December 2017, there were no outstanding loan commitments to these entities (2016: £152m). Commercial paper (CP) and medium-term note conduits The Group provided £10.2bn (2016: £9bn) in undrawn contractual backstop liquidity facilities to CP conduits. Fund management entities In previous periods, Barclays had contractually guaranteed the performance of certain cash investments in a number of managed investment funds which resulted in their consolidation. As at 31 December 2017, the notional value of the guarantees were £nil (2016: £99m) as the European Wealth Funds associated with these guarantees were either closed or ownership has been transferred outside the Group and they are no longer consolidated. home.barclays/annualreport Barclays PLC Annual Report 2017 307 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance37 Structured entities continued Employee benefit and other trusts The Group provides capital contributions to employee share trusts to enable them to meet their obligations to employees under share-based payment plans. During 2017, the Group provided undrawn liquidity facilities of £1.8bn (2016: £0.4bn) to certain trusts. Unconsolidated structured entities in which the Group has an interest An interest in a structured entity is any form of contractual or non-contractual involvement which creates variability in returns arising from the performance of the entity for the Group. Such interests include holdings of debt or equity securities, derivatives that transfer financial risks from the entity to the Group, lending, loan commitments, financial guarantees and investment management agreements. Interest rate swaps, foreign exchange derivatives that are not complex and which expose the Group to insignificant credit risk by being senior in the payment waterfall of a securitisation and derivatives that are determined to introduce risk or variability to a structured entity are not considered to be an interest in an entity and have been excluded from the disclosures below. The nature and extent of the Group’s interests in structured entities is summarised below: Summary of interests in unconsolidated structured entities As at 31 December 2017 Assets Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Other assets Total assets Liabilities Derivative financial instruments As at 31 December 2016 Assets Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Other assets Total assets Liabilities Derivative financial instruments Secured financing £m Short-term traded interests £m Traded derivatives £m Other interests £m Total £m – 31,520 – – 5,481 753 – 37,754 10,788 – – – – – – 10,788 – – 4,380 – – – – 4,380 699 2,721 – – 17,386 – 509 21,315 11,487 34,241 4,380 – 22,867 753 509 74,237 – – 5,193 3,356 8,549 – 22,706 – – – 6,338 – 29,044 8,436 – – – – – – 8,436 – – 4,731 – – – – 4,731 516 367 2,130 4,915 24,142 – 919 32,989 8,952 23,073 6,861 4,915 24,142 6,338 919 75,200 – – 3,567 2,130 5,697 Secured financing arrangements, short-term traded interests and traded derivatives are typically managed under market risk management policies described on page 129 which includes an indication of the change of risk measures compared to last year. For this reason, the total assets of these entities are not considered meaningful for the purposes of understanding the related risks and so have not been presented. Other interests include conduits and lending where the interest is driven by normal customer demand. Secured financing The Group routinely enters into reverse repurchase contracts, stock borrowing and similar arrangements on normal commercial terms where the counterparty to the arrangement is a structured entity. Due to the nature of these arrangements, especially the transfer of collateral and ongoing margining, the Group has minimal exposure to the performance of the structured entity counterparty. This includes margin lending which is presented under Loans and advances to customers in 2017 to align to the balance sheet presentation. In 2016 margin lending was presented in Reverse repurchase agreements and other similar secured lending within Note 37. A description of these transactions is included in Note 22. Short-term traded interests The Group buys and sells interests in structured entities as part of its trading activities, for example, retail mortgage backed securities, collateralised debt obligations and similar interests. Such interests are typically held individually or as part of a larger portfolio for no more than 90 days. In such cases, the Group typically has no other involvement with the structured entity other than the securities it holds as part of trading activities and its maximum exposure to loss is restricted to the carrying value of the asset. As at 31 December 2017, £9,645m (2016: £6,568m) of the Group’s £10,788m (2016: £8,436m) short-term traded interests were comprised of debt securities issued by asset securitisation vehicles. 308 Barclays PLC Annual Report 2017 home.barclays/annualreport Scope of consolidationNotes to the financial statements37 Structured entities continued Traded derivatives The Group enters into a variety of derivative contracts with structured entities which reference market risk variables such as interest rates, foreign exchange rates and credit indices among other things. The main derivative types which are considered interests in structured entities include index-based and entity specific credit default swaps, balance guaranteed swaps, total return swaps, commodities swaps, and equity swaps. A description of the types of derivatives and the risk management practices are detailed in Note 15. The risk of loss may be mitigated through ongoing margining requirements as well as a right to cash flows from the structured entity which are senior in the payment waterfall. Such margining requirements are consistent with market practice for many derivative arrangements and in line with the Group’s normal credit policies. Derivative transactions require the counterparty to provide cash or other collateral under margining agreements to mitigate counterparty credit risk. The Group is mainly exposed to settlement risk on these derivatives which is mitigated through daily margining. Total notionals amounted to £1,680,615m (2016: £1,183,215m). Except for credit default swaps where the maximum exposure to loss is the swap notional amount, it is not possible to estimate the maximum exposure to loss in respect of derivative positions as the fair value of derivatives is subject to changes in market rates of interest, exchange rates and credit indices which by their nature are uncertain. In addition, the Group’s losses would be subject to mitigating action under its traded market risk and credit risk policies that require the counterparty to provide collateral in cash or other assets in most cases. Other interests in unconsolidated structured entities The Group’s interests in structured entities not held for the purposes of short-term trading activities are set out below, summarised by the purpose of the entities and limited to significant categories, based on maximum exposure to loss. Nature of interest As at 31 December 2017 Trading portfolio assets – Debt securities Financial assets designated at fair value – Loans and advances Loans and advances to banks Loans and advances to customers Other assets Total on-balance sheet exposures Total off-balance sheet notional amounts Maximum exposure to loss Total assets of the entity As at 31 December 2016 Trading portfolio assets – Debt securities – Equity securities Financial assets designated at fair value – Loans and advances – Debt securities – Equity securities Derivative financial instruments Loans and advances to banks Loans and advances to customers Other assets Total on-balance sheet exposures Total off-balance sheet notional amounts Maximum exposure to loss Total assets of the entity Multi-seller conduit programmes £m Investment funds and trusts £m Lending £m Others £m Total £m – – – 699 699 – – 5,424 468 5,892 6,270 12,162 103,057 – – 11,497 11 11,508 6,337 17,845 179,994 – – – 8 8 – 8 11,137 2,721 – 465 22 3,907 446 4,353 22,669 2,721 – 17,386 509 21,315 13,053 34,368 316,857 – – – – – – – – – – – 6,016 5 6,021 2,734 8,755 75,535 260 50 – – 4,890 16,754 7 21,961 9,873 31,834 492,950 – – – – – – 13 13 – 13 18,550 441 75 4 48 5 2,130 25 1,372 894 4,994 1,739 6,733 39,342 441 75 264 98 5 2,130 4,915 24,142 919 32,989 14,346 47,335 626,377 Maximum exposure to loss Unless specified otherwise below, the Group’s maximum exposure to loss is the total of its on-balance sheet positions and its off-balance sheet arrangements, being loan commitments and financial guarantees. Exposure to loss is mitigated through collateral, financial guarantees, the availability of netting and credit protection held. Multi-seller conduit programme The multi-seller conduit engages in providing financing to various clients and holds whole or partial interests in pools of receivables or similar obligations. These instruments are protected from loss through over-collateralisation, seller guarantees, or other credit enhancements provided to the conduit. The Group’s off-balance sheet exposure included in the table above represents liquidity facilities that are provided to the conduit for the benefit of the holders of the commercial paper issued by the conduit and will only be drawn where the conduit is unable to access the commercial paper market. If these liquidity facilities are drawn, the Group is protected from loss through over-collateralisation, seller guarantees, or other credit enhancements provided to the conduit. home.barclays/annualreport Barclays PLC Annual Report 2017 309 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance37 Structured entities continued Lending The portfolio includes lending provided by the Group to unconsolidated structured entities in the normal course of its lending business to earn income in the form of interest and lending fees and includes loans to structured entities that are generally collateralised by property, equipment or other assets. All loans are subject to the Group’s credit sanctioning process. Collateral arrangements are specific to the circumstances of each loan with additional guarantees and collateral sought from the sponsor of the structured entity for certain arrangements. During the period the Group incurred an impairment of £11m (2016: £24m) against such facilities. Investment funds and trusts In the course of its fund management activities, the Group establishes pooled investment funds that comprise investments of various kinds, tailored to meet certain investors’ requirements. The Group’s interest in funds is generally restricted to a fund management fee, the value of which is typically based on the performance of the fund. The Group acts as trustee to a number of trusts established by or on behalf of its clients. The purpose of the trusts, which meet the definition of structured entities, is to hold assets on behalf of beneficiaries. The Group’s interest in trusts is generally restricted to unpaid fees which, depending on the trust, may be fixed or based on the value of the trust assets. Barclays has no other risk exposure to the trusts. Other This includes fair value loans with structured entities where the market risk is materially hedged with corresponding derivative contracts, interests in debt securities issued by securitisation vehicles and drawn and undrawn loan facilities to these entities. Assets transferred to sponsored unconsolidated structured entities Assets transferred to sponsored unconsolidated structured entities were immaterial. 