Close Brothers Group Annual Report 2015

Plain-text annual report

Close Brothers Group plc Annual Report 2015 Modern Merchant Banking Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading. Welcome to Modern Merchant Banking The photography within this Annual Report was photographed on location at our clients’ businesses. We would like to thank them for their generous support and cooperation. Close Brothers Group plc Annual Report 2015 Modern Merchant Banking Modern Merchant Banking is about Modern Merchant Banking is about meeting the ﬁnancial needs of our meeting the ﬁnancial needs of our clients today while applying the clients today while applying the traditional values of our past. traditional values of our past. At Close Brothers we provide ﬁnancial At Close Brothers we provide ﬁnancial support and advice to small businesses support and advice to small businesses and individuals in the UK. Our clients and individuals in the UK. Our clients are the makers of things, the wealth are the makers of things, the wealth creators, the investors, and the savers. creators, the investors, and the savers. They are playing an important role driving They are playing an important role driving growth in the British economy and we growth in the British economy and we are supporting them as they grow. are supporting them as they grow. Throughout our distinguished history, Throughout our distinguished history, we have remained focused on we have remained focused on upholding our traditional values, based upholding our traditional values, based on service and integrity. At the same on service and integrity. At the same time, we encourage innovation and time, we encourage innovation and support enterprise, reﬂecting how support enterprise, reﬂecting how our clients do business. our clients do business. This is Modern Merchant Banking This is Modern Merchant Banking at Close Brothers. We believe our at Close Brothers. We believe our traditional values and modern thinking traditional values and modern thinking are the reason behind our success and are the reason behind our success and why our clients continue to turn to us. why our clients continue to turn to us. Overleaf: Photographed on location at G&H Sheet Fed Ltd. Inset: Photographed on location at Alicat Workboats Ltd. Close Brothers Group plc Annual Report 2015 1 Financial Highlights for the year ended 31 July 2015 Strategic Report 4 Chairman’s and Chief Executive’s Statement 8 Business Model 12 Strategy and Key Performance Indicators Financial Overview 14 20 Banking 24 Securities 26 Asset Management 28 Principal Risks and Uncertainties 32 Sustainability Report Governance 40 Board of Directors 42 Executive Committee 43 Report of the Directors 45 Corporate Governance 58 Report of the Board on Directors’ Remuneration Financial Statements 80 Independent Auditor’s Report to the Members of Close Brothers Group plc 83 Consolidated Income Statement 84 Consolidated Statement of Comprehensive Income 85 Consolidated Balance Sheet 86 Consolidated Statement of Changes in Equity 87 Consolidated Cash Flow Statement 88 Company Balance Sheet 89 The Notes 132 Investor Relations 132 Cautionary Statement £224.9m (2014: £193.7m) Adjusted1 operating profit from continuing operations £219.9m (2014: £188.8m) Operating profit before tax from continuing operations £185.7m (2014: £149.8m) Profit attributable to shareholders from continuing and discontinued operations 120.5p (2014: 101.0p) Adjusted2 basic earnings per share from continuing operations 117.8p (2014: 98.4p) Basic earnings per share from continuing operations 53.5p (2014: 49.0p) Ordinary dividend per share3 19.5% (2014: 17.9%) Return on opening equity4 from continuing operations Adjusted operating proﬁt from continuing operations £ million 224.9 193.7 167.2 131.2 134.2 2011 2012 2013 2014 2015 Adjusted basic earnings per share from continuing operations pence 120.5 101.0 83.5 64.8 67.3 i S t r a t e g c R e p o r t G o v e r n a n c e 2011 2012 2013 2014 2015 Ordinary dividend per share pence 53.5 49.0 44.5 40.0 41.5 2011 2012 2013 2014 2015 Return on opening equity from continuing operations per cent 19.5 17.9 15.8 13.1 12.5 2011 2012 2013 2014 2015 i F n a n c a i l S t a t e m e n t s 1 Stated before amortisation of intangible assets on acquisition. A reconciliation to operating proﬁt before tax is shown on page 15. 2 Stated before amortisation of intangible assets on acquisition and the tax effect of such adjustment. 3 Represents the ﬁnal dividend proposed for the respective years together with the interim dividend declared and paid in those years. 4 Return on opening equity calculated as adjusted operating proﬁt after tax and non-controlling interests on opening equity less non-controlling interests. Note: The disposal of Close Brothers Seydler was completed on 5 January 2015. The proﬁt on disposal of £10.3 million and proﬁt after tax of £0.9 million have been classiﬁed as discontinued operations and the 2014 results have been restated. 2011 to 2013 results have not been restated. 2 Close Brothers Group plc Annual Report 2015 Close Brothers Group plc Annual Report 2015 3 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Strategic Report 4 Chairman’s and Chief Executive’s Statement 8 Business Model 12 Strategy and Key Performance Indicators 14 Financial Overview 20 Banking 24 Securities 26 Asset Management 28 Principal Risks and Uncertainties 32 Sustainability Report Photographed on location at Barfoots of Botley Ltd. 4 Close Brothers Group plc Annual Report 2015 Chairman’s and Chief Executive’s Statement Strone Macpherson, Chairman Preben Prebensen, Chief Executive We are pleased to report another year of strong performance for Close Brothers with good results across all of our businesses. After successive years of exceptional growth the group is in better shape than ever, which means we are well positioned to invest in supporting and extending our tried and tested business model and continue to deliver sustainable growth over the long term. Close Brothers Group plc Annual Report 2015 5 Strong Financial Position Overall, the group delivered adjusted operating proﬁt growth of 16% to £224.9 million (2014: £193.7 million), and adjusted earnings per share growth of 19% to 120.5p (2014: 101.0p). As a result, we have delivered a further improvement in return on opening equity to 19.5% (2014: 17.9%). Our strong and prudent ﬁnancial position has again been strengthened in the period, by further diversifying our sources of funding to include the government’s Funding for Lending Scheme and continued improvement in our capital position, with a common equity tier 1 ratio of 13.7% (31 July 2014: 13.1%), and a leverage ratio of 10.2% (31 July 2014: 9.2%). Our prudent approach, strong ﬁnancial position and consistent track record have resulted in Moody’s upgrading our credit rating to A3/P2 for Close Brothers Group and Aa3/P1 for Close Brothers Limited, both with stable outlooks, making us one of the highest rated banks in the UK. In line with our commitment to delivering sustainable, progressive dividend growth for our shareholders, and to reﬂect our continued strong ﬁnancial performance, the board has recommended a 9% increase in the ﬁnal dividend to 35.5p (2014: 32.5p). This gives a total dividend per share for the full year of 53.5p (2014: 49.0p) making 2015 our ﬁfth successive year of growing our dividend. Another Year of Strong Performance We are pleased to report another year of strong performance across the group, driven by continued good performance from the Banking division and steady growth in Asset Management. This once again demonstrates the robustness of our business model which supports our long-term track record and ﬁnancial performance. The Banking division achieved strong proﬁt growth, beneﬁting from the high quality loan book growth in recent years and lower impairments. Winterﬂood experienced difﬁcult market conditions in the ﬁrst half but continued to trade proﬁtably and has delivered a solid result for the full year. Asset Management is continuing to see good demand for its high quality advice and wealth management services, supporting growth in client assets and improving proﬁtability. We remain fully committed to our strategy of building leading positions in niche markets, through strong customer relationships. As the markets that we operate in continue to evolve, particularly for the Banking division, we will continue to invest in our people, products and systems, to both protect our positioning within existing markets, and extend our reach into new areas to support future growth. We remain committed to delivering this growth and investment, whilst maintaining a strong and prudent ﬁnancial position, allowing us to support our customers, grow our businesses and deliver sustainable shareholder returns in all market conditions. Consistent Proﬁtability and Returns over the Long Term The Banking division continued its good performance, delivering its sixth consecutive year of double-digit proﬁt growth. Adjusted operating proﬁt increased 15% to £208.7 million (2014: £181.6 million), reﬂecting good loan book growth over the last year, a strong net interest margin of 8.8%, and a further decline in impairments. This consistent performance illustrates the strength of our business model, focusing on our local presence in specialist markets, building strong client relationships, underpinned by prudent underwriting criteria. As we continue to see a gradual increase in the supply of credit with a return of competition in some of our key markets, we will maintain the same approach that has served us well through previous cycles, maintaining our margins and continuing to price risk appropriately rather than chasing growth. We will remain focused on our core attributes which differentiate us and underpin our long track record of proﬁtable growth through the cycle, namely the expertise of our people within their speciﬁc ﬁelds, our high levels of repeat business and local underwriting responsibility. We will also ensure that the proﬁle of our lending, which is predominantly short-term, secured and diversiﬁed across industry sectors, remains consistent. We continue to see opportunities for growth in the Banking division, both through our well established distribution network of over 500 direct sales people as well as specialist intermediaries including motor dealers and insurance brokers, and through initiatives looking at entry into adjacent markets which suit our specialist model and underwriting criteria. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 6 Close Brothers Group plc Annual Report 2015 Chairman’s and Chief Executive’s Statement continued Investing for the Long Term Our strong ﬁnancial position and good levels of proﬁtability also mean that we have the ﬁnancial resources to continuously invest in our people, products and systems to adapt as markets evolve, and to enhance and diversify our client offering and improve the delivery of services to our clients. Our high touch business model and client led approach is dependent upon the knowledge and experience of our people and our shared values of integrity, prudence and commitment to service. Therefore, attracting, retaining and developing talent in each of our specialist ﬁelds is key to our longer term success. To further develop our employees, we have introduced a sales training programme for new recruits in our asset ﬁnance business, and to maximise productivity and enhance the client experience in Asset Management, we are investing in the training and development of our professional adviser force and creating regional practices which are supported by expanded client service teams. We have a long history of supporting SMEs across the UK and currently provide £3.5 billion of lending to these growing businesses. To further demonstrate our ongoing commitment to supporting SMEs we have created an apprenticeship scheme. The Close Brothers SME Apprentice Programme will provide funding for up to 20 apprentices per annum for the next three years with the aim of enabling SMEs that would otherwise be unable to afford to take on and train additional staff to grow and expand their businesses. While we are predominantly a people driven business, we also continuously invest in our systems to both improve our client proposition and the accessibility of our products and services as well as protect our client data. During the year we have further strengthened our IT function within the Banking division to deliver improvements to our client proposition and increase our efﬁciency and speed to market. We have rolled out a number of new initiatives in recent years including system upgrades in Property and Treasury to improve efﬁciency and we are now enhancing our processes in premium ﬁnance. Winterﬂood invests continuously to support its market leading, proprietary technology and Asset Management is beneﬁting from the investment made in our technology platform in recent years. Ongoing regulatory reform remains a signiﬁcant challenge in the banking sector, but with our strong client focus, straightforward products and prudent approach we are well positioned. Monitoring and implementing this regulatory change is resource intensive and we continue to invest in our people and systems to ensure we continue to meet increasing regulatory reporting requirements and operate in the best interests of our clients. Speciﬁcally, in response to the increased focus on risk and compliance across our industry and a greater level of oversight, we have reorganised and strengthened our group wide risk and compliance functions. Winterﬂood experienced mixed market conditions during the year but continues to beneﬁt from its unique business model which allows us to provide continuous liquidity for our clients and trade proﬁtably even in challenging market conditions, thereby maintaining our market leading position. Lower activity and periods of increased volatility in the ﬁrst half resulted in an increase in the number of loss days, but conditions improved in the second half and good performance in our investment trusts business ensured that adjusted operating proﬁt reduced by just 8% to £24.6 million (2014: £26.6 million). In the ﬁrst half we completed the sale of Close Brothers Seydler, our German securities business which has been treated as a discontinued operation. Our Asset Management business continues to make good progress, with its high quality integrated ﬁnancial planning advice and investment management proposition proving popular with clients. We achieved good growth in the period with gross inﬂows into our managed assets up 31% year-on-year to £1.5 billion (31 July 2014: £1.1 billion). We continue to see good demand for our discretionary Close Portfolio Funds which now total close to £3 billion under management, the majority of which delivered top quartile performance over the last year. This growth is driving further improvement in proﬁtability with adjusted operating proﬁt increasing to £17.8 million (2014: £9.9 million), including a £4.4 million beneﬁt from our former private equity business. Our business remains well positioned to beneﬁt from ongoing changes in the market and regulatory environment, such as the recently announced pension freedoms legislation which we expect to increase the overall demand for retail advice and wealth management over the longer term. Close Brothers Group plc Annual Report 2015 7 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Management and Board Changes As previously announced, after 27 years with the business, Julian Palfreyman retired from his position as chief executive of Winterﬂood at the end of the ﬁnancial year. Philip Yarrow has taken over as chief executive, having previously been the head of electronic trading at Winterﬂood since 2000. We would like to thank Julian for his signiﬁcant contribution to the business over many years and wish him well for the future. Additionally, Robert Sack joined Close Brothers in April 2015 as group risk ofﬁcer and is a member of the Executive Committee. Robert has held a number of senior roles at other ﬁnancial institutions and brings a wealth of risk management experience to his new role within the group. As planned, Bruce Carnegie-Brown stood down from the board in November 2014. Following Bruce’s departure, Bridget Macaskill was appointed chairman of the Remuneration Committee and Geoffrey Howe was appointed senior independent director. Outlook We remain conﬁdent that our strategy and proven business model will continue to deliver both attractive propositions for our clients, and long-term value for our shareholders. We see continued opportunities for growth in the Banking division, whilst maintaining our prudent risk proﬁle and focus on returns. Winterﬂood is well positioned but remains sensitive to market conditions. In Asset Management we expect to see continued net inﬂows and increasing proﬁtability. Overall, the group remains well positioned to continue to deliver good results. Photographed on location at Haynes Ford LTD. 8 Close Brothers Group plc Annual Report 2015 Business Model Our model is underpinned by our focus on service, expertise and relationships across our businesses. These attributes are fundamental to our client proposition, allowing us to support our clients and create and sustain value for shareholders in all market conditions. s i n n t s e a r k Gen sustain uild leading p o siti o ur specialist m E x pertise Our people are experts in their ﬁelds o B erate s a b le tr o r n g e t u r a n n d s R e i n v e s t o i n u r c t h u e s t b o u m e r p sin e ro p R e l e Building long-term relationships with clients and intermediaries Allowing us to provide excellent service a o t n i s hip Servic s ss to enhance M a i n t a i n a s osition an d s u p p o r t o n sitio o e cl y e c o u n d fi nancial p u r clients through th Close Brothers Group plc Annual Report 2015 99 We support our business model by managing our ﬁnancial resources prudently, employing talented and engaged employees, and investing to enhance our client proposition and protect and extend our successful business model for the long term. Managing our resources prudently Employ talented and engaged employees Invest to strengthen our client proposition Our prudent and efﬁcient balance sheet ensures we can serve our clients and deliver growth in all market conditions. The expertise of our people is fundamental to understanding and meeting clients’ needs and ensuring high quality decision making. We continuously invest to protect, support and extend our business model to ensure it is sustainable for the long-term. • We borrow longer than we lend, and maintain a prudent level of liquidity, predominantly in deposits with the Bank of England. • We invest signiﬁcantly in recruitment, training and development, whether employing school leavers, graduates or experienced professionals. • We have access to diverse funding sources, including retail and corporate deposits, securitisations, bilateral loan facilities and the public debt markets. • We match assets and liabilities, to minimise exposure to short-term movements in interest rates. • We maintain a prudent capital position to ensure we have the resources to grow throughout the cycle, and can absorb any changes in regulatory requirements. • Our employee survey demonstrates strong employee engagement and job satisfaction across the group. • We encourage and reward entrepreneurship and innovation. • We ensure our compensation structures are fair, transparent and competitive, and balance long and short-term objectives. • We are committed to providing equal opportunities and promoting a culture of diversity in the work place. • We strengthen our distribution networks by hiring and training new sales teams and ﬁnancial advisers. • We continuously evaluate and implement new technology to support and enhance the speed and quality of our client service. • We always look for ways to improve client processes to increase efﬁciency and ensure the highest level of customer focus. • We explore new ways to extend our successful business model into adjacent areas. • We invest in our brand to increase client awareness and leverage our strong reputation. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 10 Close Brothers Group plc Annual Report 2015 Business Model continued How we are different Banking Securities Our services We focus on straightforward products and services in markets we know and understand. The expertise of our people allows us to provide flexible solutions to meet individual client needs. The Banking division provides a range of specialist lending products to UK SMEs, as well as specialist instalment payment solutions to UK retail borrowers. We also offer deposit-taking services to businesses and individuals, which form an important part of our funding along with wholesale facilities. Winterﬂood is a leading market-maker in the UK, providing dealing and execution services principally to ﬁnancial institutions. We are committed to providing continuous liquidity allowing our clients to trade securities in all market conditions. Our market position We are a trusted brand developed over the last 100 years with a strong reputation in the financial services market. We have built leading market positions in a number of specialised businesses. We have a long track record of support for our clients and strong financial performance in all market conditions. Our expertise We understand our specialist markets and our clients’ needs, ranging from small businesses to private investors and retail brokers. Our decentralised model enables personal service, with extensive local presence across the UK. Sustainable income We focus on recurring income streams and manage our financial resources carefully. We apply our strategy consistently to support sustainable earnings growth. We have a strong and established market position in each of our specialist areas. Overall our loan book is £5.7 billion across several specialist markets in asset, invoice, property development, motor and insurance premium ﬁnance. We have always recognised the importance of building long-term client relationships, generating high levels of repeat business across the division. Winterﬂood is a leading market-maker in the UK, with around 400 ﬁnancial institutions as clients, and covering around 15,000 securities in the UK and overseas. We also have a specialist team focused on investment trusts. Our strong market position ensures high levels of order ﬂow, allowing us to offer competitive prices and provide liquidity to our clients in all market conditions. Our lenders are specialists with a deep knowledge of the industry sectors and asset classes we lend in, and oversee all lending decisions from origination to maturity with authority to make decisions. This means we understand our clients and can offer fast and ﬂexible solutions, while supporting our long track record of pricing risk appropriately. We have a local presence across the UK with a large direct sales force, as well as an intermediated distribution network through credit brokers, motor dealers and insurance brokers. Income in the Banking division reﬂects the difference between the interest and fee income we earn on loans to customers and the cost of our funding. We have sustained a consistently strong net interest margin through the cycle, thanks to our high level of service and consistent pricing of risk. Winterﬂood is differentiated by the skill and experience of our people; our traders have extensive experience in executing client orders and are united by a strong culture focused on traditional market-making. They are supported by our market leading, proprietary technology, which allows us to deliver ﬂexible client solutions and provides access to a deep pool of internal liquidity. The majority of Winterﬂood’s income reﬂects the trading proﬁt on its market- making. Although the level of income ﬂuctuates, we have a long track record of trading proﬁtably in a range of market conditions. Winterﬂood also earns corporate fees in its investment trust business, which advises on primary and secondary capital raisings. Read more about Banking on pages 20 to 23. Read more about Securities on pages 24 to 25. Close Brothers Group plc Annual Report 2015 11 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Asset Management The Asset Management division provides a complete wealth management service for individuals, incorporating both ﬁnancial planning advice and investment management. We also offer a range of multi-asset investment strategies, available to both our own ﬁnancial advisers and third party IFAs and other intermediaries. We have a long history of advising clients and managing their investments and an established reputation in the market. In recent years we have enhanced our integrated model comprising ﬁnancial planning advice, investment management and platform technology, which puts us in a strong position to beneﬁt from pension reforms and changes to regulation, technology and demographics. We have increased our client assets over the last several years to nearly £11 billion today. We employ ﬁnancial advisers throughout the UK who provide advice on a full range of issues and help our clients establish long-term ﬁnancial plans. We offer a wide range of investment solutions designed to meet the varying needs of our clients, supported by a high quality investment process delivered through an experienced team covering asset allocation, research and portfolio management. Our Asset Management business builds long-term relationships with clients, which generate recurring and sustainable fee-based income for the provision of ﬁnancial advice and investment management services. Read more about Asset Management on pages 26 to 27. Photographed on location at Winterﬂood Securities Limited. 