38 Investments in associates and joint ventures Accounting for associates and joint ventures Barclays applies IAS 28 Investments in Associates and IFRS 11 Joint Arrangements. Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies. Generally the Group holds more than 20%, but less than 50%, of their voting shares. Joint ventures are arrangements where the Group has joint control and rights to the net assets of the entity. The Group’s investments in associates and joint ventures are initially recorded at cost and increased (or decreased) each year by the Group’s share of the post acquisition profit/(loss). The Group ceases to recognise its share of the losses of equity accounted associates when its share of the net assets and amounts due from the entity have been written off in full, unless it has a contractual or constructive obligation to make good its share of the losses. In some cases, investments in these entities may be held at fair value through profit or loss, for example, those held by private equity businesses. There are no individually significant investments in joint ventures or associates held by Barclays. Equity accounted Held at fair value through profit or loss Total Associates £m 402 – 402 2017 Joint ventures £m 316 447 763 Total £m 718 447 1,165 Associates £m 321 – 321 2016 Joint ventures £m 363 484 847 Total £m 684 484 1,168 Summarised financial information for the Group’s equity accounted associates and joint ventures is set out below. The amounts shown are the net income of the investees, not just the Group’s share for the year ended 31 December 2017, with the exception of certain undertakings for which the amounts are based on accounts made up to dates not earlier than three months before the balance sheet date. Profit from continuing operations Other comprehensive expense Total comprehensive income from continuing operations Associates 2017 £m 117 – 117 2016 £m 33 – 33 Joint ventures 2017 £m 77 (15) 62 2016 £m 64 19 83 Unrecognised shares of the losses of individually immaterial associates and joint ventures were £nil (2016: £nil). The Group’s associates and joint ventures are subject to statutory or contractual requirements such that they cannot make remittances of dividends or make loan repayments to Barclays PLC without agreement from the external parties. The Group’s share of commitments and contingencies of its associates and joint ventures comprised unutilised credit facilities provided to customers of £1,712m (2016: £1,755m). In addition, the Group has made commitments to finance or otherwise provide resources to its joint ventures and associates of £246m (2016: £263m). 310 Barclays PLC Annual Report 2017 home.barclays/annualreport Scope of consolidationNotes to the financial statements39 Securitisations Accounting for securitisations The Group uses securitisations as a source of finance and a means of risk transfer. Such transactions generally result in the transfer of contractual cash flows from portfolios of financial assets to holders of issued debt securities. Securitisations may, depending on the individual arrangement, result in continued recognition of the securitised assets and the recognition of the debt securities issued in the transaction; lead to partial continued recognition of the assets to the extent of the Group’s continuing involvement in those assets or to derecognition of the assets and the separate recognition, as assets or liabilities, of any rights and obligations created or retained in the transfer. Full derecognition only occurs when the Group transfers both its contractual right to receive cash flows from the financial assets, or retains the contractual rights to receive the cash flows, but assumes a contractual obligation to pay the cash flows to another party without material delay or reinvestment, and also transfers substantially all the risks and rewards of ownership, including credit risk, prepayment risk and interest rate risk. In the course of its normal banking activities, the Group makes transfers of financial assets, either where legal rights to the cash flows from the asset are passed to the counterparty or beneficially, where the Group retains the rights to the cash flows but assumes a responsibility to transfer them to the counterparty. Depending on the nature of the transaction, this may result in derecognition of the assets in their entirety, partial derecognition or no derecognition of the assets subject to the transfer. A summary of the main transactions, and the assets and liabilities and the financial risks arising from these transactions, is set out below: Transfers of financial assets that do not result in derecognition Securitisations The Group was party to securitisation transactions involving its residential mortgage loans and credit card balances. In these transactions, the assets, interests in the assets, or beneficial interests in the cash flows arising from the assets, are transferred to a special purpose entity, which then issues interest bearing debt securities to third party investors. Securitisations may, depending on the individual arrangement, result in continued recognition of the securitised assets and the recognition of the debt securities issued in the transaction. Partial continued recognition of the assets to the extent of the Group’s continuing involvement in those assets can also occur or derecognition of the assets and the separate recognition, as assets or liabilities, of any rights and obligations created or retained in the transfer. The following table shows the carrying amount of securitised assets that have not resulted in full derecognition, together with the associated liabilities, for each category of asset on the balance sheet: Loans and advances to customers Residential mortgage loans Credit cards, unsecured and other retail lending Total 2017 2016 Assets Liabilities Assets Liabilities Carrying amount £m Fair value £m Carrying amount £m Fair value £m Carrying amount £m Fair value £m Carrying amount £m Fair value £m – – – – 125 120 (107) (107) 3,772 3,772 3,757 3,757 (3,635) (3,635) (3,626) (3,626) 5,094 5,219 5,084 5,204 (4,926) (5,033) (4,931) (5,038) Balances included within loans and advances to customers represent securitisations where substantially all the risks and rewards of the asset have been retained by the Group. The relationship between the transferred assets and the associated liabilities is that holders of notes may only look to cash flows from the securitised assets for payments of principal and interest due to them under the terms of their notes, although the contractual terms of their notes may be different to the maturity and interest of the transferred assets. For transfers of assets in relation to repurchase agreements, refer to Note 22 and Note 40. home.barclays/annualreport Barclays PLC Annual Report 2017 311 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance39 Securitisations continued Continuing involvement in financial assets that have been derecognised In some cases, the Group may have transferred a financial asset in its entirety but may have continuing involvement in it. This arises in asset securitisations where loans and asset backed securities were derecognised as a result of the Group’s involvement, mainly with CLOs and CMBS. Continuing involvement largely arises from providing financing into these structures in the form of retained notes, which do not bear first losses. The table below shows the potential financial implications of such continuing involvement: Type of transfer 2017 CLO and other assets Commercial mortgage backed securities Total 2016 CLO and other assets Commercial mortgage backed securities Total Continuing involvementa Carrying amount £m Fair value £m Maximum exposure to loss £m Gain/(loss) from continuing involvement For the year ended £m Cumulative to 31 December £m – 94 94 10 – 10 – 94 94 10 – 10 – 94 94 10 – 10 – 1 1 – – – – 1 1 (3) – (3) Note a Assets which represent the Group’s continuing involvement in derecognised assets are recorded in Loans and advances and Trading portfolio assets. 40 Assets pledged Assets are pledged as collateral to secure liabilities under repurchase agreements, securitisations and stock lending agreements or as security deposits relating to derivatives. Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 171 (unaudited), other than those held in commercial paper conduits. In these transactions, Barclays will be required to step in to provide financing itself under a liquidity facility if the vehicle cannot access the commercial paper market. The following table summarises the nature and carrying amount of the assets pledged as security against these liabilities: Trading portfolio assets Financial assets at fair value Loans and advances to customers Cash collateral Financial investments Non current assets held for sale Assets pledged 2017 £m 73,899 4,798 41,772 56,351 15,058 – 191,878 2016 £m 51,241 3,195 30,414 68,797 13,053 117 166,817 Barclays has an additional £9bn (2016: £14bn) of loans and advances within its asset backed funding programmes that can readily be used to raise additional secured funding and are available to support future issuance. Total assets pledged includes a collateral pool put in place to provide security for the UKRF funding deficit. Refer to Note 35 for further details. Collateral held as security for assets Under certain transactions, including reverse repurchase agreements and stock borrowing transactions, the Group is allowed to resell or re-pledge the collateral held. The fair value at the balance sheet date of collateral accepted and re-pledged to others was as follows: Fair value of securities accepted as collateral Of which fair value of securities re-pledged/transferred to others Additional disclosure has been included in collateral and other credit enhancements (see pages 140 and 141). 2017 £m 608,412 547,637 2016 £m 466,975 405,582 312 Barclays PLC Annual Report 2017 home.barclays/annualreport Scope of consolidationNotes to the financial statementsNotes to the financial statements Other disclosure matters The notes included in this section focus on related party transactions, Auditors’ remuneration and Directors’ remuneration. Related parties include any subsidiaries, associates, joint ventures, entities under common directorships and Key Management Personnel. 