12 Close Brothers Group plc Annual Report 2015 Strategy and Key Performance Indicators Our strategy is to build and sustain strong market positions in specialist markets, where we can differentiate ourselves through the expertise of our people and by providing superior service to our clients. This is supported by a prudent approach to managing our business and our ﬁnancial resources, and ongoing investment in our people, systems and services. Strategic objectives 2015 progress Future objectives Build leading market positions Build strong market positions, using our expertise to provide excellent client service and develop long-term client relationships. • Continued increase in lending to small businesses and individuals, with 8.5% loan book growth to £5.7 billion. • Maintained Winterﬂood’s position as the leading market-maker to retail brokers in the UK. • 11% growth in total client assets with strong investment management inﬂows in Asset Management. • Grow the loan book while maintaining prudent and consistent lending criteria. • Explore new opportunities that leverage our core capabilities in adjacent markets. • Grow client assets to increase the scale of our Asset Management business. Remain prudent and efﬁcient Hold an appropriate level of capital, funding and liquidity in all market conditions. • Maintained capital levels comfortably ahead of regulatory requirements. • Further diversiﬁed funding sources through access to the Funding for Lending Scheme and maintained a prudent maturity proﬁle. • Close Brothers Limited’s credit rating upgraded by Moody’s to Aa3, making us one of the highest rated banks in the UK. • Maintain a prudent capital position to ensure ﬂexibility to deliver growth and absorb any changes in regulatory requirements. • Maintain access to a diverse range of funding sources, optimise price and maturity, and hold a prudent level of liquidity. Develop our client proposition Invest in people, technology, and products and services to enhance the proposition to our clients. • Launched new recruitment and training initiatives to attract and develop sales and advisory talent. • Targeted investment in IT infrastructure and processes to improve client proposition and efﬁciency. • Constant focus on customer service resulting in strong customer feedback and high levels of repeat business across the Banking division. • Further optimise the scale and effectiveness of our direct sales force and adviser base. • Ensure we continue to consider clients’ needs, ability to pay and appropriateness of our service, and provide clear and transparent communications to clients. • Maintain a programme of improving and upgrading our technology to further enhance resilience, efﬁciency and customer experience. Deliver growing and sustainable earnings Consistently apply our business model to generate high quality, recurring earnings and sustain a strong financial position. • Strong growth in adjusted operating proﬁt now up 68% in three years. • Continued solid earnings growth in • Maintain strong returns in Banking through commitment to our lending model. • Maximise proﬁtability for Winterﬂood in all Banking, increasing proﬁtability in Asset Management and resilient proﬁtability in Winterﬂood despite challenging markets. market conditions. • Drive operating leverage in Asset Management through growth in client assets. Deliver attractive shareholder returns Generate sustainable shareholder returns through earnings growth and prudent management of our financial resources. • Strong and improving return on opening • Continue to execute our established equity. • Fifth consecutive year of dividend growth, up 9% to 53.5p for the full year. • Total shareholder returns of 18% in the year and 119% in three years. business model and manage our ﬁnancial resources prudently. • Maintain appropriate dividend cover to support progressive and sustainable dividend growth. • Remain committed to clear and transparent communication with shareholders and other external stakeholders. Close Brothers Group plc Annual Report 2015 13 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s This in turn allows us to support our clients in all market conditions, while generating sustainable returns for our shareholders, and is demonstrated by our long track record of proﬁtability at all stages of the economic cycle. Key risks1 Key performance indicators2 • Increased competition in our markets. • Changes in technology, consumer habits or market structure. • Loss of key employees. Loan book £ billion 5.7 5.3 4.6 Winterﬂood’s income £ million Total client assets £ billion 96.1 94.6 74.6 10.8 9.1 9.7 • Changes in European or UK capital regulatory requirements. • Changes in the market price or availability of funding. 2013 2014 2015 2013 2014 2015 2013 2014 2015 Common equity tier 1 capital per cent 13.3 13.1 13.7 Leverage ratio per cent Funding % loan book per cent 9.8 9.2 10.2 135 135 131 2013 2014 2015 2013 2014 2015 2013 2014 2015 • Inability to attract and retain the required talent. • Failure in processes or controls or lack of transparency in communication. • Failure to support and upgrade technology resulting in loss of client data, security breaches or loss of competitiveness. • Changes in the economic environment adversely affecting borrowers’ ability to pay. • Failure to invest as required in people, technology, products and services. Total headcount Front ofﬁce headcount 2,650 2,669 2,860 1,070 1,008 1,016 Employees satisﬁed/ very satisﬁed3 per cent 90 88 86 2013 2014 2015 2013 2014 2015 2011 2013 2015 Adjusted operating proﬁt £ million 224.9 193.7 167.2 Adjusted basic earnings per share pence 120.5 101.0 83.5 Basic earnings per share pence 117.8 98.4 82.0 • Failure to maintain our business model or execute on key elements of strategy. • Changes in regulation or taxation. • Major legal or regulatory event resulting in ﬁnes or compensation payments. 2013 2014 2015 2013 2014 2015 2013 2014 2015 Group return on opening equity per cent 19.5 17.9 15.8 Dividend per share pence Total shareholder return per cent 53.5 49.0 44.5 47 26 18 1 Further information on principal risks and uncertainties is provided on pages 28 to 31. 2 Key performance indicators have been restated to exclude Seydler for 2014 and 2015 only. 3 Our employee survey is run on a biennial basis, chart shows results from latest three surveys. 2013 2014 2015 2013 2014 2015 2013 2014 2015 14 Close Brothers Group plc Annual Report 2015 Financial Overview Close Brothers has delivered another year of strong performance, with adjusted operating proﬁt growth of 16% to £224.9 million (2014: £193.7 million), adjusted earnings per share (“EPS”) growth of 19% to 120.5p (2014: 101.0p) and a further improvement in return on opening equity to 19.5% (2014: 17.9%). Photographed on location at Biggin Hill Heritage Hangar Ltd. Close Brothers Group plc Annual Report 2015 15 Continued Strong Performance All three of our divisions delivered a good performance in 2015. The Banking division remains the key driver of the group’s growth, delivering a 15% uplift in adjusted operating proﬁt to £208.7 million (2014: £181.6 million), with 8.5% loan book growth to £5.7 billion, helped by a strong net interest margin and further improvement in the bad debt ratio. Winterﬂood experienced difﬁcult trading conditions in the ﬁrst half but remained consistently proﬁtable, delivering £24.6 million adjusted operating proﬁt (2014: £26.6 million) in the period as strong performance in the investment trust business and a one-off investment gain helped to offset weaker trading revenues. Asset Management continues to make progress in growing client assets and underlying proﬁtability, as well as beneﬁting from non-recurring income related to our former private equity business, to deliver 80% adjusted operating proﬁt growth to £17.8 million (2014: £9.9 million). Total revenues increased 10% year-on- year to £689.5 million (2014: £627.9 million) driven primarily by strong growth in net interest and fee income in the Banking division and further growth in Asset Management, although income in Securities declined marginally. We continue to invest in people, products and systems to sustain and further develop our business model. As a result adjusted operating expenses increased 8% to £422.7 million (2014: £390.1 million) primarily driven by higher volume related costs and continued investment to support growth in the Banking division. Securities costs have remained broadly stable, while costs in Asset Management increased only modestly reﬂecting the operating leverage in the division. Overall, the expense/income and compensation ratios (total staff costs on adjusted operating income) both improved to 61% (2014: 62%) and 36% (2014: 37%) respectively. The group continues to beneﬁt from its disciplined approach to underwriting and primarily secured lending model as well as the benign credit environment. As a result, impairment losses declined and the bad debt ratio fell for the sixth consecutive year to 0.8% (2014: 0.9%), despite the strong loan book growth over the same period. Overall, this resulted in strong adjusted operating proﬁt growth of 16% to £224.9 million (2014: £193.7 million) which includes the group expenses of £26.2 million (2014: £24.4 million). The operating margin increased slightly to 33% (2014: 31%). i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Group Income Statement Adjusted operating income Adjusted operating expenses Impairment losses on loans and advances Adjusted operating proﬁt Banking Securities Asset Management Group Amortisation of intangible assets on acquisition Operating proﬁt before tax Tax Non-controlling interests Proﬁt attributable to shareholders from continuing operations Proﬁt from discontinued operations, net of tax 2015 £ million 689.5 (422.7) (41.9) 224.9 208.7 24.6 17.8 (26.2) 2014 £ million 627.9 (390.1) (44.1) 193.7 181.6 26.6 9.9 (24.4) (5.0) (4.9) 219.9 188.8 (45.4) – (43.2) (0.4) 174.5 145.2 11.2 4.6 Proﬁt attributable to shareholders from continuing and discontinued operations 185.7 149.8 Adjusted basic earnings per share (continuing operations) Basic earnings per share (continuing operations) Basic earnings per share (continuing and discontinued operations) Ordinary dividend per share Return on opening equity 120.5p 101.0p 117.8p 98.4p 125.4p 101.5p 53.5p 49.0p 19.5% 17.9% Change % 10 8 (5) 16 15 (8) 80 7 2 16 5 20 24 19 20 24 9 16 Close Brothers Group plc Annual Report 2015 Financial Overview continued Photographed on location at Piling Equipment Ltd. After amortisation of intangible assets of £5.0 million (2014: £4.9 million), proﬁt attributable to shareholders increased 20% to £174.5 million (2014: £145.2 million). The effective tax rate declined to 21% (2014: 23%), in line with the UK corporation tax rate. In July 2015, draft legislation was published in relation to a corporation tax surcharge of 8% on banking sector proﬁts from 1 January 2016, together with a reduction in the underlying corporation tax rate from 20% to 18% by 2020. We will continue to monitor this legislation and its impact on our tax rate. Our adjusted EPS from continuing operations increased 19% or 19.5p to 120.5p (2014: 101.0p), ahead of the 16% increase in adjusted operating proﬁt due to the reduction in effective tax rate. Our reported basic EPS, which includes amortisation of intangible assets, increased 20% to 117.8p (2014: 98.4p) on a continuing basis. Basic EPS including continuing and discontinued operations increased 24% to 125.4p (2014: 101.5p), which includes the trading result and proﬁt on disposal of Close Brothers Seydler. Simple and Transparent Balance Sheet During the year, the overall structure of the group’s high quality and transparent balance sheet has remained unchanged, and we have maintained our prudent capital, funding and liquidity positions. Our balance sheet remains simple and is predominantly made up of loans and advances to customers, which are short-term in nature and over 90% secured, cash and loans and advances to banks and settlement balances held within our Securities division. Total assets increased by £256.9 million to £8.0 billion, due to an 8.5% increase in loans and advances to customers to £5,737.8 million (31 July 2014: £5,289.7 million) which account for the signiﬁcant majority of the balance sheet at 72% (31 July 2014: 69%) of assets. Borrowings increased £351.6 million to £1,792.6 million (31 July 2014: £1,441.0 million) to fund the loan book growth. Net settlement balances declined £34.8 million to £77.6 million due to the disposal of Close Brothers Seydler and lower trading activity at Winterﬂood. Total equity increased to £1,009.9 million (31 July 2014: £917.6 million) reﬂecting strong proﬁtability in the year, partially offset by dividend payments of £74.3 million. The return on group assets improved to 2.3% from 1.9% in 2014. Diverse and conservative funding position Our conservative approach to funding and liquidity is a core part of our business model. Our Treasury function provides funding for our lending businesses from a diverse range of sources, including retail and corporate customer deposits, secured and unsecured loan facilities and bonds, and maintains a prudent maturity proﬁle at all times. As a result, we expect to meet the requirements for the new funding and liquidity ratios proposed under the Capital Requirements Directive (“CRD IV”) when they come into force. In 2015 we have taken advantage of favourable market conditions to strengthen our funding position whilst at the same time reducing the overall funding costs for our business. We have further diversiﬁed our funding sources by drawing down £375 million from the government’s Funding for Lending Scheme secured against a portion of the asset ﬁnance loan book. We have also renewed £945 million of facilities and since the year end we have completed a private placement of a €25 million bond. Group Balance Sheet Assets Cash and loans and advances to banks Settlement balances, long trading positions and loans to money brokers Loans and advances to customers Non-trading debt securities Intangible assets Other assets Total assets Liabilities Settlement balances, short trading positions and loans from money brokers Deposits by banks Deposits by customers Borrowings Other liabilities Total liabilities Equity Total liabilities and equity Group Funding Deposits by customers Drawn and undrawn facilities1 Senior unsecured bonds Equity Total available funding Close Brothers Group plc Annual Report 2015 17 i S t r a t e g c R e p o r t G o v e r n a n c e 31 July 2015 £ million 31 July 2014 £ million 1,122.6 481.9 5,737.8 135.4 144.2 335.4 1,259.2 634.8 5,289.7 45.6 146.3 324.8 7,957.3 7,700.4 404.3 35.1 4,481.4 1,792.6 234.0 522.4 49.6 4,513.7 1,441.0 256.1 6,947.4 6,782.8 1,009.9 917.6 7,957.3 7,700.4 31 July 2015 £ million 4,481.4 1,512.2 516.8 1,009.9 31 July 2014 £ million 4,513.7 1,191.2 505.4 917.6 Change £ million (32.3) 321.0 11.4 92.3 7,520.3 7,127.9 392.4 i F n a n c a i l S t a t e m e n t s 1 Includes £245.0 million (31 July 2014: £265.0 million) of undrawn facilities and excludes £8.6 million (31 July 2014: £9.4 million) of non-facility overdrafts included in borrowings. Group Funding Maturity Proﬁle Deposits by customers Drawn and undrawn facilities Senior unsecured bonds Equity Less than one year £ million 3,330.9 152.2 18.5 – One to two years £ million 851.2 643.4 199.4 – Greater than two years £ million 299.3 716.6 298.9 1,009.9 Total £ million 4,481.4 1,512.2 516.8 1,009.9 Total available funding at 31 July 2015 3,501.6 1,694.0 2,324.7 7,520.3 Total available funding at 31 July 2014 3,428.4 1,777.1 1,922.4 7,127.9 18 Close Brothers Group plc Annual Report 2015 Financial Overview continued Photographed on location at Alicat Workboats Ltd. Credit ratings upgraded by Moody’s In May 2015, Moody’s Investor Services (“Moody’s”) upgraded its long-term rating for Close Brothers Group (“CBG”) and Close Brothers Limited (“CBL”) to A3/P2 from Baa1/P2 and Aa3/P1 from A3/P2, respectively, both with stable outlooks. Earlier in the year, Fitch Ratings (reafﬁrmed its ratings for CBG and CBL at A/F1, both with stable outlooks. The rating upgrade reﬂects our proven business model, consistent track record through the cycle and prudent approach to funding and capital management, as well as the implementation of Moody’s new bank rating methodology. Total funding increased £392.4 million or 6% in the year to £7,520.3 million (31 July 2014: £7,127.9 million) and accounted for 131% (31 July 2014: 135%) of the loan book. This reﬂects a £321.0 million increase in drawn and undrawn facilities increasing to £1,512.2 million (31 July 2014: £1,191.2 million), reﬂecting participation in the government’s Funding for Lending Scheme. Customer deposits remained broadly stable at £4,481.4 million (31 July 2014: £4,513.7 million) as did senior unsecured bonds at £516.8 million (31 July 2014: £505.4 million). Term funding (funding with a maturity greater than 12 months) increased by 9% to £4,018.7 million (31 July 2014: £3,699.5 million) due to participation in the Funding for Lending Scheme, which runs for four years, and the facility renewals. At 31 July 2015, the loan book was 70% covered by term funding (31 July 2014: 70%) with an average maturity of 31 months (31 July 2014: 30 months), more than double the maturity of the loan book of 14 months (31 July 2014: 14 months). Prudent approach to managing liquidity The group takes a conservative approach to liquidity management, and the majority of our liquidity requirements and surplus funding are held in the form of high quality liquid assets. At 31 July 2015, our treasury assets totalled £1,173.4 million (31 July 2014: £1,217.3 million), of which £1,058.1 million (31 July 2014: £1,217.3 million) comprised high quality liquid assets, principally in the form of deposits with the Bank of England. From time to time we also place surplus funding in certiﬁcates of deposits (“CDs”) or other liquid securities to maximise yield. At the year end, we held £115.3 million (31 July 2014: £nil) in CDs. We regularly assess our long and short-term liquidity requirements including extensive stress testing, with a clearly deﬁned risk appetite. Therefore, we hold a prudent liquidity position at all times relative to both internal and external requirements, and expect to comfortably meet the Liquidity Coverage Ratio requirements under CRD IV when they come into force. Close Brothers Group plc Annual Report 2015 19 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i 31 July 2015 £ million 20.1 1,038.0 31 July 2014 £ million 45.6 1,171.7 Change £ million (25.5) (133.7) 1,058.1 1,217.3 (159.2) 115.3 – 115.3 1,173.4 1,217.3 (43.9) l S t a t e m e n t s 31 July 31 July 2015 2014 £ million £ million 13.7% 13.1% 14.3% 14.3% 10.2% 9.2% 813.2 710.8 848.0 780.4 5,932.1 5,445.8 Maintaining a strong capital position We have always maintained a strong and prudent capital position, which in recent years has allowed us to invest in our business and consistently deliver strong loan book growth while at the same time meeting increasingly demanding regulatory requirements. In 2015, our capital position improved further with a common equity tier 1 capital ratio of 13.7% (31 July 2014: 13.1%) and a leverage ratio of 10.2% (31 July 2014: 9.2%), both comfortably ahead of minimum regulatory requirements. This reﬂects the strong proﬁtability in the period, more than offsetting the impact of the growing loan book. Common equity tier 1 capital increased to £813.2 million (31 July 2014: £710.8 million), reﬂecting proﬁt for the year of £185.7 million, partly offset by the deduction for foreseeable dividend payments and other reserve movements. Total risk weighted assets increased 9% to £5,932.1 million (31 July 2014: £5,445.8 million), predominantly due to the increased credit and counterparty risk resulting from loan book growth in the period. Risk weighted assets in respect of operational risk also increased reﬂecting growth across the group, whilst market risk reduced due to the disposal of Close Brothers Seydler and lower trading in Winterﬂood. Our current capital position is strong and our existing ratios are comfortably ahead of current requirements. However, the regulatory environment continues to evolve, with capital requirements across the industry being reviewed by both UK and international regulators, which could lead to changes in the future. We are conﬁdent that our strong capital position, the quality of our assets and overall prudent approach to managing our business and ﬁnancial resources ensure we can absorb any future changes, while retaining the ﬂexibility to pursue growth opportunities. Treasury Assets Gilts Bank of England deposits High quality liquid assets Certiﬁcates of deposit Total treasury assets Group Capital Position Common equity tier 1 capital ratio Total capital ratio Leverage ratio1 Common equity tier 1 capital Total regulatory capital Risk weighted assets 1 The leverage ratio is calculated using the 2014 Basel Committee methodology as required by the Prudential Regulation Authority. It is calculated as Tier 1 capital as a percentage of total balance sheet assets, adjusting for certain capital deductions, including intangible assets, and off balance sheet exposures. 20 Close Brothers Group plc Annual Report 2015 Banking The Banking division’s strategy remains unchanged: to deliver sustainable growth and strong returns throughout the economic cycle. To do this, we continuously invest in our business model to maintain our local presence and leading position in our chosen specialist markets, in order to build long-term client relationships. This strategy has driven strong performance for the business which delivered its sixth consecutive year of double-digit proﬁt growth in 2015. Photographed on location at BCW Engineering Ltd. Close Brothers Group plc Annual Report 2015 21 The bad debt ratio has improved steadily in recent years and declined further in 2015 to 0.8% (2014: 0.9%). The improvement in the year was principally driven by lower impairment charges in Commercial and Property, and reﬂects our ongoing focus on credit quality and the favourable economic conditions. Adjusted operating expenses increased in line with income, up 12% to £248.0 million (2014: £221.0 million) reﬂecting an increase in volume related costs and continued investment in our service led business model to deliver further growth and consistent returns over the long term. Speciﬁcally, higher staff costs reﬂect increased headcount in our operational and control functions to support loan book growth and ensure we operate effectively in our regulated environment. IT costs also increased to meet the continued need to invest in our systems and technology to enhance our speed to market and customer focused service proposition. As a result the expense/income ratio has marginally increased to 50% (2014: 49%), whilst the compensation ratio remained stable at 27% (2014: 27%). Continued Loan Book Growth We have a track record of consistent growth through the cycle and delivered good growth in the year across our loan book despite a gradual increase in the supply of credit and increasing competition in some of our key markets. In the 12 months to 31 July 2015, the overall loan book increased 8.5% to £5.7 billion (31 July 2014: £5.3 billion). Most importantly this growth was achieved with no change to our strict risk and return criteria and its key characteristics remained unchanged, with an average duration of 14 months (31 July 2014: 14 months) and around 90% secured. Asset ﬁnance continues to deliver good growth due to our strong customer relationships and direct lending capabilities. In motor ﬁnance, strong demand in the overall car market has allowed us to deliver further loan book growth whilst maintaining our robust margins in the face of increasing competition. Property remains the area of highest growth in the period with continued strong demand for development ﬁnance. Overall, the Retail loan book increased 8.3% to £2,266.0 million (31 July 2014: £2,092.8 million) in the 12 months to 31 July 2015. The motor ﬁnance loan book increased 9.7% to £1,600.3 million (31 July 2014: £1,458.9 million) as underlying growth in car market volumes and successful sales campaigns in the second half offset increased competition. The premium ﬁnance book increased 5.0% to £665.7 million (31 July 2014: £633.9 million) reﬂecting new business from both new and existing customers. Delivering Sustainable Growth and Strong Returns over the Long Term In recent years, the division has achieved exceptionally strong growth, which combined with improving economic conditions and our disciplined approach to underwriting has resulted in reduced impairments and increasingly strong returns. As we continue to see a gradual increase in the supply of credit and a return of competition in some of our key markets, we remain focused on maintaining the high quality of our loan book and ensuring that we price risk appropriately. This will enable us to continue our long track record of delivering strong returns and sustainable growth through the cycle. Distinctive Business Model Drives Strong Financial Performance The Banking division has again delivered solid growth and strong returns in 2015. Adjusted operating proﬁt increased 15% to £208.7 million (2014: £181.6 million) due to a 12% increase in adjusted operating income and lower impairment losses. As a result, the division’s return on opening equity improved to 27% (2014: 25%) and the return on net loan book increased to 3.8% (2014: 3.7%). Operating income increased 12% to £498.6 million (2014: £446.7 million) driven by increases across all our businesses, with particularly strong growth in Property which increased 28% to £96.8 million (2014: £75.4 million). The net interest margin remained strong at 8.8% (2014: 8.6%), reﬂecting our focus on maintaining our margins and pricing risk appropriately as competition increases and supported by a modest decline in funding costs. Treasury and other income declined slightly to £13.4 million (2014: £19.4 million). i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 22 Close Brothers Group plc Annual Report 2015 Banking continued Photographed on location at Mark Priestley SDT Ltd. The Commercial loan book increased 6.1% to £2,172.8 million (31 July 2014: £2,047.2 million) driven by an 8.5% increase in asset ﬁnance to £1,796.2 million (31 July 2014: £1,656.0 million) due to good levels of new business across all sectors and the beneﬁts of our growth initiatives in Ireland and energy ﬁnance. Invoice ﬁnance reduced by 3.7% to £376.6 million (31 July 2014: £391.2 million) in a market that continues to be highly competitive. In Property, we continue to beneﬁt from our strong positioning in the residential development market as we continued to see solid loan book growth in 2015 of 13.0% to £1,299.0 million (31 July 2014: £1,149.7 million). We have maintained our strict and consistent lending criteria throughout this period of increased demand and continue to lend at conservative loan to values focusing primarily on residential property development in the South East. Well Positioned for Further Growth at Attractive Margins We remain conﬁdent in the outlook for the Banking division and our ability to deliver further growth and good returns over the long term. To do this we will continue to invest in our tried and tested business model, which is built upon strong customer relationships and expertise in our chosen markets which deliver high levels of repeat business. We will also deliver further investment in both people and technology to adapt to changes in the wider regulatory and market environments as they continue to evolve. We continue to see opportunities for growth and we will maximise these opportunities by investing in our people to extend our reach and distribution capacity in existing markets and looking at new initiatives in adjacent markets. At the same time we will remain focused on the quality of our lending to support strong returns over the long term. Close Brothers Group plc Annual Report 2015 23 Key Performance Indicators Net interest margin1 per cent 8.8 8.6 8.8 Bad debt ratio2 per cent 1.2 0.9 0.8 Return on opening equity3 per cent 27 24 25 Return on net loan book4 per cent 3.6 3.7 3.8 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 1 Net interest and fees on average net loans and advances to customers. 2 Impairment losses on average net loans and advances to customers. 3 Adjusted operating proﬁt after tax and non-controlling interests on the division’s opening equity, excluding non-controlling interests. 4 Adjusted operating proﬁt on average net loans and advances to customers. Key Financials Operating income Net interest and fees on loan book1 Retail Commercial Property Treasury income Adjusted operating expenses Impairment losses on loans and advances Adjusted operating proﬁt 2015 £ million 498.6 485.2 181.1 207.3 96.8 13.4 (248.0) (41.9) 2014 £ million 446.7 427.3 164.6 187.3 75.4 19.4 (221.0) (44.1) Change % 12 14 10 11 28 (31) 12 (5) 208.7 181.6 15 1 Includes £381.2 million (2014: £332.2 million) net interest income and £104.0 million (2014: £95.1 million) other income. Other income includes net fees and commissions, operating lease income, and other miscellaneous income. Loan Book Analysis Retail Motor ﬁnance Premium ﬁnance Commercial Asset ﬁnance Invoice ﬁnance Property Closing loan book 31 July 2015 £ million 2,266.0 1,600.3 665.7 2,172.8 1,796.2 376.6 1,299.0 31 July 2014 £ million 2,092.8 1,458.9 633.9 2,047.2 1,656.0 391.2 1,149.7 Change % 8.3 9.7 5.0 6.1 8.5 (3.7) 13.0 5,737.8 5,289.7 8.5 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 24 Close Brothers Group plc Annual Report 2015 Securities Winterﬂood has maintained its leading market position and remained proﬁtable by maximising revenue opportunities in all market conditions, beneﬁting from its experienced traders, proprietary technology and tight risk controls. Photographed on location at Winterﬂood Securities Limited. Close Brothers Group plc Annual Report 2015 25 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Key Performance Indicators1 Winterﬂood income £ million Winterﬂood average bargains per day ’000 Securities operating margin2 per cent Securities return on opening equity per cent 96.1 94.6 74.6 60 56 47 28 26 24 28 26 20 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 1 Key performance indicators have been restated to exclude Seydler for 2014 and 2015 only. 2 Adjusted operating proﬁt on operating income. Solid Result Despite Mixed Market Conditions Winterﬂood experienced mixed market conditions throughout the ﬁnancial year, with periods of increased volatility due to economic and political uncertainty, and the UK equity markets in general seeing lower levels of activity compared to 2014. Against this tough market backdrop, Winterﬂood has provided continuous liquidity to clients whilst maintaining consistent proﬁtability and its variable cost model has allowed it to deliver good returns in the period with both operating margin and return on opening equity broadly stable at 26% (2014: 28%) and 26% (2014: 28%) respectively. Diverse Business Model Drives Consistent Proﬁtability Winterﬂood’s operating income remained broadly stable at £94.6 million (2014: £96.1 million). This reﬂects a signiﬁcant decline in trading revenues with lower activity and income seen across most markets, but particularly in AIM which was impacted by the weakness in commodity prices. This decline was broadly offset by a particularly strong year for investment trust activity, as well as proceeds from the Euroclear disposal in the ﬁrst half. The relative stability of the division’s income under these conditions illustrates the resilience and diversity of Winterﬂood’s business model. Key Financials (continuing operations)1 Operating income2 Operating expenses 2015 £ million 94.6 (70.0) 2014 £ million 96.1 (69.5) Change % (2) 1 Adjusted operating proﬁt2 24.6 26.6 (8) 1 Results from continuing operations exclude Close Brothers Seydler, the sale of which was completed on 5 January 2015 and has been classiﬁed as a discontinued operation under IFRS 5. 2 Operating income and adjusted operating proﬁt include £6.8 million and £3.5 million respectively relating to the disposal of Euroclear shares. Total bargains and average bargains per day increased 9% to 15.3 million (2014: 14.1 million) and 60,494 (2014: 55,749) respectively, as Winterﬂood maintained its leading market position and increased the level of international trading. Income per bargain (excluding the income relating to the disposal of Euroclear shares) decreased to £5.73 (2014: £6.81) reﬂecting the adverse trading conditions seen in the ﬁrst half and an increase in lower margin international trades. As a result the number of loss days increased to 14 (2014: four), the majority of which were in the ﬁrst half. Operating expenses increased slightly to £70.0 million (2014: £69.5 million) with lower staff costs offset by higher settlement fees due to increased bargains. As a result, the expense/ income ratio increased slightly to 74% (2014: 72%) while the compensation ratio has remained broadly stable at 47% (2014: 48%). Overall, this resulted in an 8% decline in adjusted operating proﬁt to £24.6 million (2014: £26.6 million), which includes a £3.5 million beneﬁt from the partial disposal of a long standing shareholding in Euroclear. Well Positioned Market conditions since the year end have been challenging but we are conﬁdent that our consistent strategy and robust business model will enable us to provide continuous liquidity and remain proﬁtable in a variety of market conditions. Close Brothers Seydler Disposal Completed During the ﬁrst half of the year we completed the sale of Close Brothers Seydler. The proﬁt on disposal of £10.3 million and the proﬁt after tax of £0.9 million have been classiﬁed as discontinued operations and the results for 2014 have been restated. As a result, going forward the operations of the Securities division will relate exclusively to Winterﬂood. 26 Close Brothers Group plc Annual Report 2015 Asset Management Photographed on location at Barfoots of Botley Ltd. Asset Management has continued to deliver good growth in assets and improved proﬁtability in 2015. We continue to see solid demand for our integrated advice and investment management services and the business remains well positioned to beneﬁt from the ongoing regulatory and demographic changes. Continued Good Progress The division delivered adjusted operating proﬁt of £17.8 million (2014: £9.9 million), resulting in an improved operating margin of 19% (2014: 12%) and a return on opening equity of 39% (2014: 25%). Excluding a £4.4 million beneﬁt from non-recurring private equity income, adjusted operating proﬁt increased 35% to £13.4 million, with an operating margin of 15%. Income on client assets increased 8% to £90.2 million (2014: £83.8 million), reﬂecting higher investment management revenues driven by solid growth in managed assets, offset by a slight decline in advice and other services. As a result, the revenue margin remained broadly stable at 88 basis points (2014: 89 basis points). Other income increased to £5.4 million (2014: £0.6 million) due to the one-off income from our former private equity business. As a result, total operating income increased 13% to £95.6 million (2014: £84.4 million). Operating expenses increased by 4% to £77.8 million (2014: £74.5 million), less than the growth in income, reﬂecting the broadly stable ﬁxed cost base and operating leverage within the business. This resulted in an improvement in both the expense/ income ratio to 81% (2014: 88%) and the compensation ratio to 53% (2014: 58%). Strong Growth in Client Assets Total client assets increased 11% year-on-year to £10.8 billion (31 July 2014: £9.7 billion), reﬂecting both solid net inﬂows and positive market movements with continued good demand for our integrated advice and investment management proposition. We continue to see strong growth in our core investment management products, with good inﬂows from both our own advisers and investment managers and particularly from third party IFAs and other intermediaries. We also continue to deliver consistent investment performance for our clients, with three out of our ﬁve Close Portfolio Funds delivering top quartile performance over the last year. Net inﬂows into our managed assets increased year-on-year to £700 million or 10% of opening total managed assets (2014: £554 million or 9%), while market movements added £374 million, beneﬁting from rising equity markets. As a result, total managed assets increased 16% in the year to £8.0 billion (31 July 2014: £6.9 billion). This includes £2.7 billion (31 July 2014: £2.4 billion) of assets in our integrated advice and investment management proposition, a 14% increase year-on- year reﬂecting both strong new business levels and the ongoing migration of advised assets into our integrated investment management offering. As a result, advised only assets remained broadly stable year-on-year at £2.8 billion resulting in overall growth in total advised assets of 7% to £5.5 billion (31 July 2014: £5.2 billion). Since the year end we have entered into an agreement regarding the sale of our corporate advice and investment management activities which we expect to complete before the end of the calendar year. This transaction further focuses our business around our core personal advice and wealth management proposition, where we see greater opportunities for growth and operating leverage. The activities disposed of represented £711 million of advised assets and £652 million of managed assets as at 31 July 2015, and contributed income of £5.8 million and adjusted operating proﬁt of £0.7 million in the 2015 ﬁnancial year. Close Brothers Group plc Annual Report 2015 27 Key Performance Indicators Total client assets £ billion Revenue margin1 bps Operating margin per cent Return on opening equity per cent 10.8 9.1 9.7 88 89 88 19 12 5 39 25 10 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 1 Income from advice and other services and investment management over average client assets. Well Positioned for Further Growth Our business is well positioned for future growth given ongoing regulatory and demographic changes. We have a strong client offering covering a full range of ﬁnancial planning advice and investment management services, distributed directly to clients through our own advisers and high net worth investment managers and an outsourced investment management offering to third party IFAs. We continue to invest in the business to support its growth, providing training and development programmes for our advisers and improving internal processes to increase efﬁciency and accelerate the growth of both new business and, where appropriate, migration of existing advised assets into our range of investment management propositions. We believe the UK government’s recently announced changes to the pensions market create opportunities for the industry and expect them to increase demand for our products and services in the longer term. We will also continue to look selectively at opportunities to support our organic growth with inﬁll acquisitions and hiring of high quality advisers and investment managers. Key Financials Operating income Income on client assets Advice and other services1 Investment management Other income2 Adjusted operating expenses 2015 £ million 95.6 90.2 36.1 54.1 5.4 (77.8) 2014 £ million 84.4 83.8 36.6 47.2 0.6 (74.5) Adjusted operating proﬁt 17.8 9.9 Change % 13 8 (1) 15 4 80 1 Income from advice to private and corporate clients and self directed services, excluding investment management income. 2 Interest income and expense, income on principal investments and other income. Movement in Total Client Assets Total managed assets at 1 August Inﬂows Outﬂows Net inﬂows Market movements Total managed assets at 31 July1 Advised only assets at 31 July2 2015 £ million 6,922 1,477 (777) 700 374 2014 £ million 6,193 1,128 (574) 554 175 7,996 6,922 2,797 2,783 Total client assets at 31 July 10,793 9,705 Change % 12 31 35 26 114 16 1 11 1 Total managed assets include £2.7 billion (31 July 2014: £2.4 billion) of assets that are both advised and managed. 2 Total advised assets of £5.5 billion at 31 July 2015 comprise £2.8 billion of advised only assets and £2.7 billion of assets that are both advised and managed. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 28 Close Brothers Group plc Annual Report 2015 Principal Risks and Uncertainties The group faces a number of risks in the normal course of business providing a range of ﬁnancial services to small businesses and individuals. These risks are managed by: • Adhering to our established and proven business model outlined on pages 8 to 11; • Implementing an integrated risk management approach based on the concept of “three lines of defence” which is outlined in detail on pages 49 and 50; and • Setting clearly deﬁned risk appetites monitored with speciﬁc metrics within set limits. A summary of the principal risks and uncertainties which may impact the group’s ability to deliver its strategy, how we seek to mitigate these risks and the change in the perceived level of risk over the year is set out below. The risks identiﬁed remain broadly unchanged from the prior year reﬂecting the group’s consistent strategy and adherence to its established business model. This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties faced by the group but rather those risks which the group currently believes may have a signiﬁcant impact on the group’s performance and future prospects. Key: No change Risk decreased Risk increased Risk Mitigation Change Credit losses At 31 July 2015 the group had loans and advances to customers totalling £5.7 billion. The group is exposed to credit losses if customers are unable to repay loans and outstanding interest and fees. In addition the group has exposure to counterparties with which it places deposits or trades, and also has limited derivative contracts to hedge interest rate and foreign exchange exposures. The loan impairment rate has remained low reﬂecting our lending discipline as well as favourable market conditions. The group’s other counterparty exposures are broadly unchanged with the majority of our liquidity requirements and surplus funding placed with the Bank of England. Further commentary on the credit quality of our loan book is outlined on pages 21 and 22. Further details on loans and advances to customers and debt securities held are in notes 11 and 12 on pages 103 and 104 of the Financial Statements. Our approach to credit risk management and monitoring is outlined in more detail in note 29 on page 125. We seek to minimise our exposure to credit losses from our lending by: • Applying strict lending criteria when testing the credit quality and covenant of the borrower. • Maintaining consistent and conservative loan to value ratios with low average loan size and short-term tenor. • Lending on a predominantly secured basis with signiﬁcant emphasis placed on the underlying security. • Maintaining rigorous and timely collections and arrears management processes. • Operating strong control and governance both within our lending businesses and with oversight by a central credit risk team. Our exposures to counterparties are mitigated by: • Conservative management of our liquidity requirements and surplus funding with £1.0 billion or c.85% placed with the Bank of England. • Continuous monitoring of credit quality of our counterparties within approved set limits. • Winterﬂood’s trading relating to exchange traded cash securities and being settled on a delivery against payment basis. Counterparty exposure and settlement failure monitoring controls are also in place. Close Brothers Group plc Annual Report 2015 2929 Risk Mitigation Change Economic environment Any downturn in economic conditions could impact the group’s performance through: • Lower demand for the group’s products and services; • Lower investor risk appetite as a result of ﬁnancial markets instability; • Higher bad debts as a result of customers inability to service debt and lower asset values on which loans are secured; and • Increased volatility in funding markets. Legal and regulatory Changes to the existing legal, regulatory and tax environments and failure to comply with existing requirements may materially impact the group. Failing to treat customers fairly, safeguard client assets or provide advice/products contrary to clients’ best interest has the potential to damage our reputation and may lead to legal or regulatory sanctions including litigation and customer redress. This applies to current, past and future business. Similarly changes to regulation and taxation can impact our performance, capital and liquidity and the markets in which we operate. Competition The group operates in highly competitive markets and as the UK economy improves we expect to see competition continue to increase particularly in the Banking division. The majority of the group’s activities are in specialist areas where our people have signiﬁcant experience and expertise. Our long standing commitment to our proven business model and strong ﬁnancial position has enabled us to support our clients in all economic conditions. This assists us in our aim of developing long- term relationships with our clients. The group carries out regular stress testing on its performance and ﬁnancial positions to test resilience in the event of adverse economic conditions. The group seeks to manage these risks by: • Commitment to provide straightforward and transparent products and services to our clients. • Governance and control processes to review and approve new products and services. • Signiﬁcant investment in both staff and operating systems to ensure the group is well placed to respond to changes in regulation. • Investment in training for all staff including anti-money laundering, bribery and corruption, data protection and information security. Additional tailored training for relevant employees is provided in key areas such as complaint handling. • Continuous monitoring of key legal, regulatory and tax developments to anticipate their potential impact. • Maintaining constructive and positive relationships and dialogue with regulatory bodies and tax authorities. The group has a long track record of trading successfully in all types of competitive environment. We value our clients and build long-term relationships offering a differentiated proposition based on: • Speed and ﬂexibility of service. • Local presence. • Experienced and expert people. • Tailored, client driven product offerings. While the UK economy has proven resilient and the outlook appears stable, signiﬁcant global uncertainty remains. Further commentary on the attributes and resilience of the group’s business model is shown on pages 8 to 11. Financial services businesses remain subject to signiﬁcant scrutiny. We believe the potential risks from legal and regulatory changes continue to increase. The group’s approach to regulatory reform during the year is discussed in the Chairman and Chief Executive’s Statement on page 6 and the Risk Committee report on pages 51 and 52 of the Corporate Governance report. Further information on our approach to conduct risk can be found in the Sustainability Report on pages 34 and 35. We continue to experience increasing levels of competition particularly in the Banking division. Further commentary on the market environment for the Banking division is outlined on page 21. Our business model is set out on pages 8 to 11. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 30 Close Brothers Group plc Annual Report 2015 Principal Risks and Uncertainties continued Risk Mitigation Change Technology Maintaining robust and secure IT infrastructure, systems and software is fundamental to allow the group to operate effectively, respond to new technology, protect client and company data and counter the evolving cyber threat. Failure to keep up with changing customer expectations or manage upgrades to existing technology has the potential to impact group performance. The group continues to invest in its IT infrastructure, information security and software. We also continue to invest in our IT resources including the appointment of a chief information ofﬁcer in the Banking division with extensive relevant experience in the ﬁnancial services sector. The group has strong governance in place to oversee its major projects. We have in place business continuity and disaster recovery plans which are regularly tested. Employees The calibre, quality and expertise of employees is critical to the success of the group. The loss of key individuals or teams may have an adverse impact on the group’s operations and ability to deliver its strategy. The group seeks to attract, retain and develop staff by: • Operating remuneration structures which are competitive and recognise and reward performance. • Implementing succession planning for key roles. • Aiming to develop a pipeline of future leaders through our Emerging Leaders Programme. • Investing in training and development for all staff. • Attracting high quality staff including via our graduate and school leaver programmes, and new training academy in asset ﬁnance. Funding The Banking division’s access to stable funding remains key to support its lending activities and the liquidity requirements of the group. At 31 July 2015 the group’s funding position was strong with total funding 131% of the loan book. This provides a prudent level of liquidity to support our lending activities. Our funding is well diversiﬁed both by source and tenor. Liquidity in our Banking division is assessed on a daily basis and tested weekly to ensure adequate liquidity is held and readily accessible in stressed conditions. Our funding approach is conservative based on the principle of “borrow long and lend short”. Over 50% of our total funding is repayable after more than one year with an average duration of 31 months. This compares to our weighted average loan maturity of 14 months. The group continues to invest and upgrade its IT infrastructure to simplify our technology architecture and reduce exposure to cyber attack. However the risk of cyber threats or new technology impacting our business model remains. Further detail on our technology related investment is outlined on pages 6 and 21. For further information on our response to cyber threats and the independent review on our business continuity plans see page 52 of the Corporate Governance report. Our highly skilled people are likely to be targeted but we are conﬁdent we are able to retain key employees. Our latest employee survey identiﬁed 88% of employees were either satisﬁed or very satisﬁed working at Close Brothers. Further detail on the employee survey and our investment in our people is outlined in the Sustainability Report on pages 32 to 34. The group remains well funded, retains sufﬁcient liquidity and is well placed to access further funding as required. Further commentary on funding and liquidity is provided on pages 17 to 19. Further ﬁnancial analysis of our funding is shown in note 19 on page 110 of the Financial Statements. Close Brothers Group plc Annual Report 2015 3131 Risk Mitigation Change The group’s approach and the underlying risks are unchanged. Further detail on the group’s exposure to market risk is outlined in note 29 on pages 128 and 129 of the Financial Statements. Market exposure Market volatility and/or changes in interest and exchange rates have the potential to impact the group’s performance. Although the majority of the group’s activities are carried out in the UK, there is foreign exchange exposure on deposits, lending and funding balances as part of our banking activities as well as trading in foreign securities. Winterﬂood primarily act as a market- maker in exchange traded cash securities reducing exposure to market volatility. In addition trading positions are monitored on a real time basis and both individual and trading book limits are set to control exposure. The group matches ﬁxed and variable interest rate assets and liabilities using swaps where appropriate. The sensitivity analysis on interest rate exposures shown in note 29 on page 128 shows the expected impact of interest rate changes. The group’s capital and reserves are not hedged. Foreign exchange exposures in the Banking division are hedged using currency swaps with exposures monitored daily against approved limits. Trading exposures on foreign securities are also hedged and monitored against limits. The group does not speculate on foreign currency movements. Stress tests are regularly performed on market risks to ensure we maintain adequate liquidity and capital even under extreme downside scenarios. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 32 Close Brothers Group plc Annual Report 2015 Sustainability Report Over many years, we have built a strong reputation as a trusted ﬁnance partner to borrowers, depositors, and investors, providing ﬁnancial support to our clients in all market conditions. This reﬂects not only the prudent management of our ﬁnancial resources but also our ongoing investment in developing our people, maintaining sound business practices and engaging with and supporting the businesses and communities that we interact with. Photographed on location at Wastewise Ltd. Close Brothers Group plc Annual Report 2015 33 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Results of the survey are shared with group and divisional executive teams, and form the basis for planning for the next 24 months. Given the strong overall scores, most of the action planning is undertaken at a divisional and business level, and will cover areas such as communications, leadership visibility and customer focus. At a business unit level, areas of focus will be explored further through focus groups and topical surveys. The action plans are reviewed and reported on regularly between surveys to ensure momentum. We also ensure all employees are aware of ﬁnancial and economic factors affecting the performance of the company; we do this via internal communications and updates to our group-wide intranet site. We continue to be committed to maintaining a safe environment for our employees and visitors. We frequently review and look at ways to develop the safety culture within our business units and locations and are currently introducing new initiatives to ensure we have robust central oversight of health and safety matters. Training and development The training and development of our staff is key to employee retention, and ensuring that our employees continue to have the skills and expertise that is core to our business success. We have a number of initiatives under way which not only promote and develop our existing talent but also develop the next generation so that we can continue to support our successful business model over the long term. We already run a successful graduate scheme and our school leavers programme, ASPIRE, is now in its third year. Both of these have been extended to cover all three of our divisions and form a core part of our talent development. Employees also have the opportunity to be mentored by senior colleagues, building one-to- one relationships to coach people through their careers. During the year we have launched the Close Brothers Training Academy, a two year programme aiming to develop the next generation of sales professionals, initially in our asset ﬁnance business. The ﬁrst intake of 34 candidates started in September 2015 and will experience a development programme delivered by external partners, internal subject matter experts and a group of experienced business mentors. The programme will use portal based network learning as well as facilitated classroom and on the job learning. We have also recently launched the Adviser Academy in Asset Management to enhance skills and to provide career development opportunities for our ﬁnancial advisers. Recently, we have taken our strong commitment to training and development externally with the launch of the Close Brothers SME Apprentice Programme. Through this unique scheme, which is run in partnership with the Advanced Manufacturing Research Centre at Shefﬁeld University and the Manufacturers’ Technology Association, we are contributing to the cost of hiring and training 20 apprentices on behalf of SMEs in the region, who could otherwise not have afforded an apprentice. This initiative allows us to support both the SME community and our passion for training and development, and we will be looking to build on the current programme in future years. It has been extremely well received by the media and the SME manufacturing community. Not only do we strive to attract high quality new starters, we also focus on our existing employees, who have the opportunity to complete a number of internal courses for personal skills development alongside support for professional qualiﬁcations. We work hard to ensure career development and promotions within teams and also encourage internal transfers with the aim to retain our high quality staff. During 2015, we ﬁlled 124 (2014: 102) vacancies with existing employees. Strong Commitment to Clients and Employees Our focus on clients and other stakeholders is fundamental to our business, which is founded on the long-term relationships we build with them. As a group we share a strong commitment to acting responsibly, ethically and with integrity in our interaction with clients and staff, our role in the wider community and our environmental footprint. As a result, the management of sustainability issues is part of our daily business, and the management of related risks is integrated within our wider risk management framework. The group executive committee and the board receive updates on relevant issues and both human resources and responsible ﬁnance matters are regular items on the group and divisional risk committee agendas. Our sustainability objectives are to support the group’s long-term strategy by: • Attracting, retaining and developing talent; • Operating responsibly and with the highest level of integrity in our dealings with clients; • Making a positive contribution to the communities where we do business; and • Minimising our impact on the environment. Attracting, Retaining and Developing Talent The skills, expertise and engagement of our people are fundamental to our business and we are committed to ensuring that Close Brothers is a stimulating and rewarding place to work. We invest extensively in training and development, and staff engagement initiatives. Driving employee engagement In the last year we repeated our biennial employee survey and were again delighted to observe continued strong scores across the organisation. The participation rate improved further to 87%, up from 79% in our previous survey. Overall, we recorded excellent engagement scores, with 88% of employees either satisﬁed or very satisﬁed working for the group, and 85% of employees recommending our business as a place to work. 34 Close Brothers Group plc Annual Report 2015 Sustainability Report continued Photographed on location at Biggin Hill Heritage Hangar Ltd. Remuneration and benefits We believe in rewarding our staff fairly and transparently, ensuring that remuneration across the group is linked to clear and transparent objectives. Details of the group’s remuneration policies can be found in the Report of the Board on Directors’ Remuneration on pages 58 to 77. We offer our employees a comprehensive range of beneﬁts, and continually review these to ensure they remain attractive and competitive. All our employees are eligible for a pension and life assurance. We also offer a childcare voucher scheme, interest free season ticket loans, and a cycle to work scheme offering a discount on bicycles and accessories. Participation in our Save As You Earn scheme, which is intended to encourage saving and build long-term share ownership, continued to increase, with almost 40% of employees participating in the scheme. 9% of our employees are taking part in our Buy as You Earn scheme which we introduced in the year; it allows employees to acquire shares on a monthly basis out of pre-tax earnings. Both of these schemes are available to all UK resident employees who have completed six months service. Diversity and equality We have a strong commitment throughout the organisation to ensuring that all our staff are treated fairly and that we provide equal opportunity both to existing employees and in our recruitment process. Our recent employee survey reported that 88% of staff surveyed across the group believe that Close Brothers treats their employees fairly regardless of gender, ethnicity or for any other diversity reasons. Our aim is to ensure that no employees, workers or candidates are subjected to unlawful discrimination, either directly or indirectly, on grounds of a protected characteristic. This commitment applies to all aspects of employment, including: • Recruitment and selection, including advertisements, job descriptions, interview and selection procedures; • Training; • Promotion and career development opportunities; • Terms and conditions of employment (with respect to the protected characteristic of disability, this commitment applies where practicable); • Access to employment related beneﬁts and facilities; • Grievance handling and the application of disciplinary procedures; and • Selection for redundancy. We seek to consider employees from a wide range of backgrounds in our recruitment processes, and we do not tolerate any form of harassment or discrimination of employees with regards to race, gender, age, disability, sexual orientation or religion. These principles are supported by the equal opportunity policies in force across the group. Our workforce has remained diverse, with 44% of our employees being women. We also employ a broad age range, with 23% of our employees under 30 years old and 15% above 50 years old. Our board and executive committee both have three female members, which means we remain above the Lord Davies target of 25% of FTSE 100 boards made of women by 2015. Responsible Finance Maintaining the trust and respect of clients and other stakeholders is fundamental to the long-term relationships that are integral to our business model. A strong client focus is embedded in our culture and we strive to act responsibly, ethically and with integrity in all our dealings with clients and other stakeholders. This is supported by our recent employee opinion survey, which showed that 95% of staff surveyed believe we work to continuously build relationships with our customers and that we treat customers fairly. A strong culture of client focus is supported by a wide range of policies at group and divisional level which establish a framework for best practice and ensure we have robust procedures to minimise the risk of any failure in process or communication. The applicable policies are communicated to all employees and supported by a compulsory training programme to ensure staff are aware of their responsibilities and of the current rules and regulations. The relevant policies include: • A comprehensive policy on conduct risk and treating customers fairly. This policy is overseen by the group head of compliance and implemented in each division. • We have implemented policies and procedures in accordance with anti-money laundering regulations and each regulated company has a dedicated money laundering reporting ofﬁcer. Close Brothers Group plc Annual Report 2015 35 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s • Our whistle-blowing policy aims to protect employees who expose misconduct. • Our anti-bribery and corruption policy sets out the group standards and best practice for business conduct under the Bribery Act 2010. • A privacy policy to ensure the protection and correct treatment of client data in accordance with the Data Protection Act 1998. • A health and safety policy to ensure the provision of a safe and healthy working environment for our employees and visitors in accordance with The Management of Health and Safety at Work Regulations 1999. Strong client focus We aim to foster a culture of strong client focus aiming for the highest standards in all our dealings with clients. During the year, we launched customer forums across the group, which are focused on ensuring positive outcomes for customers drawing on both qualitative and quantitative inputs to challenge and improve the way we deal with customers. For example, in the Banking division the following ﬁve customer principles underpin the scope and objectives of the customer forum: • We seek to ensure the right outcomes for our customers. • We endeavour to ensure our pricing is fair and appropriate. • We are clear and consistent in the way we communicate with customers. • We expect our standards to be upheld by our partners. • We are responsible lenders and deposit-takers. The eight banking business customer forums are attended by front line staff with a central forum attended by members of the Banking division Executive Committee and business heads, and best practice is shared across the group. We collect feedback through a number of resources, including customer, staff and mystery shopper surveys along with analysis of complaints. Gender Diversity Number of board directors1 Number of directors of subsidiaries1 Number of senior managers, other than board directors2 Number of employees, other than board directors and senior managers Male 6 52 17 Female 3 9 10 1,541 1,243 1 Includes non-executive directors, excluded from Close Brothers Group plc headcount calculations. 2 Senior employees indentiﬁed as Material Risk Takers who are not directors or subsidiary directors. Customer data and privacy We continually monitor and enhance our systems and controls to ensure that our clients are safeguarded against system failure or cyber attack. Human rights The board gives due regard to human rights considerations, as deﬁned under the European Convention on Human Rights and the UK Human Rights Act 1998. The Community Close Brothers runs a number of community initiatives across the group. Employees have provided feedback through our employee engagement survey telling us that charity awareness and support is an area of interest which is important to them; and also voting for a nominated staff charity – Cancer Research UK. Therefore we wish to put in place additional support for our employees to take part in activities which matter to them. In addition to the charitable activity that our staff are involved in, there are some new community projects that Close Brothers have been involved in this year. These include our Close Brothers SME Apprentice Programme and partnering with the Prince’s Foundation for Children and the Arts to sponsor the ﬁrst National Schools Art Competition. We have also supported a local primary school since 2013, where volunteers from the business spend their lunch break reading to individual children who are struggling or who do not have time to practise at home. We seek to provide continuity for the customer throughout the handling of a complaint, with a single point of contact where possible and review our processes in order to deliver fair complaint outcomes. We have policies designed to ensure that vulnerable customers are identiﬁed and treated appropriately and undertake both specialist and general training for staff. Our commitment to customer experience is further evidenced by strong net promoter scores (“NPS”), a measure of how likely customers are to recommend a business on a scale of -100 to +100. We measure our NPS for our motor, invoice and asset ﬁnance businesses who all score above 50. Also in our premium ﬁnance business we have won awards for our contact centres, including “Contact Centre Manager of the Year 2015” by the UK National Contact Centre Awards and “Manager of the Year” by the UK Contact Centre Forum. We continue to monitor our ongoing risk policies, which include: Conduct risk and product governance Our client’s interests are key within our policies; therefore new products and governance of existing products are reviewed regularly to ensure they are ﬁt for purpose. Complaints handling Our divisions monitor customer complaints so that they can be given the attention required to resolve the problem and put processes in place to prevent reoccurrence. Supplier relationships We manage our risks when contracting with third parties, to ensure that controls are in place to protect our clients. 36 Close Brothers Group plc Annual Report 2015 Sustainability Report continued Photographed on location at G&H Sheet Fed Ltd. In Asset Management we have launched the Trustee Leadership Programme, where our employees learn the skills and conﬁdence to join a charity as a board member. By bringing young trustees onto charity boards they beneﬁt from fresh approaches and increased diversity of opinions. In 2014 we had 130 participants, 35 of which have already been matched with charities to date, and in 2015 a further 60 employees signed up for the programme. The group corporate social responsibility (“CSR”) committee is chaired by our group head of human resources and supported by employees across the group; we also have a number of local CSR committees which run initiatives to raise funds for charity. Charitable donations The group’s charitable donations have continued to increase and we contributed a total of £261,000 during the 2015 ﬁnancial year, up 4% on 2014. We run a number of events throughout the year to raise money for charity which see widespread participation from employees across the group. We have continued to run our Charity Week, a dedicated week set aside to fundraise for Cancer Research UK, which consists of a number of locally organised events for staff, including raising awareness of how the funds we raise can support the great work done by the charity. In addition, 44% of our total contributions to charity came from the Close Brothers Matched Giving Scheme, which encourages staff to fundraise and volunteer for the charities they support by matching 50% of funds raised, or donating £8 per hour of voluntary time given by employees. We also match contributions under our payroll giving scheme, Workplace Giving, which allows employee donations to be made directly from pre-tax salary. The scheme has seen a signiﬁcant increase in employee participation to 17% (2014: 11%) allowing us to maintain our Payroll Giving Quality Mark Gold Award for the ﬁfth consecutive year. Each of our divisions individually hold either Platinum or Gold awards, with participation ranging from 14% to 29% across the divisions. The Environment As a ﬁnancial services company, we require limited natural resources to operate and therefore have a relatively low environmental impact. Our direct environmental impact comes from our ofﬁce network, staff travel and from our supply chain. We continuously seek ways to minimise our environmental footprint and improve our energy saving, as well as reducing both emissions and waste. Each business manages its resources and recycling locally, and we are on track for all of our Banking division sites to be supplied from renewable sources by the end of the 2015 calendar year. We also look to introduce new initiatives to improve our energy saving; for example in 2015 we installed PIR lighting and thermostat boiler plant controls within our head ofﬁce. During the year we secured a new location at Wimbledon Bridge House for our Banking division staff previously located in Tolworth. We have taken steps to ensure that we are energy efﬁcient before moving into the property; this includes ensuring waste is recycled appropriately, LED lighting throughout the main ofﬁce and PIR detectors in all areas. We also seek to improve the efﬁciency of water and paper usage through the introduction of secure and duplex printing, and monitor waste reduction via a third party provider. In 2015, waste recycling increased further as we recycled 93% (2014: 62%) of our waste which avoided 217 cubic metres of landﬁll and saved 328 trees, as well as providing renewable energy to homes. Close Brothers Group plc Annual Report 2015 37 GHG Emissions By Division (tCO2e) 3,787 3,374 924 898 1,011 1,153 1,083 894 Group Banking Securities Asset Management 2014 2015 Note: “Group” reﬂects the group headquarters which include some Banking division businesses. GHG Emissions Summary (tCO2e) GHG emissions source Fuel (Buildings) Fuel (Owned vehicles) Electricity (excluding Scope 3 T&D losses) Scope Scope 1 Scope 2 Average number of employees Total GHG emissions Total per employee i S t r a t e g c R e p o r t G o v e r n a n c e 2015 165 2,677 4,079 2,767 20141 154 2,635 3,414 2,627 6,921 6,203 2.50 2.36 i F n a n c a i l S t a t e m e n t s 1 The prior year ﬁgures have been restated to exclude the impact of discontinued activities, following the disposal of Close Brothers Seydler on 5 January 2015. Total Scope 1 and 2 tCO2e for Close Brothers Seydler were 139 for the ﬁve months to 5 January 2015 (2014: 317 tCO2e). Greenhouse Gas (“GHG”) Emissions In line with the GHG Protocol framework, we have calculated the GHG emissions associated with our Scope 1 and 2 operations. Scope 1 includes fuel emissions from buildings and company vehicles, and Scope 2 includes our emissions from electricity. In 2015, our total GHG emissions were 6,921 tonnes of carbon dioxide equivalent (“tCO2e”), equating to 2.5 tCO2e per employee, up 5.0% overall and 0.1 per employee since 2014. As expected, given the nature of the group’s business activities, the largest source of GHG emissions in 2015 was again our Scope 2 electricity consumption. Given its relative size in terms of headcount, our Banking division contributes the majority of our GHG emissions. A full breakdown of our 2015 GHG emissions, together with corresponding data for 2014, is shown above. Calculation We have gathered data on a quarterly basis since 2013, working with an independent third party GHG emissions reporting company. This veriﬁes the accuracy of our data and enables us to monitor our performance on an ongoing basis. Our total GHG emissions are reported as tonnes of carbon dioxide equivalent and are calculated in line with the GHG Protocol framework. In addition to reporting our total emissions, we have also disclosed the emissions per employee as an intensity metric to enable a comparable analysis in disclosures. Outlook We will continue to monitor and report our GHG emissions, working to improve our energy efﬁciency across our businesses. We encourage our ofﬁces to report their Scope 3 emissions for water and waste each quarter, where this information is available to facilitate continued performance monitoring. The Strategic Report was approved by the board and signed on its behalf by: Preben Prebensen Chief Executive 22 September 2015 38 Close Brothers Group plc Annual Report 2015 Close Brothers Group plc Annual Report 2015 39 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Governance 40 Board of Directors 42 Executive Committee 43 Report of the Directors 45 Corporate Governance 58 Report of the Board on Directors’ Remuneration Photographed on location at Castle Air Ltd. 40 Close Brothers Group plc Annual Report 2015 Board of Directors Jonathan Howell Finance Director Strone Macpherson Chairman Bridget Macaskill Independent Non-executive Director Elizabeth Lee Group Head of Legal and Regulatory Affairs Preben Prebensen Chief Executive Geoffrey Howe Senior Independent Director Oliver Corbett Independent Non-executive Director Lesley Jones Independent Non-executive Director Stephen Hodges Managing Director and Banking Chief Executive Close Brothers Group plc Annual Report 2015 41 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Strone Macpherson Chairman Preben Prebensen Chief Executive Appointment to the board Strone was appointed a director in March 2003, senior independent director in 2004, deputy chairman in 2006 and chairman in June 2008. He is chairman of the Nomination and Governance Committee. Experience Strone is also chairman of British Empire Securities and General Trust plc and a trustee of the King’s Fund. He was previously a director of Flemings, chairman of Tribal Group plc and of JP Morgan Smaller Companies Investment Trust plc, executive deputy chairman of Misys plc and a non-executive director of AXA UK plc and of Kleinwort Benson Private Bank Limited. Stephen Hodges Managing Director and Banking Chief Executive Appointment to the board Stephen was appointed a director in August 1995 with responsibility for the Banking division and became managing director in November 2002. Experience Stephen spent eight years at Hambros before joining the Banking division of Close Brothers in 1985. Bridget Macaskill Independent Non-executive Director Appointment to the board Bridget was appointed a director in November 2013 and chairman of the Remuneration Committee in November 2014. Experience Bridget is president and chief executive ofﬁcer of First Eagle Investment Management LLC in New York City, a trustee of the TIAA-CREF funds and a non-executive director of Jupiter Fund Management plc. She was previously a non-executive director of Prudential plc, Scottish & Newcastle plc, J Sainsbury plc, Hillsdown Holdings plc and of the Federal National Mortgage Association in the US. Appointment to the board Preben was appointed to the board as chief executive in April 2009 when he joined Close Brothers. Experience Preben previously spent his career in a number of senior positions at JP Morgan over 23 years, as well as being chief executive of Wellington Underwriting plc from 2004 to 2006, and then chief investment ofﬁcer and a member of the group executive committee at Catlin Group Limited. Jonathan Howell Finance Director Appointment to the board Jonathan was appointed to the board as ﬁnance director in February 2008 when he joined Close Brothers. Experience Jonathan was previously ﬁnance director of London Stock Exchange Group plc from 1999. Prior to that he was at Price Waterhouse where he qualiﬁed as a chartered accountant. He is also a non-executive director of The Sage Group plc where he is chairman of the audit committee. Lesley Jones Independent Non-executive Director Appointment to the board Lesley was appointed a director in December 2013 and is chairman of the Risk Committee. Experience Lesley was group chief credit ofﬁcer of Royal Bank of Scotland plc until January 2014. She has extensive banking experience, having previously held several line management positions within Citigroup. Lesley is also a non- executive director of Northern Bank Limited and N