41 Related party transactions and Directors’ remuneration Related party transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions, or one other party controls both. The definition includes subsidiaries, associates, joint ventures and the Group’s pension schemes. Subsidiaries Transactions between Barclays PLC and its subsidiaries also meet the definition of related party transactions. Where these are eliminated on consolidation, they are not disclosed in the Group Financial Statements. Transactions between Barclays PLC and its subsidiary, Barclays Bank PLC, are fully disclosed in Barclays PLC’s balance sheet and income statement. A list of the Group’s principal subsidiaries is shown in Note 36. Associates, joint ventures and other entities The Group provides banking services to its associates, joint ventures, the Group pension funds (principally the UK Retirement Fund) and to entities under common directorships, providing loans, overdrafts, interest and non-interest bearing deposits and current accounts to these entities as well as other services. Group companies also provide investment management and custodian services to the Group pension schemes. The Group also provides banking services for unit trusts and investment funds managed by Group companies, which are not individually material. All of these transactions are conducted on the same terms as third party transactions. Summarised financial information for the Group’s investments in associates and joint ventures is set out in Note 38. Amounts included in the Group’s financial statements, in aggregate, by category of related party entity are as follows: For the year ended and as at 31 December 2017 Income/(expense) Impairment releases Total assets Total liabilities For the year ended and as at 31 December 2016 Income/(expense) Impairment charges Total assets Total liabilities For the year ended and as at 31 December 2015 Income/(expense) Impairment charges Total assets Total liabilities Associates £m Joint ventures £m Pension funds, unit trusts and investment funds £m (20) 2 2 75 (20) (13) 72 94 (19) (4) 36 158 38 – 1,048 2 7 – 2,244 95 40 (2) 1,578 133 4 – 2 162 4 – – 260 4 – – 184 Guarantees, pledges or commitments given in respect of these transactions in the year were £27m (2016: £940m) predominantly relating to joint ventures. No guarantees, pledges or commitments were received in the year. Derivatives transacted on behalf of the pensions funds, unit trusts and investment funds were £3m (2016: £3m). Key Management Personnel The Group’s Key Management Personnel, and persons connected with them, are also considered to be related parties for disclosure purposes. Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of Barclays PLC (directly or indirectly) and comprise the Directors of Barclays PLC and the Officers of the Group, certain direct reports of the Group Chief Executive and the heads of major business units and functions. There were no material related party transactions with entities under common directorship where a Director or other member of Key Management Personnel (or any connected person) is also a Director or other member of Key Management Personnel (or any connected person) of Barclays. The Group provides banking services to Directors and other Key Management Personnel and persons connected to them. Transactions during the year and the balances outstanding were as follows: Loans outstanding As at 1 January Loans issued during the year Loan repayments during the year/change of key management personnel As at 31 December 2017 £m 9.2 0.5 (4.9) 4.8 2016 £m 9.8 0.6 (1.2) 9.2 home.barclays/annualreport Barclays PLC Annual Report 2017 313 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance41 Related party transactions and Directors’ remuneration continued No allowances for impairment were recognised in respect of loans to Directors or other members of Key Management Personnel (or any connected person). Deposits outstanding As at 1 January Deposits received during the year Deposits repaid during the year/change of key management personnel As at 31 December 2017 £m 7.3 25.7 (26.1) 6.9 2016 £m 116.5 18.9 (128.1) 7.3 Total commitments outstanding Total commitments outstanding refers to the total of any undrawn amounts on credit cards and/or overdraft facilities provided to Key Management Personnel. Total commitments outstanding as at 31 December 2017 were £0.3m (2016: £0.2m). All loans to Directors and other Key Management Personnel (and persons connected to them), (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons and (c) did not involve more than a normal risk of collectability or present other unfavourable features. Remuneration of Directors and other Key Management Personnel Total remuneration awarded to Directors and other Key Management Personnel below represents the awards made to individuals that have been approved by the Board Remuneration Committee as part of the latest remuneration decisions, and is consistent with the approach adopted for disclosures set out on pages 93 to 116. Costs recognised in the income statement reflect the accounting charge for the year included within operating expenses. The difference between the values awarded and the recognised income statement charge principally relates to the recognition of deferred costs for prior year awards. Figures are provided for the period that individuals met the definition of Directors and other Key Management Personnel. Salaries and other short-term benefits Pension costs Other long-term benefits Share-based payments Employer social security charges on emoluments Costs recognised for accounting purposes Employer social security charges on emoluments Other long-term benefits – difference between awards granted and costs recognised Share-based payments – difference between awards granted and costs recognised Total remuneration awarded Disclosure required by the Companies Act 2006 The following information regarding Directors is presented in accordance with the Companies Act 2006: Aggregate emolumentsa Amounts paid under LTIPsb 2017 £m 33.9 0.1 18.4 26.8 9.6 88.8 (9.6) (9.8) (11.7) 57.7 2017 £m 8.5 1.1 9.6 2016 £m 31.9 0.2 11.0 21.9 6.2 71.2 (6.2) (2.5) (8.9) 53.6 2016 £m 8.1 – 8.1 Notes a The aggregate emoluments include amounts paid for the 2017 year. In addition, deferred share awards for 2017 will be made to James E Staley and Tushar Morzaria which will only vest subject to meeting certain conditions. The total of the deferred share awards is £1m (2016: £1.4m). b The figure above for ‘Amounts paid under LTIPs’ relates to an LTIP award that was released to Tushar Morzaria in 2017. Dividend shares released on the award are excluded. The LTIP figure in the single total figure table for executive Directors’ 2017 remuneration in the Directors’ Remuneration report relates to the award that is scheduled to be released in 2018 in respect of the 2015-2017 LTIP cycle. There were no pension contributions paid to defined contribution schemes on behalf of Directors (2016: £nil). There were no notional pension contributions to defined contribution schemes. As at 31 December 2017, there were no Directors accruing benefits under a defined benefit scheme (2016: nil). Directors’ and Officers’ shareholdings and options The beneficial ownership of ordinary share capital of Barclays PLC by all Directors and Officers of Barclays PLC (involving 22 persons) at 31 December 2017 amounted to 12,460,877 (2016: 11,464,580) ordinary shares of 25p each (0.07% of the ordinary share capital outstanding). At 31 December 2017, executive Directors and Officers of Barclays PLC (involving 11 persons) held options to purchase a total of 6,000 (2016: 22,527) Barclays PLC ordinary shares of 25p each at a price of 120p under Sharesave. Advances and credit to Directors and guarantees on behalf of Directors In accordance with Section 413 of the Companies Act 2006, the total amount of advances and credits made available in 2017 to persons who served as Directors during the year was £0.2m (2016: £0.2m). The total value of guarantees entered into on behalf of Directors during 2017 was £nil (2016: £nil). 314 Barclays PLC Annual Report 2017 home.barclays/annualreport Other disclosure mattersNotes to the financial statements42 Auditors’ remuneration Auditors’ remuneration is included within consultancy, legal and professional fees in administration and general expenses and comprises: Audit of the Group’s annual accounts Other services: Audit of the Company’s subsidiariesa Other audit related feesb Other servicesc Total Auditors’ remuneration 2017 £m 11 27 8 2 48 2016 £m 14 27 4 4 49 2015 £m 13 21 7 2 43 Notes a Comprises the fees for the statutory audit of subsidiaries both inside and outside the UK and fees for work performed by associates of KPMG or PwC in respect of the consolidated financial statements of the Company. b Comprises services in relation to statutory and regulatory filings. These include audit services for the review of the interim financial information under the Listing Rules of the UK listing authority. c Includes consultation on tax matters, tax advice relating to transactions and other tax planning and advice. KPMG became the Group’s principal Auditor in 2017. PwC was the principal Auditor in 2016 and 2015. The figures shown in the above table relate to fees paid to KPMG or PwC as principal Auditor. In addition, fees paid to KPMG in relation to discontinued operations were £4m (PwC 2016: £12m, PwC 2015: £10m). 