Brown Group plc. Elizabeth Lee Group Head of Legal and Regulatory Affairs Appointment to the board Elizabeth was appointed a director in August 2012 with responsibility for legal and regulatory affairs. Experience Elizabeth joined Close Brothers as general counsel in September 2009. She was previously with Lehman Brothers and General Electric’s ﬁnancial services businesses. Geoffrey Howe Senior Independent Director Appointment to the board Geoffrey was appointed a director in January 2011 and senior independent director in November 2014. Experience Geoffrey is chairman of Jardine Lloyd Thompson Group plc. He was previously chairman of Railtrack plc and of Nationwide Building Society, a non-executive director of Investec plc and of JP Morgan Overseas Investment Trust plc, a director of Robert Fleming Holdings Limited and managing partner of Clifford Chance. Oliver Corbett Independent Non-executive Director Appointment to the board Oliver was appointed a director in June 2014 and is chairman of the Audit Committee. Experience Oliver is chief ﬁnancial ofﬁcer of Hyperion Insurance Group Limited and was formerly ﬁnance director of LCH. Clearnet Group Limited and of Novae Group plc. He is a chartered accountant and previously worked for KPMG, SG Warburg, Phoenix Securities (later Donaldson Lufkin Jenrette) and Dresdner Kleinwort Wasserstein, where he was managing director of investment banking. He was also a non-executive director of Rathbone Brothers plc. 42 Close Brothers Group plc Annual Report 2015 Executive Committee Stephen Hodges Managing Director and Banking Chief Executive Preben Prebensen Chief Executive Robert Sack Group Chief Risk Ofﬁcer Philip Yarrow Winterﬂood Chief Executive Tazim Essani Group Head of Corporate Development Jonathan Howell Finance Director Elizabeth Lee Group Head of Legal and Regulatory Affairs Martin Andrew Asset Management Chief Executive Rebekah Etherington Group Head of Human Resources Report of the Directors Close Brothers Group plc Annual Report 2015 43 Results and Dividends The consolidated results for the year are shown on page 83 of the Financial Statements. The directors recommend a ﬁnal dividend for the year of 35.5p (2014: 32.5p) on each ordinary share which, together with the interim dividend of 18.0p (2014: 16.5p), makes an ordinary distribution for the year of 53.5p (2014: 49.0p) per share. The ﬁnal dividend, if approved by shareholders at the 2015 Annual General Meeting (“AGM”), will be paid on 24 November 2015 to shareholders on the register at 16 October 2015. Directors The names of the directors of the company at the date of this report, together with biographical details, are given on pages 40 and 41 of this Annual Report. All the current directors held ofﬁce throughout the year, Bruce Carnegie-Brown having stood down from the board on 20 November 2014. In accordance with the UK Corporate Governance Code, all directors offer themselves for reappointment at the 2015 AGM. The company is unaware of any arrangements between its shareholders that may result in restrictions on the transfer of shares and/or voting rights. New issues of share capital Under section 551 of the Companies Act 2006, the directors may allot equity securities only with the express authorisation of shareholders which may be given in general meeting, but which cannot last more than ﬁve years. Under section 561 of the Companies Act, the board may not allot shares for cash (otherwise than pursuant to an employee share scheme) without ﬁrst making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in proportion to their respective shareholdings, unless this requirement is waived by a special resolution of the shareholders. The existing authorities given to the company at the last AGM to allot shares will expire at the conclusion of the forthcoming AGM. Details of the resolutions renewing these authorities are included in the Notice of AGM. Directors’ interests The directors’ interests in the share capital of the company at 31 July 2015 are set out on pages 74 and 76 of the Report of the Board on Directors’ Remuneration. Purchase of Own Shares Under section 724 of the Companies Act 2006 a company may purchase its own shares to be held in treasury (“Treasury Shares”). Powers and appointment of directors Details on the powers and appointment of directors are set out on page 48 of the Corporate Governance report. The existing authority given to the company at the last AGM to purchase Treasury Shares of up to 10% of its issued share capital will expire at the conclusion of the next AGM. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Directors’ indemnity The company has granted indemnities to all of its directors on terms consistent with the applicable statutory provisions. Qualifying third party indemnity provisions for the purposes of section 234 of the Companies Act 2006 were accordingly in force during the course of the year, and remain in force at the date of this report. Share Capital The company’s share capital comprises one class of ordinary share with a nominal value of 25p each. At 31 July 2015, 150,633,736 ordinary shares were in issue. During the year the company’s issued share capital increased by 11,153 ordinary shares of 25p each through the issue of shares to satisfy option exercises. Full details of options exercised, the weighted average option exercise price and the weighted average market price at the date of exercise can be found in note 27 on page 117 of the Financial Statements. Rights attaching to shares On a show of hands, each member has the right to one vote at general meetings of the company. On a poll, each member would be entitled to one vote for every share held. The shares carry no rights to ﬁxed income. No person has any special rights of control over the company’s share capital and all shares are fully paid. Restrictions on the transfer of shares There are no speciﬁc restrictions on the transfer of the company’s shares which are governed by the general provisions of the articles of association and prevailing legislation. The board considers it would be appropriate to renew this authority and intends to seek shareholder approval to purchase Treasury Shares of up to 10% of its issued share capital at the forthcoming AGM in line with current investor sentiment. Details of the resolution renewing the authority are included in the Notice of AGM. Awards under the company’s employee share plans are met from a combination of shares purchased in the market and held either in treasury or in the employee share trust as well as by newly issued shares. During the year the company transferred 558,680 shares out of treasury, to satisfy share option awards, for a total consideration of £2.2 million. It did not purchase any Treasury Shares. The maximum number of Treasury Shares held at any time during the year was 1,724,960 with a nominal value of £0.4 million. Employee Share Trust Bedell Trustees Limited is the trustee of the Close Brothers Group Employee Share Trust, an independent trust, which holds shares for the beneﬁt of employees and former employees of the group. The trustee has agreed to satisfy a number of awards under the employee share plans. As part of these arrangements the company funds the trust, from time to time, to enable the trustee to acquire shares to satisfy these awards, details of which are set out in note 27 on pages 117 and 118 the Financial Statements. During the year, the employee share trust made market purchases of 1,240,299 ordinary shares. 44 Close Brothers Group plc Annual Report 2015 Report of the Directors continued Substantial Shareholdings Details on substantial shareholdings in the company are set out on page 56 of the Corporate Governance report. Post-balance Sheet Events Details of post-balance sheet events are given in note 30 on page 130 of the Financial Statements. Signiﬁcant Contracts A change of control of the company, following a takeover bid, may cause a number of agreements to which the company is party to take effect, alter or terminate. These include the company bonds due 2017, certain insurance policies, bank facility agreements and employee share plans. The group had committed facilities totalling £1.5 billion at 31 July 2015 which contain clauses which require lender consent for any change of control. Should consent not be given, a change of control would trigger mandatory repayment of £1.5 billion of the facilities. All of the company’s employee share plans contain provisions relating to a change of control. Outstanding awards and options may vest and become exercisable on a change of control, subject where appropriate to the satisfaction of any performance conditions at that time and pro-rating of awards. Business Activities The group’s business activities, together with the factors likely to affect its future development and performance and its summarised ﬁnancial position are set out on pages 4 to 31 of the Strategic Report. Financial Risk Management The group has procedures in place to identify, monitor and evaluate the signiﬁcant risks it faces. The group’s risk management objectives and policies are described on pages 49 and 50 and the risks associated with the group’s ﬁnancial instruments are analysed in note 29 on pages 120 to 130 of the Financial Statements. Going Concern The group has a strong, proven and conservative business model and has traded proﬁtably during the year. It is well positioned in each of its core businesses, well capitalised, soundly funded and has adequate access to liquidity. After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report. Sustainability Information on the company’s employment practices and greenhouse gas emissions is set out on pages 33, 34, 35 and 37 of the Strategic Report. Political Donations No political donations were made during the year (2014: £nil). Resolutions at the AGM The company’s AGM will be held on 19 November 2015. Resolutions to be proposed at the AGM include the renewal of the directors’ authority to allot shares, the disapplication of pre-emption rights, authority for the company to purchase its own shares and the re-election of all the directors standing for reappointment. The full text of the resolutions is set out in the Notice of AGM sent to the company’s shareholders. A letter from the chairman, which explains the purpose of the resolutions, accompanies the Notice of AGM. Auditor Resolutions to reappoint Deloitte LLP as the company’s auditor and to give the directors the authority to determine the auditor’s remuneration will be proposed at the forthcoming AGM. Disclosure of Information to Auditor Each of the persons who are directors at the date of approval of this Annual Report conﬁrms that: • So far as the director is aware, there is no relevant audit information of which the company’s auditor is unaware; and • They have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the company’s auditor is aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. By order of the board Nicholas Jennings Company Secretary 22 September 2015 Corporate Governance Close Brothers Group plc Annual Report 2015 45 Strone Macpherson, Chairman i S t r a t e g c R e p o r t G o v e r n a n c e As chairman of Close Brothers, I view the governance and oversight of its distinctive and prudent business model and strategy as key to the continuing creation and delivery of value to its stakeholders. To accomplish this, the board has held eight meetings this year. Prior to each meeting the board receives reports on the results of each of the three divisions and key performance indicators, together with detailed updates on the progress and implementation of the agreed strategies for each division. The board has the opportunity to discuss the reports and challenge each of the divisional chief executives, who attend all or part of the board meetings, directly on the progress and implementation of their divisional strategy. In addition, in May 2015 the board attended two strategy days dedicated to discussing and reviewing the group’s long-term strategy with executive management. The board has been unchanged this year, other than for the planned departure of Bruce Carnegie-Brown in November 2014, as a consequence of which Bridget Macaskill was appointed chairman of the Remuneration Committee and Geoffrey Howe senior independent director. The group’s overarching strategy is well deﬁned and continuing to produce good growth and strong returns, and the board’s focus has again been on reviewing its delivery by the divisions. Within the Banking division, there has been a monitoring of its major businesses, a focus on strengthening its risk management function and on the customer forums established to place particular emphasis on the provision of positive outcomes for its customers. For the Securities division the board has spent time understanding the impact of market conditions on Winterﬂood and reviewing regulatory developments. In relation to Asset Management, the focus has remained on reviewing its steady progress in meeting its strategic objectives and the opportunities for growth, including from the reforms to pension saving and from the continuing challenges in the IFA sector. The board has also spent time considering challenges facing the businesses from regulatory and industry developments, understanding the prioritisation of project expenditure and monitoring relevant trends in emerging technology. We are committed to the principles established in the UK Corporate Governance Code (“the Code”) issued by the Financial Reporting Council (“FRC”) in September 2012 and this report will explain and demonstrate how the group has applied the principles set out in the Code and complied with its provisions of best practice. Strone Macpherson Chairman 22 September 2015 i F n a n c a i l S t a t e m e n t s 46 Close Brothers Group plc Annual Report 2015 Corporate Governance continued Compliance The Code has been applied by the company throughout the ﬁnancial year. In September 2014, the FRC updated the Code, publishing a revised UK Corporate Governance Code (“the Revised Code”). The Revised Code is not applicable to the company in the year under review, but the company has begun the process of reviewing its procedures to enable the board to report, as required, under the Revised Code in the next ﬁnancial year ending 31 July 2016. The Code sets out guidance on best practice in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice. The Financial Conduct Authority (“FCA”) requires companies with a premium listing in the UK to disclose, in relation to the Code, how they have applied its principles and whether they have complied with its provisions throughout the ﬁnancial year. Where the provisions have not been complied with, companies must provide an explanation for this. It is the board’s view that the company’s governance regime has been fully compliant with the best practice set out in the Code for the ﬁnancial year. A copy of the Code can be found on the FRC’s website: www.frc.org.uk. The Board Leadership of the board The board’s primary role is to provide leadership, ensure that the company is appropriately managed and delivers long- term shareholder value. It sets the group’s strategic objectives and provides direction for the group as a whole. A number of key decisions are reserved for and may only be made by the board, which enables the board and executive management to operate within a clear governance framework. These speciﬁc responsibilities are set out in a schedule of matters reserved to the board which is published on the company’s website and are summarised opposite. Governance Framework Board governance structure The Board Audit Committee Remuneration Committee Risk Committee Nomination and Governance Committee Executive Committee Responsible for developing strategy, setting business objectives and assisting the chief executive with management of the group. Board and committee meeting attendance 2014/2015 The attendance of directors at board and committee meetings of which they were members during the ﬁnancial year is shown in the table below. Some directors also attended committee meetings as invitees during the year. This is not reﬂected in the table. Board Audit Committee Remuneration Committee Risk Committee1 Nomination and Governance Committee Attended Eligible to attend Attended Eligible to attend Attended Eligible to attend Regular attended Ad hoc attended Eligible to attend Attended Eligible to attend Executive director Preben Prebensen Jonathan Howell Stephen Hodges Elizabeth Lee Non-executive director Strone Macpherson Bruce Carnegie-Brown Oliver Corbett Geoffrey Howe2 Lesley Jones Bridget Macaskill 8 8 8 8 8 1 8 8 8 8 8 8 8 8 8 1 8 8 8 8 2 5 4 5 5 2 5 5 5 5 1 5 4 5 5 1 5 5 5 5 2 5 5 5 5 – 1 1 1 1 2 6 6 6 6 2 4 3 4 4 2 4 4 4 4 1 The Risk Committee held ﬁve regular meetings during the year, together with one ad hoc meeting speciﬁcally to consider the Internal Capital Adequacy Assessment Process. 2 Geoffrey Howe was unable to attend one meeting of the Audit Committee due to illness and one meeting of each of the Remuneration Committee and Nomination and Governance Committee which were unavoidably held on the same day as the annual general meeting of the Nationwide Building Society at which he retired as chairman. Close Brothers Group plc Annual Report 2015 47 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Specific responsibilities • Approval of strategy and monitoring its delivery. • Oversight of risk management, regulatory compliance and internal control. • Ensuring adequate ﬁnancial resources. • Acquisitions, disposals and expenditure over certain thresholds. • Approval of communications to shareholders. • Board membership and other appointments. • Corporate governance matters. composition of the board. When board positions become available as a result of retirement, resignation or otherwise, it is focused on ensuring that a diverse pool of candidates is considered. Recent appointments have required specialist qualiﬁcations and extensive ﬁnancial services experience, whilst also widening the range of insights and perspectives brought to the board’s deliberations. Details of the individual directors and their biographies are set out on pages 40 and 41. The board has delegated speciﬁc powers for some matters to its committees, as set out in each committee’s terms of reference. These terms of reference, which are reviewed annually, detail a full list of each committee’s responsibilities and are available on our website at www.closebrothers.com/ investor-relations/investor-information/corporate-governance. The chairman of each committee reports regularly to the board on matters discussed at committee meetings. The board has assessed the independence of each of the non-executive directors and is of the opinion that each acts in an independent and objective manner and therefore, under the Code, is independent and free from any relationship that could affect their judgement. The board’s opinion was determined by considering for each non- executive director: • Whether they are independent in character and At each scheduled meeting the board receives reports from the chief executive and ﬁnance director on the performance and results of the group. In addition, the heads of the Banking, Securities and Asset Management divisions update the board on performance, strategic developments and initiatives in their respective areas and the head of legal and regulatory affairs provides updates on legal matters. In addition the board receives updates from the group operating functions on compliance, human resources, corporate development matters and internal audit. There is an annual schedule of rolling agenda items to ensure that all matters are given due consideration and are reviewed at the appropriate point in the ﬁnancial and regulatory cycle. Meetings are structured to ensure that there is sufﬁcient time for consideration and debate of all matters. During the year, the board has spent time particularly on: • Presentations from businesses within the Banking division; • Engagement with the regulators; • Review of regulatory proposals on capital requirements; • Review of the new Senior Managers Regime; • Updates to the Banking division’s Recovery & Resolution Plans and the Individual Liquidity Adequacy Assessment; • Consideration of disposal of Close Brothers Seydler; and • Marketing strategy. All directors also attended a dedicated two day strategy session in May 2015 on strategy development and execution. Board size, composition and independence Following the AGM in November 2014 at which Bruce Carnegie-Brown stood down as a director, the board comprises nine members: the chairman, four executive directors and four independent non-executive directors. The structure of the board ensures that no individual or group of individuals is able to dominate the decision making process and no undue reliance is placed on any individual. The board now comprises six male and three female members. This means that a third of the directors are women. The company is committed to ensuring that any vacancies that may arise are ﬁlled by the most qualiﬁed candidates and recognises the value of diversity in the judgement; • How they conduct themselves in board and committee meetings; • Whether they have any interests which may give rise to an actual or perceived conﬂict of interest; and • Whether they act in the best interests of the company and of all its shareholders at all times. The company has therefore complied with the Code provision that at least half the board, excluding the chairman, should comprise independent non-executive directors. Each non-executive director is required to conﬁrm at least annually, whether any circumstances exist which could impair their independence. Meetings and attendance The board held eight scheduled meetings in addition to the two day strategy session. Details of attendance at board meetings can be found on page 46. The directors receive detailed papers in advance of each board meeting. The board agenda is carefully structured by the chairman in consultation with the chief executive and the company secretary. Each director may review the agenda and propose items for discussion with the chairman’s agreement. Additional information is also circulated to directors between meetings including relevant updates on the business and regulatory announcements. The annual schedule of board meetings is decided a substantial time in advance in order to ensure the availability of each of the directors. In the event that directors are unable to attend meetings due to conﬂicts in their schedule, they receive papers in the normal manner and have the opportunity to relay their comments in advance of the meeting, as well as follow up with the chairman if necessary. The same process applies in respect of the various board committees. Chairman and chief executive The roles of the chairman and chief executive are separate and there is a clear division of responsibilities between the two roles. The chairman is Strone Macpherson. His other signiﬁcant commitments are set out in his biography on page 41. The board is satisﬁed that his other commitments do not restrict him from carrying out his duties effectively. 48 Close Brothers Group plc Annual Report 2015 Corporate Governance continued As chairman, Strone Macpherson is primarily responsible for leading the board and ensuring the effective engagement and contribution of all the directors. His other responsibilities include setting the agenda for board meetings, providing the directors with information in an accurate, clear and timely manner and the promotion of effective decision making. The chairman is also charged with ensuring that the directors continually update their skills and knowledge and that the performance of the board, its committees and the individual directors is evaluated on an annual basis. The group chief executive is Preben Prebensen who is primarily responsible for the day-to-day management of the group’s business. His other responsibilities include proposing and developing strategic objectives for the group, managing the group’s risk exposures in line with board policies, implementing the decisions of the board and facilitating appropriate and effective communication with shareholders and regulatory bodies. Senior independent director The senior independent director is Geoffrey Howe. In addition to the existing channels for shareholder communications, shareholders may discuss any issues or concerns they may have with the senior independent director. Powers of directors The directors are responsible for the management of the company. They may exercise all powers of the company, subject to any directions given by special resolution and the articles of association. The directors have been authorised to allot and issue ordinary shares and to make market purchases of the company’s ordinary shares by virtue of resolutions passed at the company’s 2014 AGM. Board evaluation In accordance with the Code, the board determined that the annual evaluation of the board and its committees should be undertaken externally in 2015, two years after the previous external evaluation. It was decided to bring forward the external review by a year, particularly in light of the signiﬁcant change in non-executive director composition since 2013. Dr. Long of Boardroom Review Limited, who conducted previous effectiveness reviews most recently in 2013, was appointed to carry out the evaluation. Boardroom Review Limited provides no other services to the company. The evaluation explored key aspects of board and committee effectiveness through observation of meetings of the board and each of its committees, a review of board and committee information and one-to-one interviews with each of the directors. Dr. Long presented her independent view of board strengths and future challenges to the board in July 2015, concluding that it is engaged and adding value, has many strengths, a sensible rhythm of meetings across the year and is focused on priorities. The report contained a number of observations and recommendations, designed to encourage the board to optimise its contribution to the success of the company and to add value beyond the legal requirements, by building on existing strengths, agreeing the challenges ahead and preparing for the future. The recommendations included: • Recommendations for the reﬁnement of agendas and the presentation of board papers, given the necessary quantity of information required to be considered; • Suggestions for the further development of the board as a team, following the extensive non-executive director changes, and for board composition and succession planning in order to ensure continued alignment with long-term strategy; • A discussion of alternative approaches to the review of strategy and the beneﬁts of competitive analysis; and • Thoughts regarding the development of remuneration strategies and executive succession planning. The evaluation conﬁrmed the directors’ opinion that the board and its committees continue to be effective. Following discussion, it was agreed to adopt the report and to consider its recommendations with a view to producing an action plan and to review progress in six months time. It was further agreed to submit the report to the Prudential Regulation Authority (“PRA”). Dr. Long has reviewed and agreed this disclosure. In addition to the board evaluation process, the senior independent director led a separate performance review in respect of the chairman which involved a review with the non-executive directors, excluding the chairman, and separate consultation with the chief executive. The senior independent director subsequently provided feedback to the chairman on his appraisal which conﬁrmed his effectiveness. Appointment of directors The appointment of directors is governed by the company’s articles of association, the Companies Act 2006 and other applicable regulations and policies. Directors may be elected by shareholders in general meeting or appointed by the board of directors in accordance with the provisions of the articles of association. The articles of association may be amended by special resolution of the shareholders and were last amended in November 2009. In accordance with the Code all directors are subject to re-election at the AGM. The board will only recommend to shareholders that executive and non-executive directors be proposed for re-election at an AGM after evaluating the performance of the individual directors. Following the performance evaluations, the board will be recommending that all directors be re-elected by shareholders and conﬁrms that each director continues to be effective and demonstrates commitment to their role. Letters of appointment are available for inspection by shareholders at each AGM and during normal business hours at the company’s registered ofﬁce. Induction and professional development On appointment all new directors receive a comprehensive and personalised induction programme to familiarise them with the company and to meet their speciﬁc requirements. The company also provides bespoke inductions for directors when they are appointed as a committee chairman. Induction programmes are tailored to a director’s particular requirements, but would typically include site visits, one-to- one meetings with executive directors, the company secretary, senior management for the business areas and support functions and a conﬁdential meeting with the external auditor. Directors also receive guidance on directors’ liabilities and responsibilities. Induction programmes were concluded by non-executive directors appointed during the prior year. Close Brothers Group plc Annual Report 2015 49 There is a central training programme in place for the directors which is reviewed and considered by the board. In addition, the chairman discusses and agrees any speciﬁc requirements as part of each non-executive director’s half year and year end reviews. During the year, training took the form of informal meetings with senior management within the businesses and control functions, in-depth business reviews, attendance at external seminars and brieﬁngs from the regulators and from internal and external advisers covering topics such as: • Operational risk model training; • Developments in the digital environment; • Corporate governance update; • Regulatory developments; and • UK accounting changes. Training and development records are maintained by the company secretary and reviewed annually by the chairman and each individual director. The company secretary is responsible for ensuring that the board procedures and applicable rules and regulations are observed. All directors have direct access to the services and advice of the company secretary who also acts as secretary to each of the board committees. Directors are able to take independent external professional advice to assist with the performance of their duties at the company’s expense. Risk and Control Framework The board has overall responsibility for maintaining a system of internal control to ensure that an effective risk management and oversight process operates across the group. The risk management framework and associated governance arrangements are designed to ensure that there is a clear organisation structure with well deﬁned, transparent and consistent lines of responsibility and effective processes to identify, manage, monitor and report the risks to which the group is, or might become, exposed. The board has a well deﬁned risk appetite with risk appetite measures which are integrated into decision making, monitoring and reporting processes, with early warning trigger levels set to drive the required corrective action before overall tolerance levels are reached. The risk framework through key committees, including the Risk Committee and Audit Committee, is the mechanism that ensures the board receives comprehensive risk information in a timely manner. Identiﬁcation, measurement and management of risk are fundamental to the success of the group. Over the past 12 months the group has continued to strengthen its risk management framework and further develop the group’s risk committees, at both board and divisional level, and these continue to work efﬁciently and effectively. The group’s risk and control framework is designed to allow the capture of business opportunities while maintaining an appropriate balance of risk and reward within the group’s agreed risk appetite. It further ensures that the risks to which the group is or may become exposed are appropriately identiﬁed and that those which the group chooses to take are managed, controlled and, where necessary, are mitigated so that the group is not subject to material unexpected loss. The group reviews and adjusts its risk appetite annually as part of the strategy setting process. This aligns risk taking with the achievement of strategic objectives. Adherence to appetite is monitored by the group’s risk committees. The Risk Committee conducted its annual review of the adequacy and effectiveness of the group’s risk management and internal control arrangements in relation to the group’s strategy and risk proﬁle for the ﬁnancial year. This review was approved by the board which considers that it has in place adequate systems and controls with regard to the company’s proﬁle and strategy. The risk management framework is based on the concept of “three lines of defence”, as set out in the table on page 50, and the key principles underlying risk management in the group are: • Business management own all the risks assumed throughout the group and are responsible for their management on a day-to-day basis to ensure that risk and return are balanced; • The board and business management promote a culture in which risks are identiﬁed, assessed and reported in an open, transparent and objective manner; • The overriding priority is to protect the group’s long-term viability and produce sustainable medium to long-term revenue streams; • Risk functions are independent of the businesses and provide oversight of and advice on the management of risk across the group; • Risk management activities across the group are proportionate to the scale and complexity of the group’s individual businesses; • Risk mitigation and control activities are commensurate with the degree of risk; and • Risk management and control supports decision making. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 50 Close Brothers Group plc Annual Report 2015 Corporate Governance continued Risk Management Framework First line of defence The businesses Second line of defence Risk and Compliance Third line of defence Internal Audit Group Risk and Compliance Committee (Reports to the Risk Committee) Risk Committee (Reports to the board) Audit Committee (Reports to the board) Chief executive delegates to divisional and operating business heads day-to- day responsibility for risk management, regulatory compliance, internal control and conduct in running their divisions or businesses. Business management has day-to- day ownership, responsibility and accountability for risks: • Identifying and assessing risks; • Managing and controlling risks; • Measuring risk (key risk indicators/ early warning indicators); • Mitigating risks; and • Reporting risks. Risk Committee delegates to the group chief risk ofﬁcer day-to-day responsibility for oversight and challenge on risk related issues. Audit Committee mandates the head of group internal audit with day-to- day responsibility for independent assurance. Risk functions (including compliance) provide support and independent challenge on: • The design and operation of the Risk Internal audit provides independent assurance on: • First and second line of defence; • Appropriateness/effectiveness of framework; • Risk assessment; • Risk appetite and strategy; • Performance management; • Risk reporting; • Adequacy of mitigation plans; and • Group risk proﬁle. internal controls; and • Effectiveness of policy implementation. Key features • Draws on deep knowledge of the group and its businesses; • Independent assurance on the Key features • Promotes a strong risk culture and focus on sustainable risk-adjusted returns; • Implements the risk framework; • Promotes a culture of adhering to Key features • Overarching “risk oversight unit” takes an integrated view of risk (qualitative and quantitative); activities of the ﬁrm including the risk management framework; • Assesses the appropriateness and effectiveness of internal controls; and • Risk management separate from risk • Incorporates review of culture and control but work together; conduct. limits and managing risk exposures; • Promotes a culture of customer focus • Supports through developing and advising on risk strategies; and appropriate behaviours; • Ongoing monitoring of positions and management of risks; • Portfolio optimisation; and • Self assessment. • Creates constructive tension through challenge – “critical friend”/“trusted adviser”; and • Oversight of business conduct. Close Brothers Group plc Annual Report 2015 51 Lesley Jones, Chairman of the Risk Committee i S t r a t e g c R e p o r t G o v e r n a n c e The Risk Committee’s principal roles and responsibilities are to support the board in its oversight of risk management across the group. The following sections set out the Committee’s membership, its key responsibilities and the principal areas of risk upon which we have focused during the year. The identiﬁcation, management and mitigation of risk is fundamental to the success of the group. The Committee plays an important role in setting the tone and culture that promotes effective risk management across the group. Risk Committee Chairman’s overview The uneven recovery in the global economy continues to pose challenges for consumers and companies alike and has necessitated a continued high degree of vigilance. The UK economy has strengthened against a backdrop of tight public sector spending constraints and decreasing unemployment but remains vulnerable to Eurozone dislocation and to the uncertainties posed by a forthcoming EU referendum. These challenges, coupled with an ever- broadening regulatory agenda aimed at bolstering the strength of the banking industry and the conduct of those who work in it, have kept the Risk Committee fully occupied throughout the year. I am nevertheless pleased to report again this year that Close Brothers’ prudent and consistent risk appetite has allowed us to maintain a robust capital position and a low risk proﬁle. As in previous years the Committee apportions its time between the planned periodic review of key portfolio risks and the close scrutiny of new business risks as they develop. This allows us to ensure that emerging risks can be identiﬁed and debated and that management’s plans for risk mitigation are well understood and appropriately resourced. During the year the Committee saw continued improvement in the quality of the management information that it receives, facilitated by the considerable investment that the group has made in upgrading its risk and ﬁnance systems in recent years. This remains a key focus for the Committee given its importance as a management tool to ensure that risk appetite is well understood, embedded and tracked across the many business areas. Committee roles and responsibilities The Committee’s key roles and responsibilities are therefore in summary to: • Oversee the maintenance and development of a supportive culture of organisation design in relation to the management of risk; • Review and set risk appetite, which is the level of risk the group is willing to take in pursuit of its strategic objectives; • Monitor the group’s risk proﬁle against the prescribed appetite; • Review the effectiveness of the risk framework to ensure that key risks are identiﬁed and appropriately managed; and • Provide input from a risk perspective into the alignment of remuneration with performance against risk appetite (through the Remuneration Committee). i F n a n c a i l S t a t e m e n t s 52 Close Brothers Group plc Annual Report 2015 Corporate Governance continued Membership and meetings The Committee comprises each of the independent non- executive directors, with me as chairman. Five scheduled meetings were held during the year and these were supplemented by an additional meeting for review of the Internal Capital Adequacy Assessment Process (“ICAAP”) and its assumptions. Full details of attendance by the non-executive directors at these meetings during the year are set out on page 46. In addition to the members of the Committee, standing invitations are extended to the company chairman, the executive directors, chief risk ofﬁcer and risk team, head of compliance and the head of internal audit who attend all meetings as a matter of practice and have supported and informed the Committee’s discussions. Other executives, subject matter experts and external advisers may also be invited to attend the Committee to present and advise on reports commissioned. I meet regularly with the chief risk ofﬁcer and his risk team in a combination of formal and informal sessions, and with senior management across all divisions of the group to discuss the business environment and to gather their views of emerging risks. Activity in 2015 financial year Consistent with our plan to continue enhancing our overall risk management environment, April 2015 saw the appointment of a new chief risk ofﬁcer. This has supported the continued evolution and strengthening of the risk function across the group in a manner consistent with the three lines of defence model, an industry and regulatory standard. This has also allowed us to drive further improvement in the management information that is available to the Committee, from both a ﬁnancial and non-ﬁnancial risk perspective. The Committee additionally received regular updates across the spectrum of operational risks and information technology, in response both to the growing threat posed by cyber crime and more exacting data management requirements driven by previous incidents elsewhere in the industry. Several of these kinds of risks were stressed in various scenarios as part of the annual ICAAP process. Following robust debate and challenge, the Committee and board were satisﬁed that the group’s business model and allocated risk appetite remained appropriate under each of the modelled scenarios. Risk around relationships with third parties also remained under review to ensure that outsourcing arrangements are appropriately controlled and the ﬁnancial condition of third party agents or suppliers is monitored and understood. The identiﬁcation and management of conduct risk, including associated management information, continues to be strengthened, so that the board can be comfortable that its understanding of the embedded risk culture is well founded. The Committee maintained its oversight, review and challenge of the change management programmes across the group, and in our regular meetings there is speciﬁc focus on the progress of key projects and initiatives. We continue to actively engage with the PRA and FCA with regards to proposed new regulation and the ongoing effective operation of the group’s risk framework. Remuneration We provided input to the Remuneration Committee to ensure that risk behaviours and the management of operational risk incidents over the course of the ﬁnancial year were appropriately reﬂected in the annual management performance and compensation review process. Looking ahead to 2016 Key priorities for the coming year include: • Further development of the methodologies supporting the allocation and management of risk appetite. • Updating and enhancing the group’s risk framework, policies and standards, to further embed policy approval and governance. • Continued development of management information as well as the planned evolution of our risk systems to enhance further the efﬁciency of the Committee. Lesley Jones Chairman of the Risk Committee 22 September 2015 Close Brothers Group plc Annual Report 2015 53 Oliver Corbett, Chairman of the Audit Committee i S t r a t e g c R e p o r t G o v e r n a n c e This report sets out the role and responsibilities of the Audit Committee and the principal areas which the Committee has focused on during the year. The Committee continues to be effective in supporting the board in its oversight of the group’s ﬁnancial reporting and internal controls. Audit Committee Chairman’s overview This year the Committee has again primarily focused on the review and challenge of the key accounting judgements underpinning the group’s ﬁnancial statements. We also commissioned and received an independent assessment of the internal audit function, continued to review the group’s processes to ensure its external reporting is fair, balanced and understandable; considered the rationale and evidence to support the going concern assumption and received an assessment of additional regulatory reporting and its impact on resources in our ﬁnance teams. Looking ahead, the Committee will be focused on future accounting changes particularly with regard to credit provisioning, as well as preparing for the external audit tender which we expect to take place by 2017. Committee roles and responsibilities The Committee’s key roles and responsibilities are to: • Monitor the integrity of the group’s external ﬁnancial reporting, in particular reviewing signiﬁcant ﬁnancial reporting judgements to ensure they are appropriate; • Review the effectiveness of the group’s internal controls; and • Monitor and review the activities and performance of both internal and external audit. Membership and meetings The Committee comprises each of the independent non- executive directors and me as chairman. The Committee acts independently of the executive to ensure the interests of shareholders are protected. Each of the Committee members is independent. Five meetings were held during the year scheduled to coincide with the ﬁnancial reporting cycle of the group. Each of the Committee members attended all meetings held with the exception of Geoffrey Howe who missed one meeting. Full details of attendance are shown in the table on page 46. The qualiﬁcations of the members of the Committee are outlined in their biographies on page 41. I am deemed to have recent and relevant experience by the board. Standing invitations are extended to the chairman of the board and the executive directors, all of whom attend meetings as a matter of practice. I meet with the group ﬁnance director, the heads of internal audit, risk and compliance and the group ﬁnancial controller in advance of each of the scheduled meetings to agree the agenda and receive full brieﬁng on relevant issues. This group also attends the meetings by invitation together with other senior executives as required. The lead external audit partner attends all of the Committee meetings and meets in private with the Committee on each occasion. In addition I have had regular contact with the lead audit partner throughout the year. i F n a n c a i l S t a t e m e n t s 54 Close Brothers Group plc Annual Report 2015 Corporate Governance continued Key Accounting Judgements Credit provisioning The Committee considered a paper setting out the group’s provisioning policies and the governance processes in place to ensure compliance with those policies. The Committee challenged management and the external auditor on the level of provisioning and the consistency of the policies applied in the current year. The Committee concluded that the approach taken was consistent and appropriate and that the judgements were reasonable. The Committee was also updated by management on the work being undertaken in preparation for the new accounting requirements relating to accounting for expected losses as part of International Financial Reporting Standard (“IFRS”) 9 “Financial instruments”. Revenue recognition The Committee reviewed the group’s accounting policies on revenue recognition and in particular the timing of recognition and consistency of approach with prior periods. The Committee considered the approach to interest income, fee and commission income and gains less losses from dealing in securities. The Committee was satisﬁed that the approach to revenue recognition was appropriate and has been consistently applied across the group. Goodwill The Committee reviewed the annual assessment of the carrying value of goodwill. The results of the group’s value in use calculations were reviewed and the key assumptions regarding discount rates and forecast future earnings were challenged. Noting the levels of headroom above carrying value, the Committee agreed with management’s conclusion that the carrying value of goodwill remains appropriate. Other accounting treatments The Committee also reviewed a number of other accounting treatments during the year. In particular the Committee reviewed the proposed accounting treatment of the Close Brothers Seydler disposal and the disclosure and treatment of one-off revenues received in the Securities and Asset Management divisions. Internal Audit The group has operated a co-source internal audit function with PwC since 2009. This provides ﬂexible resourcing and ensures access to a full range of audit expertise across the group’s businesses. The Committee continues to monitor the level and mix of co-source and internal resources and has again concluded that they remain appropriate. During the year the Committee approved the annual internal audit plan. It also received a report from the head of internal audit at each meeting summarising audits concluded in the period and updates on outstanding agreed actions from previous reports including explanations around any overdue actions. The function completed 25 audits across the group during the 2015 ﬁnancial year. The head of internal audit meets the Committee privately at each meeting as well as meeting regularly with the Audit Committee chairman throughout the year. An external effectiveness review of the internal audit function was undertaken in the year. The group’s policy is to carry out such a review every ﬁve years. The report concluded that the function is effective and identiﬁed a number of minor areas where enhancements could be made which will be fully implemented in the coming year. External Audit The Committee assesses the independence and objectivity, qualiﬁcations and effectiveness of the external auditor on an annual basis. The Committee also concludes on whether to recommend the reappointment of the auditor to the board. Our annual evaluation focused on the following key areas: • The quality of audit expertise, judgement and dialogue with the Committee and senior management. • The independence and objectivity demonstrated by the audit team. • The quality of service including consistency of approach and responsiveness. This process was facilitated by an enhanced group-wide survey of ﬁnance teams, formal interviews with management, a survey of the Deloitte LLP senior audit team’s view on the group and a review of audit and non-audit fees. The Committee oversees the group’s policy on the provision of non-audit services by the external auditor. The Committee continues to see beneﬁts for the group in engaging Deloitte LLP where: • Work is closely related to the audit; • A detailed understanding of the group is required; and • Deloitte LLP is able to provide a higher quality and/or better value service. However, the key principle of our policy is that permission to engage the external auditor will always be refused when a threat to independence and/or objectivity is perceived. Close Brothers Group plc Annual Report 2015 55 During the year non-audit fees amounted to £0.6 million and were 56% of the overall audit fee (2014: 92%). Non-audit fees in the year were: Nomination and Governance Committee This report sets out the role and responsibilities of the Nomination and Governance Committee. Assurance work on: Systems and controls Securitisation funding Tax compliance £ million 0.3 0.1 0.2 0.6 The Committee concluded that all of these fees fell within its criteria for engaging Deloitte LLP and does not believe they pose a threat to the auditor’s independence or objectivity. The Committee has concluded that Deloitte LLP remain independent and that