43 Assets included in disposal groups classified as held for sale and associated liabilities Accounting for non-current assets held for sale and associated liabilities The group applies IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Non-current assets (or disposal groups) are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction rather than continuing use. In order to be classified as held for sale, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary and the sale must be highly probable. Non-current assets (or disposal groups) held for sale are measured at the lower of carrying amount and fair value less cost to sell. Assets included in disposal groups classified as held for sale Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Financial investments Loans and advances to banks Loans and advances to customers Prepayments, accrued income and other assets Investments in associates and joint ventures Property, plant and equipment Goodwill Intangible assets Current and deferred tax assets Retirement benefit assets Total Balance of impairment unallocated under IFRS 5 Total assets classified as held for sale Total 2017 £m – – – 3 – – – 1,164 – – 26 – – – – 1,193 – 1,193 Total 2016 £m 2,930 570 3,084 6,984 1,992 7,737 1,666 43,504 696 87 954 997 570 149 33 71,953 (499) 71,454 home.barclays/annualreport Barclays PLC Annual Report 2017 315 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance43 Assets included in disposal groups classified as held for sale and associated liabilities continued Liabilities included in disposal groups classified as held for sale Deposits from banks Items in the course of collection due to banks Customer accounts Repurchase agreements and other similar secured borrowing Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issue Subordinated liabilities Accruals, deferred income and other liabilities Provisions Current and deferred tax liabilities Retirement benefit liabilities Total liabilities classified as held for sale Net assets classified as held for sale Expected contribution to BAGL Disposal group post-contribution Total 2017 £m – – – – – – – – – – – – – – 1,193 – 1,193 Total 2016 £m 2,149 373 42,431 597 388 7,325 1,611 7,997 934 1,180 103 162 42 65,292 6,162 866 7,028 During the year, a number of disposal groups classified as held for sale have been disposed of. The £70bn decrease in assets is driven by the disposals of BAGL (£65bn), the French retail business (£4bn), the Egypt business (£1bn), Barclays Vida Pensiones (£0.7bn) and the Zimbabwe business (£0.4bn). The associated liabilities of the above disposal groups have also been sold in the year. Discontinued Operations On 1 March 2016, Barclays announced its intention to reduce the Group’s 62.3% interest in BAGL to a level which would permit Barclays to deconsolidate BAGL from a regulatory perspective and, prior to that, from an accounting perspective. From this date, BAGL was treated as a discontinued operation. On 5 May 2016, Barclays sold 12.2% of the Group’s interest in BAGL and on 1 June 2017 Barclays sold a further 33.7% of BAGL’s issued share capital, resulting in the accounting deconsolidation of BAGL from the Barclays Group. As a result, as of 1 June 2017 BAGL was consequently no longer reported as a discontinued operation. At this time, Barclays’ holding in BAGL technically met the requirements to be treated as an Associate. However, following a revision of its governance rights in July 2017 and the difference being immaterial, the holding was treated as an available for sale asset from the transaction date. In Q317 Barclays contributed 1.5% of BAGL’s ordinary shares to a Black Economic Empowerment scheme, resulting in Barclays accounting for 126 million ordinary shares in BAGL, representing 14.9% of BAGL’s issued share capital. The retained investment is reported as an available for sale asset, in the Head Office segment, with Barclays’ share of BAGL’s dividend recognised in the Head Office income statement. Prior to the disposal of shares on 1 June 2017, BAGL met the requirements for presentation as a discontinued operation. As such, the results, which have been presented as the profit after tax and non-controlling interest in respect of the discontinued operation on the face of the Group income statement, are analysed in the income statement below. The income statement, statement of other comprehensive income and cash flow statement below represent five months of results as a discontinued operation to 31 May 2017, compared to the full year ended 31 December 2016. Barclays Africa disposal group income statement For the year ended 31 December Net interest income Net fee and commission income Net trading income Net investment income Net premiums from insurance contracts Other income Total income Net claims and benefits incurred on insurance contracts Total income net of insurance claims Credit impairment charges and other provisions Net operating income Staff costs Administration and general expensesa Operating expenses Share of post-tax results of associates and joint ventures (Loss)/profit before tax Taxation (Loss)/profit after taxb Attributable to: Equity holders of the parent Non-controlling interests (Loss)/profit after taxb 2017 £m 1,024 522 149 30 161 (16) 1,870 (84) 1,786 (177) 1,609 (586) (1,634) (2,220) 5 (606) (154) (760) 2016 £m 2,169 1,072 281 45 362 8 3,937 (191) 3,746 (445) 3,301 (1,186) (1,224) (2,410) 6 897 (306) 591 (900) 140 (760) 189 402 591 Notes a Includes impairment of £1,090m (2016: £nil). b Total loss in respect of the discontinued operation was £2,195m which included the £60m loss on sale and £1,375m loss on recycling of other comprehensive loss on reserves. 316 Barclays PLC Annual Report 2017 home.barclays/annualreport Other disclosure mattersNotes to the financial statements43 Assets included in disposal groups classified as held for sale and associated liabilities continued Other comprehensive income relating to discontinued operations is as follows: For the year ended 31 December Available for sale assets Currency translation reserves Cash flow hedge reserves Other comprehensive (loss)/income, net of tax from discontinued operations The cash flows attributed to the discontinued operation are as follows: For the year ended 31 December Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Effect of exchange rates on cash and cash equivalents Net increase in cash and cash equivalents 2017 £m (3) (38) 19 (22) 2017 £m 540 (245) (165) (29) 101 2016 £m (9) 1,451 89 1,531 2016 £m 1,164 (691) (105) 37 405 44 Barclays PLC (the Parent company) Other income Other income of £690m (2016: £334m) includes £639m (2016: £457m) of income received from gross coupon payments on Barclays Bank PLC issued AT1 securities. Non-Current Assets and Liabilities Investment in subsidiaries The investment in subsidiaries of £39,354m (2016: £36,553m) predominantly represents investments made into Barclays Bank PLC, including £8,986m (2016: £6,486m) of AT1 securities. The increase of £2,801m during the year was driven by AT1 issuances of £2,500m during the period, as well as a £300m investment in Barclays Services Limited (the ‘Group Service Company’). The Group Service Company was established in September 2017 as a direct subsidiary of Barclays PLC to deliver operational continuity and to drive operational efficiencies across the Group. In September 2017, Barclays transferred c.£3.8bn of assets and liabilities from Barclays Bank PLC and its subsidiaries to the Group Service Company. Loans and advances to subsidiaries, subordinated liabilities and debt securities in issue During the period, Barclays PLC issued $2bn of Fixed Rate Subordinated Notes, €1.5bn of Fixed Rate Subordinated Notes and SGD 0.2bn Fixed Rate Subordinated Notes included within the subordinated liabilities balance of £6,501m (2016: £3,789m), $5bn of Fixed and Floating Rate Senior Notes, £1.95bn of Fixed Rate Senior Notes and €0.5bn Fixed Rate Senior Notes included within the debt securities in issue balance of £22,110m (2016: £16,893m). The proceeds raised through these transactions were used to invest in Barclays Bank PLC in each case with a ranking corresponding to the notes issued by Barclays PLC and included within the loans and advances to subsidiaries balance of £23,970m (2016: £19,421m). Financial investments The financial investment assets relate to loans made to subsidiaries of the Group accounted for as available for sale instruments. These include a feature that allows for the loan to be written down in whole or in part by the borrower only in the event that the liabilities of the subsidiary would otherwise exceed its assets. Derivative financial instrument The derivative financial instrument of £161m (2016: £268m) held by the Parent company represents Barclays PLC’s right to receive a Capital Note for no additional consideration, in the event the Barclays PLC consolidated CRD IV CET1 ratio (FSA October 2012 transitional statement) falls below 7% at which point the notes are automatically assigned by the holders to Barclays PLC. Management of internal investments, loans and advances Barclays PLC retains the discretion to manage the nature of its internal investments in subsidiaries according to their regulatory and business needs. As we implement our structural reform programme, Barclays PLC expects to invest capital and funding in Barclays Bank PLC and other Group subsidiaries such as the Group Service Company, the US IHC and the UK ring-fenced bank. In October 2017, the Bank of England published a consultation on ‘Internal MREL’ and following that consultation a final statement of policy is expected to be published in H1 2018. Accordingly, during the course of 2018 Barclays expects to restructure certain of its investments in subsidiaries, including to subordinate internal MREL beneath operating liabilities, to the extent required to achieve compliance with internal MREL requirements which are expected to be in effect from 1 January 2019. Total equity Called up share capital and share premium of Barclays PLC was £22,045m (2016: £21,842m). Other equity instruments of £8,943m (2016: £6,453m) comprises of AT1 securities. For further details please refer to Note 31. Structural reform Barclays’ plans for UK ring-fencing remain on track. The relevant court processes began in November 2017 with the Sanction hearing to be held on 26 and 27 February 2018 at which the Court will be requested to sanction Barclays’ ring-fencing transfer scheme. We intend to complete the reorganisation and establish the UK ring-fenced bank in April 2018, ahead of the 1 January 2019 legislative deadline for implementation. home.barclays/annualreport Barclays PLC Annual Report 2017 317 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance45 Related undertakings The Group’s corporate structure consists of a number of related undertakings, comprising subsidiaries, joint ventures, associates and significant other interests. A full list of these undertakings, the country of incorporation and the ownership of each share class is set out below. The information is provided as at 31 December 2017. The entities are grouped by the countries in which they are incorporated. The profits earned by the activities of these entities are in some cases taxed in countries other than the country of incorporation. Barclays’ 2017 Country Snapshot provides details of where the Group carries on its business, where its profits are subject to tax and the taxes it pays in each country it operates in. Wholly owned subsidiaries Unless otherwise stated the undertakings below are wholly owned and consolidated by Barclays and the share capital disclosed comprises ordinary and/or common shares, 100% of the nominal value of which is held by Group subsidiaries. Notes A Directly held by Barclays PLC B Partnership Interest C Membership Interest D Trust Interest E F Guarantor Preference Shares G A Preference Shares H B Preference Shares I J K L Ordinary/Common Shares in addition to other shares A Ordinary Shares B Ordinary Shares C Ordinary Shares M F Ordinary Shares N O Ordinary Shares O W Ordinary Shares V Class A Ordinary Shares, Class A Preference Shares, Class B Ordinary Shares, Class C Ordinary Shares, Class C Preference Shares, Class D Ordinary Shares, Class D Preference Shares, Class E Ordinary Shares, Class E Preference Shares, Class F Ordinary Shares, Class F Preference Shares, Class H 2012 Ordinary Shares, Class H 2012 Preference Shares, Class H Ordinary Shares, Class H Preference Shares, Class I Preference Shares, Class J Preference Shares W First Class Common Shares, Second Class X Y Common Shares PEF Carry Shares EUR Tracker 1 Shares, GBP Tracker 1 Shares, USD Tracker 1 Shares, USD Tracker 2 Shares, USD Tracker 3 shares Z Not Consolidated (refer to Note 37) AA USD Linked Ordinary Shares BB Redeemable Class B Shares CC A Ordinary, Y Ordinary, Z Ordinary P Redeemable Ordinary Shares DD Nominal Shares Q Core Shares, Insurance (Classified) Shares EE A Ordinary, D Ordinary, ZI Ordinary R S T B, C, D, E (94.36%), F (94.36%), G (94.36%), H (94.36%), I (94.36%), J (95.23%) and K Class Shares A Unit Shares, B Unit Shares Class A Residual Shares, Class B Residual Shares U A Voting Shares, B Non-Voting Shares FF Z Ordinary GG Class A1 Ordinary Shares, Class A2 Ordinary Shares HH Class A Unit Shares II A Shares – Tranche I, Premium – Tranche I, C Shares – Tranche II, Premium – Tranche II Wholly owned subsidiaries United Kingdom – 1 Churchill Place, London, E14 5HP Aequor Investments Limited Ardencroft Investments Limited B D & B Investments Limited B.P.B. (Holdings) Limited Barafor Limited Barclay Leasing Limited Barclays (Security Realisation) Limited Barclays Aegis Trust Barclays Africa Group Holdings Limited Barclays Aldersgate Investments Limited Barclays Asset Management Limited Barclays Bank PLC Barclays Bank UK PLC Barclays Cantal Investments Trust Barclays Capital Asia Holdings Limited Barclays Capital Finance Limited Barclays Capital Japan Securities Holdings Limited Barclays Capital Luxembourg S.à.r.l. Trust Barclays Capital Margin Financing Limited Barclays Capital Nominees (No.2) Limited Barclays Capital Nominees (No.3) Limited Barclays Capital Nominees Limited Barclays Capital Principal Investments Limited Barclays Capital Securities Client Nominee Limited Barclays Capital Securities Limited Barclays CCP Funding LLP Barclays Converted Investments (No.2) Limited Barclays Converted Investments Limited Barclays Direct Investing Nominees Limited Barclays Directors Limited Barclays Equity Holdings Limited Barclays Equity Index Investments Bare Trust Barclays Executive Schemes Trustees Limited Barclays Financial Planning Nominee Company Limited Barclays Funds Investments Limited Barclays Global Shareplans Nominee Limited Barclays Group Holdings Limited Barclays Group Operations Limited Barclays Industrial Development Limited Note D J, K A, F, I D D F, I B D Wholly owned subsidiaries Barclays Industrial Investments Limited Barclays Insurance Services Company Limited Barclays Investment Management Limited Barclays Investment Solutions Limited Barclays Lamorak Trust Barclays Leasing (No.9) Limited Barclays Long Island Limited Barclays Luxembourg USD Holdings Trust Barclays Marlist Limited Barclays Mercantile Business Finance Limited Barclays Mercantile Limited Barclays Nominees (Branches) Limited Barclays Nominees (George Yard) Limited Barclays Nominees (K.W.S.) Limited Barclays Nominees (Provincial) Limited Barclays Pension Funds Trustees Limited Barclays Private Bank Barclays Private Banking Services Limited Barclays SAMS Limited Barclays Security Trustee Limited Barclays Services Limited Barclays Services (Japan) Limited Barclays Shea Limited Barclays Singapore Global Shareplans Nominee Limited Barclays Stockbrokers Limited Barclays Unquoted Investments Limited Barclays Unquoted Property Investments Limited Barclays USD Funding LLP Barclays Wealth Nominees Limited Barclayshare Nominees Limited Barcosec Limited Barclays (Barley) Limited Barometers Limited Barsec Nominees Limited BB Client Nominees Limited BMBF (No.21) Limited BMBF (No.24) Limited BMBF (No.3) Limited BMBF (No.6) Limited BMBF (No.9) Limited BMI (No.9) Limited BNRI ENG 2013 Limited Partnership Note B B B B B I, J, K B E J, K B B B B B G, H, I Note D D A A B I, J, K B Wholly owned subsidiaries BNRI ENG 2014 Limited Partnership BNRI ENG GP LLP BNRI England 2010 Limited Partnership BNRI England 2011 Limited Partnership BNRI England 2012 Limited Partnership Carnegie Holdings Limited Chapelcrest Investments Limited Clydesdale Financial Services Limited Cobalt Investments Limited Condor No.1 Limited Partnership CP Flower Guaranteeco (UK) Limited CP Propco 1 Limited CP Propco 2 Limited CP Topco Limited CPIA England 2008 Limited Partnership CPIA England 2009 Limited Partnership CPIA England No.2 Limited Partnership DMW Realty Limited Durlacher Nominees Limited Eagle Financial and Leasing Services (UK) Limited Equity Value Investments Limited Liability Partnership Equity Value Investments No.1 Limited Equity Value Investments No.2 Limited Finpart Nominees Limited FIRSTPLUS Financial Group PLC Foltus Investments Limited Gerrard Financial Planning Limited Gerrard Management Services Limited Gerrard Nominees Limited Global Dynasty Natural Resource Private Equity Limited Partnership Globe Nominees Limited Greig, Middleton Nominees Limited Hawkins Funding Limited Heraldglen Limited Investors In Infrastructure Limited J.V. Estates Limited Keepier Investments Kirsche Investments Limited Lombard Street Nominees Limited Long Island Assets Limited Maloney Investments Limited 318 Barclays PLC Annual Report 2017 home.barclays/annualreport Other disclosure mattersNotes to the financial statements 45 Related undertakings continued Wholly owned subsidiaries Menlo Investments Limited Mercantile Credit Company Limited Mercantile Leasing Company (No.132) Limited MK Opportunities LP Murray House Investment Management Limited Naxos Investments Limited North Colonnade Investments Limited Northwharf Investments Limited Northwharf Nominees Limited PIA England No.2 Limited Partnership Real Estate Participation Management Limited Real Estate Participation Services Limited Relative Value Investments UK Limited Liability Partnership Relative Value Trading Limited Roder Investments No.1 Limited Roder Investments No.2 Limited Ruthenium Investments Limited RVT CLO Investments LLP Solution Personal Finance Limited Surety Trust Limited Swan Lane Investments Limited US Real Estate Holdings No.1 Limited US Real Estate Holdings No.2 Limited US Real Estate Holdings No.3 Limited W.D. Pension Fund Limited Wedd Jefferson (Nominees) Limited Westferry Investments Limited Woolwich Homes Limited Woolwich Plan Managers Limited Woolwich Qualifying Employee Share Ownership Trustee Limited Woolwich Surveying Services Limited Zeban Nominees Limited – Hill House, 1 Little New Street, London, EC4A 3TR Barclays BPT (in liquidation) Barclays Mercantile Highland Finance Limited (in liquidation) Boudeuse Limited (in liquidation) Denham Investments Limited (in liquidation) Exshelfco (DZBC) (in liquidation) Greig Middleton Holdings Limited (in liquidation) Scotlife Home Loans (No.3) Limited (in liquidation) Woolwich Assured Homes Limited (in liquidation) Woolwich Homes (1987) Limited (in liquidation) Woolwich Limited (in liquidation) – 5 The North Colonnade, Canary Wharf, London, E14 4BB BBR Holdings Trust Barclays Capital Trading Luxembourg Trust CPIA Canada Holdings Leonis Investments LLP Preferred Liquidity Limited Partnership – Aurora Building, 120 Bothwell Street, Glasgow, G2 7JS R.C. Grieg Nominees Limited – 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ BNRI PIA Scot GP Limited BNRI Scots GP, LLP Pecan Aggregator LP – Logic House, Waterfront Business Park, Fleet Road, Fleet, GU51 3SB The Logic Group Enterprises Limited The Logic Group Holdings Limited Note B I, X B B I, Y I, Y B E D D B B B B B J Wholly owned subsidiaries Argentina – 855 Leandro N.Alem Avenue, 8th Floor, Buenos Aires Compañía Sudamerica S.A. – Marval, O’Farrell & Mairal, Av. Leandro N. Alem 882, Buenos Compañia Regional del Sur S.A. Brazil – Av. Brigadeiro Faria Lima, No. 4.440, 12th Floor, Bairro Itaim, Bibi, Sao Paulo, CEP, 04538-132 BNC Brazil Consultoria Empresarial Ltda Barclays Brasil Assessoria Financeira Ltda. Canada – 333 Bay Street, Suite 4910, Toronto ON M5H 2R2 Barclays Capital Canada Inc. – Stikeman Elliott LLP, 199 Bay Street, 5300 Commerce Court, West, Toronto ON M5L 1B9 Barclays Corporation Limited Cayman Islands – Maples Corporate Services Limited, PO Box 309GT, Ugland House, South Church Street, Grand Cayman, KY1-1104 Alymere Investments Limited Analytical Trade UK Limited Barclays Capital (Cayman) Limited Braven Investments No.1 Limited Capton Investments Limited Claudas Investments Limited Claudas Investments Two Limited CPIA Investments No.1 Limited CPIA Investments No.2 Limited Furbridge Investments Limited (in liquidation) Hurley Investments No.1 Limited Iris Investments 1 Limited Mintaka Investments No. 4 Limited OGP Leasing Limited Pelleas Investments Limited Pelleas Investments Two Limited Pippin Island Investments Limited Razzoli Investments Limited RVH Limited – PO Box 1093, Queensgate House, Grand Cayman, KY1-1102 Blaytell Limited Coskwo Limited Godler Limited Harflane Limited Hentock Limited Hollygrice Limited Pilkbull Limited Strickyard Limited Winhall Limited – 190 Elgin Avenue, George Town, Grand Cayman, KY1-9005 Calthorpe Investments Limited Gallen Investments Limited JV Assets Limited Palomino Limited Wessex Investments Limited – Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George Town, KY1– 9008 Long Island Holding B Limited Note Wholly owned subsidiaries China – Room 213, Building 1, No. 1000 Chenhui Road, Zhangjiang Hi-Tech Park, Shanghai Barclays Technology Centre (Shanghai) Company Limited Note France – 34/36 avenue de Friedland, Paris, 75008 BBAIL SAS Germany – TaunusTurm, Taunustor 1, 60310, Frankfurt Barclays Capital Effekten GmbH – c/o SFM Deutschland GmbH, Gruneburgweg 58-62, 60322 , Frankfurt am Main Baubecon Holding 1 GmbH (in liquidation) – Stuttgarter Straße 55-57, 73033 Göppingen Adler Toy Beteiligungs GmbH Holding Stuttgarter Straße GmbH Guernsey – P.O. Box 33, Maison Trinity, Trinity Square, St. Peter Port, GY1 4AT Barclays Insurance Guernsey PCC Limited – PO BOX 41, Floor 2, Le Marchant House, Le Truchot, St Peter Port, GY1 3BE Barclays Nominees (Guernsey) Limited Hong Kong – 42nd floor Citibank Tower, Citibank Plaza, 3 Garden Road Barclays Bank (Hong Kong Nominees) Limited (in liquidation) Barclays Capital Asia Nominees Limited (in liquidation) – Level 41, Cheung Kong Center, 2 Queen's Road Central Barclays Asia Limited Barclays Capital Asia Limited India – 208 Ceejay House, Shivsagar Estate, Dr A Beasant Road, Worli, Mumbai, 400 018 Barclays Securities (India) Private Limited Barclays Wealth Trustees (India) Private Limited – 67, Maker Tower ‘F’ 6th Floor, Cuffe Parade, Mumbai, 400 005 Barclays Holdings India Private Limited (in liquidation) – Ground to Fourth Floor, Wing 3 – Cluster A, Eon Free Zone, MIDC Knowledge Park, Pune, 411014 Barclays Global Service Centre Private Limited – Level 10, Block B6, Nirlon Knowledge Park, Off Western Express Highway, Goregaon (East), Mumbai, 40063 Barclays Investments & Loans (India) Limited Q F, I G, H, I G, H, I V F, I G, H, I F, I F, I Indonesia – Barclays House, 12th Floor, Jl. Jend Sudirman Kav. 22-23, Jakarta, 12920 PT Bank Barclays Indonesia (in liquidation) – Plaza Lippo, 10th Floor, Jalan Jend, Sudirman Kav 25, Jakarta, 12920 PT Bhadra Buana Persada (in liquidation) L Z Ireland – Two Park Place, Hatch Street, Dublin 2 Barclaycard International Payments Limited Barclays Bank Ireland Public Limited Company home.barclays/annualreport Barclays PLC Annual Report 2017 319 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance45 Related undertakings continued Wholly owned subsidiaries Isle of Man – Barclays House, Victoria Street, Douglas Barclays Nominees (Manx) Limited – P O Box 9, Victoria Street, Douglas, IM99 1AJ Barclays Private Clients International Limited – 2nd Floor, St Georges Court, Upper Church Street, Douglas, IM1 1EE Barclays Holdings (Isle of Man) Limited (in liquidation) Japan – 10-1, Roppongi 6-chome, Minato-ku, Tokyo Barclays Funds and Advisory Japan Limited Barclays Securities Japan Limited Barclays Wealth Services Limited Jersey – Third Floor, 37 Esplanade, St. Helier, JE2 3QA CP Newco 1 Limited CP Newco 2 Limited CP Newco 3 Limited – La Motte Chambers, St Helier, JE1 1BJ Barclays Services Jersey Limited – 39-41 Broad Street, St Helier, JE2 3RR Barclays Wealth Management Jersey Limited BIFML PTC Limited – 13 Castle Street, St. Helier, JE4 5UT Barclays Index Finance Trust – Lime Grove House, Green Street, St Helier, JE1 2ST Barbridge Limited – 13 Library Place, St Helier, JE4 8NE Barclays Nominees (Jersey) Limited Barclaytrust Channel Islands Limited – Appleby Trust (Jersey) Limited, PO Box 207, 13-14 Esplanade, St Helier, JE1 1BD MK Opportunities GP Ltd Korea, Republic of – A-1705 Yeouido Park Centre, 28-3 Yeouido-dong, Yeongdeungpo-gu, Seoul Barclays Korea GP Limited Luxembourg – 9, allée Scheffer, L-2520 Barclays Aegis Investments S.à r.l. Barclays Alzin Investments S.à r.l. Barclays Bayard Investments S.à r.l. Barclays Bedivere Investments S.à r.l. Barclays Bordang Investments S.à r.l. Barclays BR Holdings S.à r.l. Barclays BR Investments S.à r.l. Barclays Cantal Investments S.à r.l. Barclays Capital Luxembourg S.à r.l. Barclays Capital Trading Luxembourg S.à r.l. Barclays Claudas Investments Partnership Barclays Equity Index Investments S.à r.l. Barclays Lamorak Investments S.à r.l. Barclays Leto Investments S.à r.l. Barclays Luxembourg EUR Holdings S.à r.l Barclays Luxembourg Finance S.à r.l. Barclays Luxembourg GBP Holdings S.à r.l. Barclays Luxembourg Holdings S.à r.l. Barclays Luxembourg Holdings SSC Barclays Luxembourg USD Holdings S.à r.l. Barclays Pelleas Investments Limited Partnership Barclays Pelleas Investments S.à r.l. Blossom Finance General Partnership – 68-70 Boulevard de la Petrusse, L-2320 Adler Toy Holding Sarl Note J, K Wholly owned subsidiaries Malaysia – Unit 30-01, Level 30, Tower A, Vertical Business Suite, Avenue 3, Bangsar South, No.8, Jalan Kerinchi, Kuala Lumpur, 59200 Barclays Capital Markets Malaysia Sdn Bhd. (in liquidation) Note F, I Mauritius – C/O Rogers Capital Corporate Services, St. Louis Business Centre, Cnr Desroches & St. Louis Streets, Port Louis Barclays Capital Mauritius Limited Barclays Capital Securities Mauritius Limited – Fifth Floor, Ebene Esplanade, 24 Cybercity, Ebene Barclays (H&B) Mauritius Limited Barclays Mauritius Overseas Holdings Limited Mexico – Paseo de la Reforma 505, 41 Floor, Torre Mayor, Col. Cuauhtemoc, CP 06500 Barclays Bank Mexico, S.A. Barclays Capital Casa de Bolsa, S.A. de C.V. Grupo Financiero Barclays Mexico, S.A. de C.V. Servicios Barclays, S.A. de C.V. K, M K, M K, M Monaco – 31 Avenue de la Costa, BP 339 Barclays Wealth Asset Management (Monaco) S.A.M Netherlands – Strawinskylaan 3105, 1077 ZX, Amsterdam Barclays SLCSM Funding B.V. (in liquidation) – De Boelelaan 7, 1083 Hj Amsterdam Chewdef BidCo BV. (in liquidation) Nigeria – Southgate House, Udi Street, Osborne Estate, Ikoyi, Lagos Barclays Group Representative Office (NIG) Limited Philippines – 21/F, Philamlife Tower, 8767 Paseo de Roxas, Makati City, 1226 Meridian (SPV-AMC) Corporation Russian Federation – Four Winds Plaza, 1st Tverskaya-Yamskaya Str, Moscow 21, 125047 Limited Liability Company Barclays Capital (in liquidation) Saudi Arabia – 18th Floor Al Faisaliah Tower, Riyadh, 11311 Barclays Saudi Arabia (in liquidation) Singapore – 10 Marina Boulevard, #24-01 Marina Bay Financial Centre, Tower 2, 018983 Barclays Bank (Singapore Nominees) Pte Ltd Barclays Bank (South East Asia) Nominees Pte Ltd Barclays Capital Futures (Singapore) Private Limited Barclays Capital Holdings (Singapore) Private Limited Barclays Merchant Bank (Singapore) Ltd. J, K S I, DD J, K GG J, K B I, AA B J, K B B Wholly owned subsidiaries Spain – Plaza De Colon 1, 28046, Madrid Barclays Tenedora De Immuebles SL. BVP Galvani Global, S.A.U. Note Z Switzerland – Chemin de Grange Canal 18-20, PO Box 3941, 1211, Geneva Barclays Bank (Suisse) S.A. BPB Holdings SA Barclays Switzerland Services SA United States – Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington DE 19801 Archstone Equity Holdings Inc Barclays BWA, Inc. Barclays Capital Commodities Corporation Barclays Capital Derivatives Funding LLC Barclays Capital Energy Inc. Barclays Capital Real Estate Finance Inc. Barclays Capital Real Estate Holdings Inc. Barclays Capital Real Estate Inc. Barclays Commercial Mortgage Securities LLC Barclays Electronic Commerce Holdings Inc. Barclays Financial LLC Barclays Group US Inc. Barclays Oversight Management Inc. Barclays Receivables LLC Barclays Services Corporation Barclays US CCP Funding LLC Barclays US Funding LLC Barclays US LLC Barclays US Investments LLC BCAP LLC CPIA Equity No. 1 Inc. Crescent Real Estate Member LLC Gracechurch Services Corporation Long Island Holding A LLC LTDL Holdings LLC Marbury Holdings LLC Protium Finance I LLC Protium Master Mortgage LP Protium REO I LP Securitized Asset Backed Receivables LLC Sutton Funding LLC TPLL LLC TPProperty LLC US Secured Investments LLC – 1201 North Market Street, P.O. Box 1347 Wilmington, DE19801 Barclays Bank Delaware Procella Investments LLC Procella Investments No.1 LLC Procella Investments No.2 LLC Procella Investments No.3 LLC Procella Swaps LLC Verain Investments LLC – 2711 Centerville Road, Suite 400, Wilmington DE 19808 Analog Analytics Inc Protium Master Grantor Trust – 251 Little Falls Drive, New Castle County, Wilmington DE 19808 Barclays Capital Equities Trading GP Barclays Capital Holdings Inc. Lagalla Investments LLC Relative Value Holdings, LLC C C C C C C G, I K, GG C C C C C B B C C C C C F, I C C C C C D B G, H, I 320 Barclays PLC Annual Report 2017 home.barclays/annualreport Other disclosure mattersNotes to the financial statements 45 Related undertakings continued Wholly owned subsidiaries – 745 Seventh Avenue, New York NY 10019 Alynore Investments Limited Partnership Curve Investments GP HYMF, Inc. Preferred Liquidity, LLC – CT Corporation System, One Corporate Center, Floor 11, Hartford CT 06103-3220 Barclays Capital Inc. – c/o RL&F Service Corp, One Rodney Square, 10th Floor, Tenth and King Streets, Wilmington DE 19801 Analytical Trade Holdings LLC Analytical Trade Investments LLC – 100 South West Street, Wilmington DE 19801 Barclays Dryrock Funding LLC Wilmington Riverfront Receivables LLC – 15 East North Street, Dover DE 19801 Barclays Services LLC – CT Corporation System, 225 Hillsborough Street, Raleigh, NC 27603 Barclays US GPF Inc. – CT Corporation System, 350 North St. Paul Street, Dallas TX 75201 La Torretta Beverages LLC La Torretta Hospitality LLC La Torretta Operations LLC – 500 Forest Point Circle, Charlotte, North Carolina 28273 Equifirst Corporation (in liquidation) – Aon Insurance Managers (USA) Inc., 76 St. Paul Street, Suite 500, Burlington, VT05401-4477 Barclays Insurance U.S. Inc. Zimbabwe – 2 Premium Close, Mount Pleasant Business Park, Mount Pleasant , Harare Branchcall Computers (Pvt) Limited Note B B J Other Related Undertakings Unless otherwise stated, the undertakings below are consolidated and the share capital disclosed comprises ordinary and/or common shares which are held by subsidiaries of the Group. The Group’s overall ownership percentage is provided for each undertaking. BB C J, K C C C C 37.41% EE, Z 65.47% CC, Z 19.50% 25.00% 59.94% 20.00% Percentage 75.00% 51.00% 20.00% 35.00% 50.00% 50.00% Other related undertakings United Kingdom – 1 Churchill Place, London, E14 5HP Barclaycard Funding PLC Claas Finance Limited PSA Credit Company Limited (in liquidation) Barclays Covered Bond Funding LLP – 1 Poultry, London, England, EC2R 8EJ Igloo Regeneration (General Partner) Limited – 1 Robeson Way, Sharston Green Business Park, Manchester, M22 4SW KDC Holdings Limited – 3-5 London Road, Rainham, Kent, ME8 7RG Trade Ideas Limited – Derby Training Centre, Ascot Drive, Derby, DE24 8GW Develop Training Group Limited – 50 Lothian Road, Festival Square, Edinburgh, EH3 9BY Equistone Founder Partner II L.P. Equistone Founder Partner III L.P. – Building 6 Chiswick Park, 566 Chiswick High Road, London W4 5HR Intelligent Processing Solutions Limited – Oak House, Ellesmere Port, Cheshire, CH65 9HQ Elan Homes Holdings Limited – 16 Palace Street, London, SW1E 5JD Barclays Alma Mater Management Limited Partnership – 20-22 Bedford Row, London, WC1R 4JS Cyber Defence Alliance Limited – 30 Gresham Street, London, EC2V 7PG Gresham Leasing March (3) Limited – 80 New Bond Street, London, W1S 1SB GN Tower Limited GW City Ventures Limited – 5th Floor, 70 Gracechurch Street, London, EC3V 0XL Camperdown UK Limited – 5 North Colonnade, Canary Wharf, London, E14 4BB BEIF Management Limited Partnership 30.00% – 2nd Floor, 110 Cannon Street, London, EC4N 6EU Vectorcommand Limited (in liquidation) – 55 Baker Street, London, W1U 7EU Formerly H Limited (in liquidation) – Countryside House, The Warley Hill Business Park, The Drive, Brentwood, Essex, CM13 3AT Woolwich Countryside Limited – Haberfield Old Moor Road, Wennington, Lancaster, LA2 8PD Full House Holdings Limited – 6th Floor 60 Gracechurch Street, London, EC3V 0HR BMC (UK) Limited – Central House, 124 High Street, Hampton Hill, Middlesex TW12 1NS Rio Laranja Holdings Limited – 13-15 York Buildings, London, WC2N 6JU BGF Group Limited 50.00% 50.00% 50.00% 30.00% 30.00% 25.00% 45.00% 70.32% 74.00% 24.40% 67.43% Note J K J, L B L, Z Z B, Z B, Z Z J, Z B, Z E, Z Z Z K, Z J B, Z J, Z O, Z J, Z J, Z Z 30.39% J, K, Z 40.18% J, F, Z Other related undertakings Cayman Islands – Maples Corporate Services Limited, PO Box 309GT, Ugland House, South Church Street, Grand Cayman, KY1-1104 Cupric Canyon Capital LP Southern Peaks Mining LP Third Energy Holdings Limited Percentage Note 40.19% HH, Z 55.76% HH, Z 78.94% F, J, K, Z Germany – Schopenhauerstraße 10, D-90409, Nurnberg Eschenbach Holding GmbH 21.70% Z Indonesia – Wisma GKBI 39th Floor, Suite 3906, Jl. Jend. Sudirman No.28, Jakarta, 10210 PT Barclays Capital Securities Indonesia (in liquidation) 99.00% Korea, Republic of – 18th Floor, Daishin Finance Centre, 343, Samil-daero, Jung-go, Seoul Woori BC Pegasus Securitization Specialty Co., Limited Luxembourg – 9, allée Scheffer, L-2520 BNRI Limehouse No.1 Sarl Partnership Investments S.à r.l. Preferred Funding S.à r.l. Preferred Investments S.à r.l. Malta – RS2 Buildings, Fort Road, Mosta MST 1859 RS2 Software PLC 70.00% W R 96.30% 33.40% I, J ,K ,L H 33.33% H, I 33.33% 18.25% Z Monaco – 31 Avenue de la Costa, Monte Carlo Societe Civile Immobiliere 31 Avenue de la Costa 75.00% Netherlands – Alexanderstraat 18, 2514 JM, The Hague Tulip Oil Holding BV South Africa – 9 Elektron Road, Techno Park, Stellenbosch 7600 Imalivest Mineral Resources LP Sweden – c/o ForeningsSparbanken AB, 105 34 Stockholm EnterCard Group AB 30.26% II, Z 69.88% J, Z 40.00% K, Z 80.00% United States of America – 777 Main Street, Fort Worth TX 76102 CRE Diversified Holdings LLC Crescent Crown Greenway Plaza SPV LLC 80.00% Crescent Crown Land Holding SPV LLC 80.00% 80.00% Crescent Plaza Residential LP, LLC 80.00% Crescent Plaza Residential, L.P. 80.00% Crescent Plaza Residential, LLC 80.00% Crescent Resort Development LLC 80.00% Crescent Tower Residences GP, LLC 80.00% Crescent Tower Residences, L.P. 80.00% Crescent TRS Holdings LLC 80.00% CREW Tahoe Holdings LLC 80.00% DBL Texas Holdings LLC 80.00% Desert Mountain Development LLC C, Z C, Z C, Z C, Z B, Z C, Z C, Z C, Z B, Z C, Z C, Z C, Z C, Z home.barclays/annualreport Barclays PLC Annual Report 2017 321 Risk reviewFinancial reviewShareholder informationStrategic reportFinancial statementsGovernance Subsidiaries by virtue of control The related undertakings below are subsidiaries in accordance with s.1162 Companies Act 2006 as Barclays can exercise dominant influence or control over them. Percentage Subsidiaries by virtue of control United Kingdom – 1 Churchill Place, London, E14 5HP Oak Pension Asset Management Limited Water Street Investments Limited Cayman Islands – PO Box 309GT, Ugland House, South Church Street, Grand Cayman, KY1-1104 Hornbeam Limited Barclays US Holdings Limited Note Z Z Z J 00.00% 00.00% 00.00% 10.00% Joint Ventures The related undertakings below are Joint Ventures in accordance with s.18, Schedule 4, The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and are proportionally consolidated. Note Percentage Joint Ventures United Kingdom – All Saints Triangle, Caledonian Road, London, N1 9UT Vaultex UK Limited Joint management factors The Joint Venture Board comprises two Barclays representative directors, two JV partner directors and three non-JV partner directors. The Board are responsible for setting the company strategy and budgets. 50.00% 45 Related undertakings continued 71.11% 71.11% 39.55% 60.80% Percentage 33.52% 79.57% 79.10% 74.75% 56.96% 60.82% 60.82% 60.82% 56.93% 60.80% 60.80% 60.80% 60.82% 60.82% Other related undertakings Desert Mountain Properties Limited 74.40% Partnership East West Resort Development VII LLC 80.00% 78.40% Mira Vista Development LLC Mountainside Partners LLC 80.00% – 126 Riverfront Lane , 5th Floor, Drawer 2770, Avon CO 81620 Blue River Land Company, LLC East West Resort Development IV, L.P., L.L.L.P. East West Resort Development VIII, L.P., L.L.L.P. East West Resort Development XIV, L.P., L.L.L.P. EWRD Summit Holding, L.P., L.L.L.P. EWRD Summit, LLC – 3001 Northstar Drive, C200, Truckee CA 96161 CREW Tahoe LLC East West Resort Development V, L.P., L.L.L.P. Gray’s Station, LLC Home Run Tahoe, LLC Northstar Mountain Properties, LLC Northstar Trailside Townhomes, LLC Northstar Village Townhomes, LLC Old Greenwood Realty, Inc. Old Greenwood, LLC Tahoe Club Company, LLC Tahoe Mountain Resorts, LLC The Glades Tahoe, LLC – Corporation Service Company, 2711 Centreville Road, Suite 400, Wilmington DE 19808 Crescent Fresh Series B Hold Co. Mountainside Boulders, LLC MVWP Development LLC MVWP Investors LLC Stellar Residences, LLC Stellar Townhomes, LLC – 1701 Wynkoop Street, Suite 140, Box 47, Denver, CO 80202 Central Platte Valley Management, LLC 51.78% 47.63% St. Charles Place, LLC 47.63% The Park at One Riverfront, LLC Union Center LLC 51.78% – Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington DE 19801 DG Solar Lessee II, LLC DG Solar Lessee, LLC VS BC Solar Lessee I LLC – East West Partners, Inc., 126 Riverfront Lane, 5th Floor, Avon CO 81620 Tahoe Club Employee Company – 6600 Mira Vista Blvd., Fort Worth TX 76132 Mira Vista Golf Club, L.C. – 251 Little Falls Drive, New Castle County, Wilmington DE 19808 Crescent Legacy LLC Surrey Funding Corporation Sussex Purchasing Corporation – 1415 Louisiana Street, Suite 1600, Houston, Texas, 77002 Sabine Oil & Gas Holdings, Inc. 80.00% 60.82% 30.40% 60.80% 60.82% 60.82% 50.00% 50.00% 50.00% 80.00% 99.45% 99.45% 60.80% 23.25% 76.83% Note B, Z C, Z C, Z C, Z C, Z B, Z B, Z B, Z B, Z C, Z C, Z B, Z C, Z C, Z C, Z C, Z C, Z Z C, Z C, Z C, Z C, Z Z C, Z C, Z C, Z C, Z C, Z C, Z C, Z C, Z C, Z C, Z C, Z C, Z Z Z C, Z Z 322 Barclays PLC Annual Report 2017 home.barclays/annualreport Other disclosure mattersNotes to the financial statementsShareholder information Barclays shareholding Key dates 5 April 2018 Final dividend payment date 26 April 2018 Q1 Results Announcement 1 May 2018 Annual General Meeting, at 10.00am 17 September 2018 Interim dividend payment date Green Park all P all M all h e M T d a o R s d r a u G e s r o H St. James’s Park St. James’s Park QEII Centre Broad Sanctuary Victoria Street Victoria Horseferry Road Donations to charity We launched a Share Dealing Service in October 2017 aimed at shareholders with relatively small shareholdings for whom it might otherwise be uneconomical to deal. One option open to shareholders was to donate their sale proceeds to ShareGift. As a result of this initiative, more than £61,000 was donated in 2017, taking the total donated since 2015 to over £299,000. Returning funds to shareholders Over 60,000 shareholders did not cash their Shares Not Taken Up (SNTU) cheque following the Rights Issue in September 2013. In 2017, we continued the tracing process to reunite these shareholders with their SNTU monies and any unclaimed dividends. By the end of the year, we had returned over £4.5m to our shareholders. Annual General Meeting (AGM) This year’s AGM will be held at the QEII Centre, Westminster, London SW1P 3EE, on Tuesday, 1 May 2018 at 10.00am. The Chairman and Chief Executive will update shareholders on our performance in 2017 and our goals for 2018. Shareholders will also have the opportunity to ask the Board questions at the meeting. Youcanfindoutmoreat home.barclays/agm C haring Cross River Thames s e m a h T r e v R i Westminster Bridge Waterloo Lambeth North s e m a h T r e v R i Lambeth Bridge Strand t n e m k n a b m E a i r o t c V i i r e t s n m t s e W t e e r t S t n e m a i l r a P t e e r t S n o d g n b A i Keep your personal details up to date Please remember to tell Equiniti if: ■■ you move ■■ you need to update your bank or building society details. If you are a Shareview member, you can update your bank or building society account or address details online. If you hold 2,500 shares or less, you can update details quickly and easily over the telephone using the Equiniti contact details overleaf. If you hold more than 2,500 shares you will need to write to Equiniti. You must provide a copy of your sharecertificate,Sharestorestatementor mostrecentdividendconfirmation.Ifthese are not available, you will need to provide a copy of a utility bill or bank statement dated in the last three months. Dividends Thefinaldividendfortheyearended 31 December 2017 will be 2.0p per share, making the 2017 total dividend 3.0p. Barclays understands the importance of the ordinary dividend for our shareholders. Barclays is therefore committed to maintaining an appropriate balance between total cash returns to shareholders, investment in the business, and maintaining a strong capital position. Going forward, Barclays intends to pay an annual ordinary dividend that takes into account these objectives and the medium-term earnings outlook of the Group. It is also the Board’s intention to supplement the ordinary dividends with additional returns to shareholders as and when appropriate. The Board notes that in determining any proposed distributions to shareholders, the Board will consider the expectation of servicing more senior securities. For 2018, Barclays anticipates resuming a total cash dividend of 6.5p, subject to regulatory approvals. How do Barclays shareholders receive their dividends? As at 31 December 2017, Barclays shareholders received their dividends in the following ways: 56.1% Direct to bank account 21.4% Cheque 22.5% Scrip Dividend Programme (new shares) Save time and receive your dividends faster by choosing to have them paid directly into your bank or building society account It is easy to set up and your money will be in your bank account on the dividend payment date. If you hold 2,500 shares or less, you can provide your bank or building society details quickly and easily over the telephone using the Equiniti contact details overleaf. If you hold more than 2,500 shares, please contact Equiniti for details of how to change your payment instruction. Scrip Dividend Programme Shareholders can choose to have their dividends reinvested in new ordinary Barclays shares through the Scrip Dividend Programme. More information, including the terms and conditions and application form, are available on our website. Tofindoutmore,contactEquinitior visit home.barclays/dividends home.barclays/annualreport Barclays PLC Annual Report 2017 323 Strategic reportGovernanceRisk reviewFinancial reviewFinancial statementsShareholder information Shareholder information Barclays shareholding Useful contact details Equiniti The Barclays share register is maintained by Equiniti. If you have any questions about your Barclays shares, please contact Equiniti by visiting shareview.co.uk Equiniti 0371 384 2055a (in the UK) +44 121 415 7004 (from overseas) 0371 384 2255a (for the hearing impaired in the UK) +44 121 415 7028 (for the hearing impaired from overseas) Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA American Depositary Receipts (ADRs) ADRs represent the ownership of Barclays PLC shares which are traded on the New York Stock Exchange. ADRs carry prices, and pay dividends, in US Dollars. If you have any questions about ADRs, please contact J.P.Morgan: jpmorgan.adr@wellsfargo.com or visit adr.com J.P.Morgan Shareholder Services +1 800 990 1135 (toll free in US and Canada) +1 651 453 2128 (outside the US and Canada) JPMorgan Chase Bank N.A. PO Box 64504 St Paul MN 55164-0504 USA Shareholder Relations To give us your feedback or if you have any questions, please contact: privateshareholderrelations@barclays.com Shareholder Relations Barclays PLC 1 Churchill Place London E14 5HP Share price Information on the Barclays share price and other share price tools are available at: home.barclays/investorrelations Managing your shares online Shareview Barclays shareholders can go online to managetheirshareholdingandfindoutabout Barclays performance by joining Shareview. Through Shareview, you: ■■ will receive the latest updates from Barclays direct to your email ■■ can update your address and bank details online ■■ can vote in advance of general meetings. Shareholder security Shareholders should be wary of any cold calls with an offer to buy or sell shares. Fraudsters use persuasive and high-pressure techniques to lure shareholders into high-risk investments or scams. You should treat any unsolicited calls with caution. Pleasekeepinmindthatfirmsauthorised by the Financial Conduct Authority (FCA) are unlikely to contact you out of the blue. You should consider getting independent financialorprofessionaladvicefrom someone unconnected to the respective firmbeforeyouhandoveranymoney. Report a scam If you suspect that you have been approached by fraudsters please tell the FCA using the share fraud reporting form at fca.org.uk/scams. You can also call the FCA Helpline on 0800 111 6768 or through Action Fraud on 0300 123 2040. To join Shareview, please follow these three easy steps: Step 1 Go to portfolio.shareview.co.uk Step 2 Register for electronic communications by following the instructions on screen Step 3 You will be sent an activation code in the post the next working day Alternative formats Shareholder documents can be provided in large print, audio CD or Braille free of charge by calling Equiniti. 0371 384 2055a (in the UK) +44 121 415 7004 (from overseas) Audio versions of the Strategic Report will also be available at the AGM Note a Lines open 8.30am to 5.30pm (UK time) Monday to Friday, excluding public holidays. 324 Barclays PLC Annual Report 2017 home.barclays/annualreport Notes The terms Barclays or Group refer to Barclays PLC together with its subsidiaries. Unless otherwise stated, the income statement analysis compares the year ended 31 December 2017 to the corresponding 12 months of 2016 and balance sheet analysis as at 31 December 2017 with comparatives relating to 31 December 2016. The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of Pounds Sterling respectively; the abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of US Dollars respectively; and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of Euros respectively. There are a number of key judgement areas, for example impairment calculations, which are based on models and which are subject to ongoing adjustment and modifications. Reported numbers reflect best estimates and judgements at the given point in time. Relevant terms that are used in this document but are not defined under applicable regulatory guidance or International Financial Reporting Standards (IFRS) are explained in the results glossary that can be accessed at home.barclays/results. The information in this announcement, which was approved by the Board of Directors on 21 February 2018, does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2017, which includes certain information required for the Joint Annual Report on Form 20-F of Barclays PLC and Barclays Bank PLC to the US Securities and Exchange Commission (SEC) and which contain an unqualified audit report under Section 495 of the Companies Act 2006 (which does not make any statements under Section 498 of the Companies Act 2006) will be delivered to the Registrar of Companies in accordance with Section 441 of the Companies Act 2006. These results will be furnished as a Form 20-F to the SEC as soon as practicable following their publication. Once furnished with the SEC, copies of the Form 20-F will also be available from the Barclays Investor Relations website at home.barclays/ results and from the SEC’s website at www.sec.gov Barclays is a frequent issuer in the debt capital markets and regularly meets with investors via formal road-shows and other ad hoc meetings. Consistent with its usual practice, Barclays expects that from time to time over the coming quarter it will meet with investors globally to discuss these results and other matters relating to the Group. Non-IFRS performance measures Barclays’ management believes that the non-IFRS performance measures included in this document provide valuable information to the readers of the financial statements as they enable the reader to identify a more consistent basis for comparing the business’ performance between financial periods, and provide more detail concerning the elements of performance which the managers of these businesses are most directly able to influence or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by Barclays’ management. However, any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well. Refer to the pages 223 to 225 of the Barclays PLC Annual Report 2017 for further information and calculations of non-IFRS performance measures included throughout this document, and the most directly comparable IFRS measures. Forward-looking statements This document contains certain forward-looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended, and Section 27A of the US Securities Act of 1933, as amended, with respect to the Group. Barclays cautions readers that no forward-looking statement is a guarantee of future performance and that actual results or other financial condition or performance measures could differ materially from those contained in the forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements sometimes use words such as ‘may’, ‘will’, ‘seek’, ‘continue’, ‘aim’, ‘anticipate’, ‘target’, ‘projected’, ‘expect’, ‘estimate’, ‘intend’, ‘plan’, ‘goal’, ‘believe’, ‘achieve’ or other words of similar meaning. Examples of forward-looking statements include, among others, statements or guidance regarding or relating to the Group’s future financial position, income growth, assets, impairment charges, provisions, business strategy, structural reform, capital, leverage and other regulatory ratios, payment of dividends (including dividend payout ratios and expected payment strategies), projected levels of growth in the banking and financial markets, projected costs or savings, any commitments and targets and the impact of any regulatory deconsolidation resulting from the sell down of the Group’s interest in Barclays Africa Group Limited, estimates of capital expenditures and plans and objectives for future operations, projected employee numbers, IFRS 9 impacts and other statements that are not historical fact. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. These may be affected by changes in legislation, the development of standards and interpretations under International Financial Reporting Standards including the implementation of IFRS 9, evolving practices with regard to the interpretation and application of accounting and regulatory standards, the outcome of current and future legal proceedings and regulatory investigations, future levels of conduct provisions, the policies and actions of governmental and regulatory authorities, geopolitical risks and the impact of competition. In addition, factors including (but not limited to) the following may have an effect: capital, leverage and other regulatory rules (including with regard to the future structure of the Group) applicable to past, current and future periods; UK, US, Africa, Eurozone and global macroeconomic and business conditions; the effects of continued volatility in credit markets; market related risks such as changes in interest rates and foreign exchange rates; effects of changes in valuation of credit market exposures; changes in valuation of issued securities; volatility in capital markets; changes in credit ratings of any entities within the Group or any securities issued by such entities; the potential for one or more countries exiting the Eurozone; the implications of the exercise by the United Kingdom of Article 50 of the Treaty of Lisbon and the disruption that may result in the UK and globally from the withdrawal of the United Kingdom from the European Union and the success of future acquisitions, disposals and other strategic transactions. A number of these influences and factors are beyond the Group’s control. As a result, the Group’s actual future results, dividend payments, and capital and leverage ratios may differ materially from the plans, goals, expectations and guidance set forth in the Group’s forward-looking statements. Additional risks and factors which may impact the Group’s future financial condition and performance are identified in our filings with the SEC (including, without limitation, our Annual Report on form 20-F for the fiscal year ended 31 December 2017), which will be available on the SEC’s website at www.sec.gov Subject to our obligations under the applicable laws and regulations of the United Kingdom and the United States in relation to disclosure and ongoing information, we undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This report is printed on Cocoon Preprint made from 100% FSC® Recycled certified fibre sourced from de-inked post-consumer waste. The printer and the manufacturing mill are both credited with ISO14001 Environmental Management Systems Standard and both are FSC® certified. By printing this publication on Cocoon Preprint, the environmental impact was reduced by: 5,865 kg of landfill, 867 kg CO2 and greenhouse gases, 171,542 litres of water, 10,078 kWh of energy and 9,530 kg of wood. Source: Carbon footprint data evaluated by Labelia Conseil in accordance with the Bilan Carbone methodology. Calculations are based on a comparison between the recycled paper used versus a virgin fibre paper according to the latest European BREF data (virgin fibre paper) available. Positioned for growth, sharing and success Barclays PLC Annual Report 2017 Front cover image Out of Africa, into new territory After more than 150 years on the continent, the decision to sell down Barclays’ investment in Africa was not an easy one. But with people like Win Chung and Sophia Aluko working hard to ensure a thoughtful separation, we broke new ground for Barclays in 2017. B a r c l a y s P L C A n n u a l R e p o r t 2 0 1 7 Registered office: 1 Churchill Place, London E14 5HP © Barclays Bank PLC 2018 Registered in England. Registered No: 48839 Designed by FleishmanHillard Fishburn 9915784 fhflondon.co.uk 

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