their audit is effective. Deloitte LLP or its predecessor ﬁrm has audited the group since it was ﬁrst listed in 1984, but has only acted as the group’s sole auditor since 2008. Although a full audit tender was not carried out, a detailed proposal was reviewed at that time prior to Deloitte LLP’s appointment as sole auditor to the group. No audit tender is planned for the current year given the continuing effectiveness of Deloitte LLP. However, as previously reported the Committee intends that an audit tender will take place no later than completion of the current lead partner’s ﬁve year term in 2017 in line with the Code and within the transitional period set out in recent EU legislation. Oliver Corbett Audit Committee Chairman 22 September 2015 Committee roles and responsibilities The Committee’s key roles and responsibilities are: • Regularly reviewing the structure, size and composition of the board; • Considering the leadership needs of the group and considering succession planning for directors and other senior executives; • Considering the appointment or retirement of directors; • Evaluation of the skills, knowledge and experience required for a particular appointment, normally with the assistance of external advisers used to facilitate the search for suitable candidates; and • Assessing the contribution of non-executive directors. Membership and meetings The Committee comprises Geoffrey Howe, the senior independent director, Oliver Corbett, Lesley Jones and Bridget Macaskill who chair the Audit, Risk and Remuneration Committees respectively and me as chairman. Bruce Carnegie-Brown was also a member until 20 November 2014. Each of the Committee members is independent. Four meetings were held during the year. All members attended each of the meetings held during their tenure of ofﬁce, except that Geoffrey Howe was unable to attend one of them. In addition, the chief executive attends meetings by invitation, as does the group head of human resources when presenting a review of talent and executive management succession planning. Activity in 2015 financial year During the year the Committee focused on: • Appointment of a new senior independent director and Remuneration Committee chairman; • Talent review and executive management succession planning; • Reviewing the non-executive directors’ skill sets to ensure that an appropriate balance of skills has been maintained; and • Board evaluation. The Committee recommended the appointment of Geoffrey Howe as senior independent director on the basis of his extensive experience and contribution since his appointment to the board in 2011. It nominated Bridget Macaskill as chairman of the Remuneration Committee in line with its succession plan, following her appointment to the board in November 2013. Bridget Macaskill has signiﬁcant remuneration committee credentials and familiarity with FCA/ PRA and EU remuneration regulations. Strone Macpherson Chairman of the Nomination and Governance Committee 22 September 2015 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 56 Close Brothers Group plc Annual Report 2015 Corporate Governance continued Remuneration Committee The Report of the Board on Directors’ Remuneration is set out on pages 58 to 77. Conﬂicts of Interest The articles of association include provisions giving the directors authority to approve conﬂicts of interest and potential conﬂicts of interest as permitted under the Companies Act 2006. A procedure has been established whereby actual and potential conﬂicts of interest are regularly reviewed and appropriate authorisation sought, prior to the appointment of any new director or if a new conﬂict arises. The decision to authorise a conﬂict of interest can only be made by non- conﬂicted directors and in making such a decision the directors must act in a way they consider, in good faith, will be most likely to promote the success of the company. The board believes this procedure operated effectively throughout the year. Investor Relations The group has a comprehensive investor relations (“IR”) programme to ensure that current and potential shareholders, as well as ﬁnancial analysts, are kept well informed of the group’s performance and have appropriate access to management to understand the company’s business and strategy. The board believes it is important to maintain open and constructive relationships with all shareholders. The IR team, reporting to the ﬁnance director, are responsible for managing a structured programme of meetings, calls and presentations around the ﬁnancial reporting calendar as well as throughout the year. The chief executive and ﬁnance director meet with the group’s major institutional shareholders on a regular basis. In addition, the chairman arranges to meet with them once a year to discuss challenges facing the board, particularly in relation to strategy, corporate governance and succession planning. Separately the senior independent director is available, should shareholders wish to discuss any concerns they may have. All shareholders also have the opportunity to raise questions with the board at the AGM, either in person or by submitting written questions in advance. The chairman of each of the board committees attends the AGM and all other directors are expected to attend the meeting. The board is regularly updated on the IR programme. An IR report, summarising share price performance, share register composition and feedback from any investor meetings, is produced for each board meeting. All results announcements, annual reports, regulatory news announcements, presentations, webcasts and other relevant documents are available on the IR section of the group website (www.closebrothers.com/investor-relations). The group’s investor briefcase app for iPads and iPhones also offers analysts and investors access to ﬁnancial reports, presentations and news releases. Substantial Shareholdings The company has been notiﬁed to 11 September 2015 under the provisions of the Disclosure and Transparency Rules of the following signiﬁcant interests in the voting rights of the company. Standard Life Investments M&G Investment Management Aberdeen Asset Managers Royal London Asset Management Ordinary shares millions 18.0 10.0 9.5 4.5 Voting rights % 12.05 6.81 6.42 3.03 Substantial shareholders do not have different voting rights from those of other shareholders. Statement of Directors’ Responsibilities The directors are responsible for preparing the Annual Report and accounts in accordance with applicable law and regulations. Company law requires the directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the directors are required to prepare the group ﬁnancial statements in accordance with IFRSs as adopted by the European Union and Article 4 of the International Accounting Standards (“IAS”) Regulation. The directors have elected to prepare the parent company ﬁnancial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the accounts unless they are satisﬁed that they give a true and fair view of the state of affairs of the company and of the proﬁt or loss of the company for that period. In preparing the parent company ﬁnancial statements, the directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and accounting estimates that are reasonable and prudent; • State whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the ﬁnancial statements; and • Prepare the ﬁnancial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. In preparing the group ﬁnancial statements, IAS 1 requires that directors: • Properly select and apply accounting policies; • Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • Provide additional disclosures when compliance with the speciﬁc requirements in IFRSs are insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance; and • Make an assessment of the company’s ability to continue as a going concern. Close Brothers Group plc Annual Report 2015 57 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s The directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the company and enable them to ensure that the ﬁnancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a strategic report, directors’ report, directors’ remuneration report and corporate governance report that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Responsibility statement We conﬁrm that to the best of our knowledge: • The ﬁnancial statements, prepared in accordance with the relevant ﬁnancial reporting framework, 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; • The Strategic 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; and • The Annual Report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary to assess the group’s performance, business model and strategy. By order of the board Nicholas Jennings Company Secretary 22 September 2015 58 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration Bridget Macaskill, Chairman of the Remuneration Committee This report sets out our approach to remuneration for the group’s employees and directors for the 2015 ﬁnancial year. This report has been prepared in compliance with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and the listing rules. It has been approved by the board. Certain parts of this report are audited by the company’s auditor Deloitte LLP and are marked as “audited” for clarity. Annual Statement from the Remuneration Committee Chair On behalf of the Remuneration Committee (hereafter referred to in this report as the “Committee”), I am pleased to present the report on directors’ remuneration for the 2015 ﬁnancial year. This is my ﬁrst report since becoming chairman of the Committee in November 2014. On behalf of the board, I would like to thank my predecessor, Bruce Carnegie-Brown for his service as chairman. The report is split into three sections: Governance (page 60) This section of the report covers the objectives, responsibilities, membership and activities of the Committee during the 2015 ﬁnancial year. The Directors’ Remuneration Policy (pages 60 to 68) The group’s policy on directors’ remuneration and the key factors taken into account in setting the policy are covered in this section. This policy was approved by shareholders for the following three years at the AGM on 20 November 2014. The Annual Report on Remuneration (pages 69 to 77) This section reports on the payments and awards made to the directors and details the link between company performance and remuneration for the 2015 ﬁnancial year. The Annual Report on Remuneration together with this annual statement is subject to an advisory shareholder vote at the AGM on 19 November 2015. At a Glance How we performed As reported in the Financial Overview section on pages 14 to 19 of the Strategic Report, this has been another year of strong performance across the group, driven by continued good performance from the Banking division and good growth in Asset Management. The key performance indicators with regards to remuneration are shown in the table below. The bonuses for the executive directors (“EDs”) have increased slightly this year, driven by strong performance. However, the single ﬁgure totals of remuneration have all decreased, primarily due to the impact of share price movement. Key performance indicator Return on equity Adjusted operating proﬁt Compounded adjusted 2015 19.5% 20141 18.5% £224.9 million £200.6 million earnings per share growth2 79.0% 60.6% Total shareholder return per annum3 33.9% Distributions to shareholders £79.1 million 24.5% £71.8 million 1 2014 performance measurement based on continuing and discontinued operations. 2 For the three year periods ended 31 July 2015 and 31 July 2014. 3 For the three year periods ended 31 July 2015 and 31 July 2014 based on the average three month share price prior to that date. Key changes during the financial year This year we have introduced clawback on all variable remuneration for the EDs, to allow the recovery of variable remuneration where appropriate. Clawback will extend to three years for cash bonuses, deferred bonuses and invested shares under the Share Matching Plan (“SMP”), and to four years for the Long Term Incentive Plan (“LTIP”) and Matched SMP shares. The other key details are outlined in the policy table on pages 61 to 64. Close Brothers Group plc Annual Report 2015 59 This is an addition to the remuneration policy that was approved by 92.5% of shareholders for the following three years at the AGM held on 20 November 2014. A binding shareholder vote is required on this policy at least every three years, or in the event that the company wishes to make any signiﬁcant changes to the policy. Since clawback is a provision of the Revised Code, and the Committee believes it can operate these provisions within the remit of the existing policy, it is not our intention to put the remuneration policy to a vote at the AGM to be held on 19 November 2015. Major Decisions on Remuneration for the Financial Year Previous salary Salary with effect from 1 August 2015 Percentage salary increase 2015 bonus Percentage change in bonus from 2014 2015 bonus as a per cent of 2015 salary 2015 LTIP award Percentage change in LTIP award from 2014 2015 LTIP award as a per cent of 2015 salary Managing director and Banking chief executive Chief executive Finance director Preben Prebensen Stephen Hodges Jonathan Howell £400,000 £408,000 2.0% £1,135,000 0.9% 284% £750,000 £528,000 £540,000 2.3% £1,552,000 0.8% 294% £1,000,000 £475,000 £485,000 2.1% £1,405,000 1.4% 296% £850,000 Group head of legal and regulatory affairs Elizabeth Lee £360,000 £367,500 2.1% £335,000 11.7% 93% £400,000 0.0% 189% 0.0% 179% 0.0% 188% 0.0% 111% i S t r a t e g c R e p o r t G o v e r n a n c e EDs’ Remuneration and Shareholdings Single total figure of remuneration1 Preben Prebensen £’000 Stephen Hodges £’000 Jonathan Howell £’000 Elizabeth Lee £’000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 £7,411 70% 21% 9% 2014 £6,052 63% 26% 11% 2015 6,000 5,000 4,000 3,000 2,000 1,000 0 £5,098 62% 27% 11% 2014 £4,312 54% 32% 14% 2015 6,000 5,000 4,000 3,000 2,000 1,000 0 £4,571 65% 24% 11% 2014 £3,487 53% 33% 14% 2015 2,000 1,750 1,500 1,250 1,000 750 500 250 0 £1,646 £1,580 55% 50% 18% 27% 2014 21% 29% 2015 Fixed remuneration Annual bonus Performance awards 1 See page 69 for details. Value of shareholding versus shareholding policy1 as a percentage of salary Preben Prebensen per cent Stephen Hodges per cent Jonathan Howell per cent Elizabeth Lee per cent 2,400 2,100 1,800 1,500 1,200 900 600 300 0 1,926 Actual 200 Policy 2,400 2,100 1,800 1,500 1,200 900 600 300 0 2,376 200 Policy Actual 2,400 2,100 1,800 1,500 1,200 900 600 300 0 1 See EDs’ Shareholding and Share Interests table on page 74 for details. 1,000 800 600 400 200 0 100 Policy 222 Actual 958 Actual 200 Policy i F n a n c a i l S t a t e m e n t s 60 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued Looking Forward to 2016 2016 is going to be another busy year for the Committee. If the proposed amendments to the application of the Capital Requirements Directive, currently in consultation by the European Banking Authority, are implemented, this will require a redesign of our remuneration policy. The most signiﬁcant proposed change would see the application of a cap on variable remuneration of one times ﬁxed remuneration, rising to two times with shareholder approval. We anticipate consulting with shareholders about any proposed amendments to the remuneration structure in the summer of 2016, and presenting a revised remuneration policy for approval by shareholders at the AGM in November 2016. I hope that you will ﬁnd this report on the directors’ remuneration useful, understandable and clear. Bridget Macaskill Chairman of the Remuneration Committee 22 September 2015 Governance Remuneration Committee Committee roles and responsibilities The Committee’s key objectives are to: • Determine the over-arching principles and parameters of the remuneration policy on a group-wide basis; • Establish and maintain a competitive remuneration package to attract, motivate and retain high calibre EDs and senior management across the group; • Promote the achievement of the group’s annual plans and its strategic objectives by providing a remuneration package that contains appropriately motivating targets that are consistent with the group’s risk appetite; and • Align senior executives’ remuneration with the interests of shareholders. The Committee’s main responsibilities are to: • Review and determine the total remuneration packages of EDs and other senior executives in consultation with the chairman and chief executive and within the terms of the agreed policy; • Approve the design and targets of any performance related pay schemes operated by the group; • Review the design of all employee share incentive plans; • Ensure that contractual terms on termination and any payments made are fair to the individual and the group, that failure is not rewarded and that a duty to mitigate risk is fully recognised; • Review any major changes in employee beneﬁts structures throughout the group; • Select, appoint and determine terms of reference for independent remuneration consultants to advise the Committee on remuneration policy and levels of remuneration; • Ensure that the remuneration structures in the group are compliant with the rules and requirements of regulators, and all relevant legislation; • Ensure that provisions regarding disclosure of remuneration are fulﬁlled; and • Seek advice from group control functions to ensure remuneration structures and annual bonuses are appropriately aligned to the group’s risk appetite. Membership The Committee comprises Bridget Macaskill as chairman, together with each of the other independent non-executive directors. Five meetings were held during the year and a record of attendance at meetings is set out on page 46. The chairman of the board, chief executive, group head of human resources and the head of reward and HR operations also attend meetings. Activity in the 2015 financial year The Committee has a standing calendar of items within its remit. In addition to these standing items, it discusses matters relating to the operation of the remuneration policy and emerging regulatory and market practices. The key issues that the Committee focused on during the year were as follows: • The introduction of clawback on variable remuneration for EDs; • The review of the annual bonus targets and objectives for EDs; • An external review of the reporting to the Committee; • Assessment of the vesting of LTIP and SMP awards; • Regular reviews of regulatory and legislative changes and developments; • Review of the remuneration structure for senior employees; • Review of the remuneration structure for employees in control and support functions; • Review of the approach to employee sales incentive schemes in the group; • The implementation of the Share Incentive Plan (“SIP”) for employees; and • The annual performance, salary and variable remuneration review. Directors’ Remuneration Policy This section sets out the company’s remuneration policy for directors and explains each element and how it operates. The reward structure aims to: • Attract, motivate and retain high calibre employees across the group; • Reward good performance; • Promote the achievement of the group’s annual plans and its long-term strategic objectives; • Align the interests of employees with those of all key stakeholders in particular our shareholders, clients and regulators; and • Support effective risk management and promote a positive client conduct culture. There is one signiﬁcant change to the policy this year, which is the introduction of clawback on all variable remuneration for EDs. The cash bonus is subject to clawback for a period of three years from award. The deferred bonus vests in equal tranches over three years, and is subject to malus prior to vesting and clawback for three years from the date of grant. The LTIP is subject to malus for the three year period to the point of vesting, and is subject to clawback for four years from the date of grant. The Invested SMP shares are subject to malus until vesting and to clawback for three years from the date of grant, while the Matched SMP shares are subject to malus until vesting and to clawback for four years from the date of grant. Close Brothers Group plc Annual Report 2015 61 The events which may trigger malus are as follows: • The ED’s employment has been terminated for misconduct The events which may trigger clawback are as follows: • Discovery of a material mis-statement resulting in an or the ED has been issued with a formal disciplinary warning for misconduct under the ﬁrm’s disciplinary policy; or • The ﬁrm suffers a material loss where the ED has operated outside the risk parameters or risk proﬁle applicable to their position and as such the Committee considers a material failure in risk management has occurred; or • The level of the award is not sustainable when assessing the overall ﬁnancial viability of the ﬁrm. In the event that one of these is triggered, the Committee may, at its discretion, defer and/or reduce, in whole or in part any unvested award. adjustment in the audited consolidated accounts of the company, or the audited accounts of any material subsidiary; or • The assessment of any performance target or condition in respect of an award was based on material error, or materially inaccurate or misleading information; or • The discovery that any information used to determine the bonus and number of shares subject to an award was based on material error, or materially inaccurate or misleading information; or • Action or conduct of a participant which, in the reasonable opinion of the board, amounts to fraud or gross misconduct. In the event that one of these is triggered, the Committee may require the ED to repay all or part of a relevant award, and any associated dividend equivalents. Remuneration Policy for EDs Element and how it supports the company’s short-term and long-term strategic objectives Base salary Attracts and retains high calibre employees. Reﬂects the employee’s role and experience. Operation and maximum payable Set annually based on the individual’s role and experience, pay for the broader employee population, and external factors, where applicable. Increases normally take effect from 1 August. Paid monthly in cash. Increases will generally not exceed increases for the broader employee population unless there is a change in role or responsibility. Performance framework, recovery and withholding None. Beneﬁts Enables the EDs to perform their role effectively by contributing to their wellbeing and security. Private medical cover. Health screening. Life assurance cover. Income protection cover. None. Provides competitive beneﬁts consistent with the role. Allowance in lieu of a company car. The maximum allowance in lieu of a company car is £18,000 for the chief executive and £12,000 for the other EDs. Pension Provides an appropriate and competitive level of personal and dependant retirement beneﬁts. Other beneﬁts provided from time to time. Cash allowance in lieu of employer pension contributions equal to 22.5% of base salary. None. The maximum is 22.5% of base salary and the absolute values will only increase in line with any base salary increases. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 62 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued Element and how it supports the company’s short-term and long-term strategic objectives Annual bonus Rewards good performance. Motivates employees to support the group’s goals, strategies and values over both the medium and long term. Aligns the interests of senior employees and executives with those of key stakeholders, including shareholders, and increases retention for senior employees, through the use of deferrals. Operation and maximum payable Set annually based on the achievement of pre-determined objectives. Annual bonus up to 100% of base salary is delivered in cash. Annual bonus above 100% of base salary is deferred into group shares vesting one third per year over three years. Shares may be called for at any time up to 12 months from the date of vesting. When the shares are called for, the ED is entitled to the gross value of accumulated dividends in respect of the shares held under the deferred awards prior to calling. The annual bonus for EDs is capped at 300% of base salary. The annual bonus for the group head of legal and regulatory affairs is capped at 100% of base salary given that this is a control function, and so a lower proportion of the remuneration should be variable. Performance framework, recovery and withholding Individual bonuses are determined based on both ﬁnancial and non-ﬁnancial performance, including adherence to relevant risk and control frameworks. The ﬁnancial measure used to determine the bonus is return on opening equity (“RoE”). The non-ﬁnancial metric is individual performance. This includes risk, compliance and control measures, and others applicable to each role. The actual performance targets will be set at the beginning of each ﬁnancial year, but will not be disclosed in advance for commercial sensitivity reasons. The actual targets set for each year will be designed to align the interests of EDs with the key stakeholders over the medium term, be challenging but also provide an effective incentive for the EDs. 60% of the annual bonus for the chief executive, the Banking chief executive and the ﬁnance director will be determined based on RoE. 40% of the annual bonus for the group head of legal and regulatory affairs will be determined based on RoE. The remainder will be determined based on individual performance. Threshold performance would result in a bonus of no more than one third of the maximum being paid for the chief executive, the Banking chief executive and the ﬁnance director, and no more than 60% of the maximum being paid for the group head of legal and regulatory affairs. The deferred awards would be forfeited if the ED leaves employment in certain circumstances or is dismissed for cause before the relevant vesting date. The cash and deferred bonuses are subject to clawback and/or malus conditions, as outlined on page 60. Close Brothers Group plc Annual Report 2015 63 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Element and how it supports the company’s short-term and long-term strategic objectives Long Term Incentive Plan Motivates executives to achieve the group’s longer-term strategic objectives. Aids the attraction and retention of key staff. Aligns executive interests with those of shareholders. Operation and maximum payable Awards are made in the form of nil cost options or conditional shares. Awards vest after three years subject to achieving absolute total shareholder return (“TSR”), adjusted earnings per share (“EPS”) growth and Risk Management objectives. Performance framework, recovery and withholding Awards vest after three years subject to achieving TSR, adjusted EPS growth and Risk Management objectives. The weighting of the performance measures is 40% TSR, 40% adjusted EPS and 20% Risk Management objectives. On vesting, EDs receive an amount (in cash or shares) equal to the dividends which would have been paid on vested shares during the period from the beginning of the performance period to the time that the ED calls for the award. The TSR and adjusted EPS performance targets are determined at the time of each grant, are set to support the objectives of the LTIP and be challenging but achievable. EDs are eligible to receive an annual award of shares with a face value of up to 200% of base salary, excluding dividend equivalents. The group head of legal and regulatory affairs is eligible to receive an annual award of shares with a face value of up to 125% of base salary, excluding dividend equivalents, given that this is a control function, and so a lower proportion of remuneration should be variable. The Risk Management objectives are: capital and balance sheet management; and risk, compliance and controls. These two elements have equal weighting. For each element of the award, vesting starts at 25% for threshold performance, rising on a straight line basis to 100% for maximum performance. The actual target ranges set for each grant and performance against the targets at vesting will be reported in the Annual Report on Remuneration for the relevant ﬁnancial years. The LTIP awards will be forfeited if the ED leaves employment in certain circumstances or is dismissed for cause before the relevant vesting date. The LTIP awards are subject to malus and clawback conditions, as outlined on page 61. Share Matching Plan Aligns the interests of executives with those of shareholders. EDs can choose to invest up to a maximum value of 100% of base salary from their bonus into Close Brothers Group plc shares (“Invested Shares”) for three years. The performance conditions for the Matching Shares are the same as the performance conditions in respect of the LTIP awards, outlined above. Invested Shares are matched with free matching shares (“Matching Shares”) for every Invested Share. The Invested Shares are released in full at the end of the three year deferral. The Matching Shares are subject to performance conditions over the three year deferral period. On vesting, EDs receive an amount (in cash or shares) equal to the dividends which would have been paid on vested shares during the period from the beginning of the performance period to the time that the ED calls for the award. The maximum matching ratio will be two Matching Shares for each Invested Share. For each performance element of the Matching Share award, vesting starts at 25% for threshold performance, rising on a straight line basis to 100% for maximum performance. The actual target ranges set for each grant and performance against the targets at vesting will be reported in the Annual Report on Remuneration for the relevant ﬁnancial years. The Invested Shares and Matching Shares are forfeited if the ED leaves employment in certain circumstances or is dismissed for cause before the relevant vesting date. The Invested Shares and Matching Shares are subject to malus and clawback conditions, as outlined on page 61. 64 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued Element and how it supports the company’s short-term and long-term strategic objectives Save As You Earn (“SAYE”) Aligns the interests of executives with those of shareholders through building a shareholding. Share Incentive Plan Aligns the interests of executives with those of shareholders through building a shareholding. Shareholding requirement Aligns the interests of executives with those of shareholders. Other Legacy arrangements Operation and maximum payable Employees save a ﬁxed amount per month over a three or ﬁve year time frame. Performance framework, recovery and withholding None as this is a voluntary scheme where employees have invested their own earnings. At the end of the period employees can withdraw all of their savings, or use some or all of their savings to buy shares at the guaranteed option price. The option price is set at the beginning of the participation period and is usually set at a 20% discount to the share price at invitation. Employees can make total maximum contributions of £6,000 per annum, in line with HMRC rules. The Committee reserves the discretion to increase the maximum contributions in line with any HMRC rule changes during the period of the policy. Employees are able to contribute up to a maximum of £1,800 per year from pre-income tax and national insurance earnings to buy Partnership Shares. At present the Committee has determined that employees have the ability to buy Partnership Shares; however it retains the discretion to offer Matching Shares of up to twice the number of Partnership Shares. This will be on the same basis for all employees should the Committee exercise this discretion. Dividends paid on shares held in the SIP are to be reinvested to acquire further Dividend Shares. The Committee reserves the discretion to increase the maximum contributions in line with any HMRC rule changes during the period of the policy. The chief executive, the Banking chief executive and the ﬁnance director are required to build and maintain a shareholding of 200% of base salary over a reasonable timeframe. The group head of legal and regulatory affairs is required to build a shareholding of 100% of base salary, given that this is a control function. Short-term share price ﬂuctuations are disregarded for these calculations. The company will pay legal, training and other reasonable and appropriate fees incurred by the EDs as a result of doing their job. The company will have the ability to honour any commitments entered into with current or former directors that were disclosed to shareholders in remuneration reports prior to the 2014 remuneration report. The Committee reserves the right to allow awards to vest or make payments subject to arrangements that were granted or agreed before the individual became a director and not in contemplation of becoming a director. None as this is a voluntary scheme where employees have invested their own earnings. None. None. None. Close Brothers Group plc Annual Report 2015 65 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Additional Details on the Remuneration Policy Annual bonus: Performance measures and targets Per cent determined by RoE 60% Per cent determined by achievement against personal goals Examples of personal goals 40% Strategic: Maintain discipline of the Banking model particularly as competition increases and maintain momentum in Asset Management. People: Develop senior succession and support pipeline talent programmes. Business delivery: Deliver versus key group metrics. 60% 40% Strategic: Maintain discipline of funding and lending models and progress strategic and tactical initiatives. People: Develop senior succession and support pipeline talent programmes. Business delivery: Deliver against key metrics, principally in the Banking division and maintain cost discipline and prioritise spending. 60% 40% Strategic: Manage the positioning of our strategy and results with investors and analysts. Manage the level of group capital, including both regulatory and economic. 40% 60% Strategic: Play a leadership role in all regulatory issues, including advice on key decisions as we address PRA/FCA requirements and standards. Risk and compliance: Ensure operation within the agreed risk appetite and continue to enhance the control environment and supporting infrastructure. Role Chief executive Banking chief executive Finance director Group head of legal and regulatory affairs The Committee chose RoE as a performance measure as it aligns the interests of the shareholders and the executives and it captures both proﬁt and capital management metrics. Individual performance was selected to ensure that the EDs are implementing and executing the groups’ strategies and objectives over the short and medium term. Risk, compliance and controls are included as part of the personal objectives to ensure that the EDs set the right tone from the top and ensure the company maintains the appropriate risk and compliance discipline. The actual performance targets for each ﬁnancial year will be set at the beginning of the ﬁnancial year based on prior year performance, the budget for the following year, and other internal and external factors as appropriate. LTIP and SMP: Performance measures Adjusted EPS was chosen as a performance measure as the Committee believes it is the best measure of long-term performance for the group. Absolute TSR was selected as it is the key objective for most of our shareholders and it supports both the delivery of a good RoE for shareholders and strong alignment of interests between executives and shareholders. Capital and balance sheet management was included to ensure capital is used efﬁciently and in a disciplined way to support the long-term health of the group. Risk, compliance and controls was selected to ensure that the long-term interests of the group are protected and to support key requirements for our business such as good customer outcomes. Additional details on performance measures for the annual bonus, LTIP and SMP The Committee has the discretion to change the overall weighting of each category over the duration of the policy where it is deemed appropriate and reasonable to do so. The Committee can also make adjustments to performance targets to reﬂect signiﬁcant one-off items which occur during the measurement period (for example a major transaction), where it is deemed appropriate and reasonable to do so. The Committee will make full and clear disclosure of any such adjustments within the Annual Report on Remuneration for the relevant ﬁnancial year. Consistency of executive remuneration across the group The pay and employment conditions of employees within the group were taken into consideration when setting the policy and pay of the EDs. The Committee does not formally consult with employees when setting the policy, however the employee opinion survey conducted every two years includes remuneration as one of the topics surveyed. The principles of remuneration are applied throughout the group and are designed to support the group’s key attributes across our businesses, which are expertise, service and relationships. Remuneration structures and arrangements for employees below the EDs are based on the individual’s role, experience, performance and relevant market practice. Annual bonuses for those below ED level are based on role, business performance, market conditions and individual performance. These bonuses are not capped; however highly remunerated employees have a portion of their bonus deferred. For the majority of employees the bonus deferral policy is in line with the EDs, although there are differing approaches in some parts of the group. 66 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued A limited group of senior employees receive LTIP awards, generally on the same basis as the EDs, but the maximum face value of these awards is generally at or below the level of the employee’s base salary. Members of the group Executive Committee who are not EDs are required to build and maintain shareholdings of at least one times base salary and as such are also eligible to participate in the SMP. No other employees have shareholding requirements or are eligible to participate in the SMP. All employees are eligible to participate in the SAYE and SIP plans. Illustrations of Application of Remuneration Policy for EDs Preben Prebensen £’000 Stephen Hodges £’000 Jonathan Howell £’000 Elizabeth Lee £’000 5,000 4,000 3,000 2,000 1,000 £686 £4,466 49% 36% £2,585 32% 42% 100% 26% 15% 0 5,000 4,000 3,000 2,000 1,000 £613 100% 0 £4,008 49% 36% 15% £2,293 31% 42% 27% 5,000 4,000 3,000 2,000 1,000 0 £3,374 49% 36% 15% £1,950 32% 42% 26% £518 100% 5,000 4,000 3,000 2,000 1,000 0 £1,171 35% 25% 40% £469 100% £2,031 59% 18% 23% Minimum On target Maximum Minimum On target Maximum Minimum On target Maximum Minimum On target Maximum The following assumptions were made in developing the scenarios: Fixed remuneration Annual bonus Performance awards Assumptions used Element Fixed remuneration Consists of 2016 base salary, 2016 beneﬁts and 2016 pension allowance. Minimum On target No variable elements are awarded. Annual bonus: Awarded at 200% of base salary for all EDs, with the exception of Elizabeth Lee, where the award is 80% of base salary. LTIP: Awards with a face value of £1,000,000 for Preben Prebensen, £850,000 for Stephen Hodges, £750,000 for Jonathan Howell and £400,000 for Elizabeth Lee (the level of the ﬁnancial year 2015 awards) and vesting at 53% (average level of vesting for the ﬁve years up to and including 2014). SMP: The ED invests 50% of the policy maximum in the SMP, the investment is matched at two times the Invested Shares and vests at 53% (average level of vesting for the ﬁve years up to and including 2014). Annual bonus: Awarded at policy maximum (300% of base salary for all EDs, with the exception of Elizabeth Lee, where the policy maximum is 100% of base salary). LTIP: Maximum award with a face value equal to 200% of base salary for all EDs with the exception of Elizabeth Lee where the award is 125% of salary. Assumes 100% vesting. SMP: The executive invests 100% of the maximum in the SMP (that is equal to 100% of base salary), the investment is matched at two times the Invested Shares and vests at 100%. No adjustment for share price growth or dividends paid. Maximum Other At maximum performance, the ratio of ﬁnancial to non-ﬁnancial measures for the EDs across the annual bonus, LTIP and SMP is approximately 70% to 30%. The Committee believes this combination provides a good balance of ﬁnancial and non- ﬁnancial measures, supports the medium and long-term strategic objectives of the group, and alignment of EDs’ and shareholders’ interests. Close Brothers Group plc Annual Report 2015 67 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Approach to Recruitment Remuneration The remuneration package for new EDs will comply with the Remuneration Policy for EDs outlined on pages 61 to 64. The Committee will seek to pay no more than is necessary to secure the right candidate. The Committee may seek to “buy out” remuneration that the director forfeits as a result of joining the company. In such cases, the Committee will seek to replace this with awards that match the quantum and terms of the forfeited awards as closely as possible. There may be situations where a new director has to relocate in order to take up the post with the company. In such situations reasonable ﬁnancial and, or, practical support will be provided to enable the relocation. This may include the cost of any tax that is incurred as a result of the move. Service Contracts and Policy for Payment on Loss of Ofﬁce Standard provision Notice period Policy 12 months notice from the company. 12 months notice from the ED. Compensation for loss of ofﬁce in service contracts No more than 12 months’ salary, pension allowance and beneﬁts. Treatment of annual bonus on termination The standard approach is no payment unless employed on date of payment. Treatment of unvested deferred awards under the annual bonus plan and the Invested Shares under the SMP The Committee has the discretion under the relevant plan rules to determine whether “good leaver” status should be applied on termination. The current approach provides that discretion may be afforded in cases such as death, disability, retirement, redundancy or mutual separation. Treatment of the LTIP and the Matched Shares under the SMP All awards lapse except for “good leavers”. The Committee has the discretion under the relevant plan rules to determine how “good leaver” status should be applied on termination. The current approach provides that discretion may be afforded in cases such as death, disability, retirement, redundancy or mutual separation. Outside appointments EDs may accept external appointments. Details EDs may be required to work during the notice period or may be provided with pay in lieu of notice if not required to work the full period. All EDs are subject to annual re-election by shareholders. Payment will be commensurate with the company’s legal obligations and we will seek appropriate mitigation of loss by the ED. The Committee may award a pro-rated bonus to “good leavers” (as determined by the Committee) in certain circumstances, although there is no automatic entitlement. “Good leaver” status may be granted in cases such as death, disability or retirement. The Committee has discretion to reduce the entitlement of a “good leaver” in line with performance, the circumstances of the termination, and the malus conditions outlined in the policy table. The Committee also has the ability to recover annual bonuses in line with the clawback conditions outlined in the policy table. Where the director is designated a “good leaver”, awards vest in full over the original schedule and remain subject to the malus conditions. The deferred shares are released in full in the event of a change in control. Awards lapse in the event the employee is declared bankrupt, joins another ﬁnancial services company within 12 months of termination (unless this condition is waived under “good leaver” status), or leaves and is not designated a “good leaver”. These are also subject to the clawback conditions. For “good leavers”, vesting is pro-rated for the period of employment during the performance period. Vesting is subject to the achievement over the original performance period against the performance targets and is on the original schedule. Awards remain subject to the malus and clawback conditions. In the event of a change in control, the awards will vest subject to the service factor and the achievement against the performance targets at that point. However, the Committee retains the discretion to increase the amount vesting depending on the circumstances of the change in control. Board approval must be sought before accepting the appointment. The fees may be retained by the director. 68 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued Standard provision Chairman and non- executive directors Other Policy Engaged under letters of appointment for terms not exceeding three years. Renewable by mutual agreement and can be terminated on one month’s notice. Details All non-executive directors are subject to annual re-election. No compensation is payable if required to stand down. The company may pay settlement payments, legal, training and outplacement fees incurred on exit, if appropriate. Other notable provisions in service contracts There are no other notable provisions in the service contracts. Copies of the directors’ service contracts and letters of appointment are available for inspection at the company’s registered ofﬁce. Dates of EDs’ Service Contracts Name Preben Prebensen Stephen Hodges Jonathan Howell Elizabeth Lee Date of service contract 9 February 2009 22 January 2001 8 October 2007 1 August 2012 Remuneration Policy for the Chairman and Independent Non-executive Directors Element and how it supports the company’s short-term and long-term strategic objectives Fees Attract and retain a chairman and independent non-executive directors who have the requisite skills and experience to determine the strategy of the group and oversee its implementation. Operation and maximum payable Fees are paid in cash and are reviewed periodically. Fees for the chairman and non-executive directors are set by the board based on a recommendation from the Nomination and Governance Committee. The non-executive directors do not participate in that discussion. The chairman of the board receives a fee as chairman but receives no other fees for chairmanship or membership of any committees. Non-executive directors receive a base fee. The senior independent director receives an additional fee for this role. Additional fees are paid for chairmanship of each of the Audit, Remuneration and Risk Committees. Additional fees are paid for membership of committees, with the exception of the Nomination and Governance Committee, for which no additional fees are payable. The chairman and non-executive directors are entitled to claim reimbursement for reasonable expenses incurred performing their duties for the company, including travel expenses. Overall aggregate fees will remain within the £1 million authorised by our articles of association. There is no performance framework, recovery or withholding. Non-executive Directors’ Appointment Letters Name Bruce Carnegie-Brown Oliver Corbett Geoffrey Howe Lesley Jones Bridget Macaskill Strone Macpherson Date of initial appointment 22 June 2006 3 June 2014 4 January 2011 23 December 2013 21 November 2013 3 March 2003 Current letter of appointment start date Date of resignation 20 November 2014 20 November 2014 20 November 2014 20 November 2014 20 November 2014 20 November 2014 Consideration of Shareholders’ Views The chairman of the board consults our key shareholders on a regular basis on key issues, including remuneration. The Committee took issues of concern raised by shareholders in prior years into account when determining the policy. Close Brothers Group plc Annual Report 2015 69 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Annual Report on Remuneration This section explains how our Directors’ Remuneration Policy was implemented during 2015. Single Total Figure of Remuneration for EDs (Audited) Name Preben Prebensen Stephen Hodges Jonathan Howell Elizabeth Lee Salary Beneﬁts Annual bonus Performance awards1 Pension Total 2015 £’000 528 475 400 360 2014 £’000 513 462 390 350 2015 £’000 20 13 14 13 2014 £’000 24 14 14 16 2015 £’000 1,552 1,405 1,135 335 2014 £’000 2015 £’000 1,539 3,833 2,312 1,386 1,125 1,848 791 300 2014 £’000 5,220 3,132 2,954 901 2015 £’000 119 107 90 81 2015 2014 £’000 £’000 115 6,052 4,312 104 88 3,487 79 1,580 2014 £’000 7,411 5,098 4,571 1,646 1 The ﬁgures for the performance awards for 2014 have been recalculated using the actual share price on the dates of vesting for the Matching Share Award, LTIP and SMP Matched shares. These were £14.25 for Matching Share Award and £14.60 for LTIP and SMP Matched Shares. As highlighted in the 2014 report, the three month average to 31 July 2014 was used for the 2014 report given that the awards were vesting after publication of the report. Link between reward and performance The group’s ﬁnancial results have been strong this year, and over the past three years. Adjusted operating proﬁt has increased 16% in the year to £224.9 million, and it has grown 68% or 19% per annum compounded over the last three ﬁnancial years. RoE has increased from 17.9% in 2014 to 19.5% this year, and it is up from 12.5% in 2012. Dividend growth was 9% this year and dividend cover has increased to 2.3 times, from 2.1 times last year and 1.6 times in 2012. The strong RoE has been reﬂected in the EDs’ bonuses, with the element of the bonus determined based on RoE being 97.7% of the potential maximum. The compounded adjusted EPS growth of 79.0% over the last three years has resulted in the EPS element of the LTIP vesting at 100%. The compounded TSR of 33.9% per annum has exceeded the maximum target under the LTIP and this has therefore also vested at 100%. The very strong approach to capital management combined with a good performance in risk, compliance and controls mean that the Risk Management objectives element vested at 86.7%. As a result, the LTIP will vest at 97.3% this year. Additional Disclosures on the Single Total Figure of Remuneration for EDs Table (Audited) Salary The per annum salaries paid during the year are as shown in the single ﬁgure of remuneration table above. The increase was with effect from 1 August 2014. When reviewing salary levels, the Committee takes into account the individual’s role and experience, pay for the broader employee population, and external factors, where applicable. The increases for ﬁnancial year 2015 for EDs were all less than the average increase for employees of 3%. Benefits The EDs each received an allowance in lieu of a company car. Preben Prebensen received £18,000 while the others received £12,000. These have not been increased since 2012. They also received private health cover. The discount to the share price on grant of SAYE options is included in the year of grant. Preben Prebensen and Elizabeth Lee elected to participate in SAYE in ﬁnancial year 2014. Pension The EDs all received a monthly cash pension allowance equivalent to 22.5% of base salary. They do not receive any additional pension provision. Annual bonus: Achievement against targets The bonuses for EDs were determined with reference to RoE targets and stretching personal goals relevant to each ED’s role and business accountabilities. The RoE for ﬁnancial year 2015 was 19.5% against a maximum target of 20%, warranting an award of 97.7% of the potential maximum bonus. Any annual bonus above the level of the 2015 base salary was deferred into group shares vesting one third per year over three years in line with the approach outlined in the Remuneration Policy on page 62. Achievement Against Annual Bonus Targets Name Preben Prebensen Stephen Hodges Jonathan Howell Elizabeth Lee Financial target (RoE) Personal objectives Weighting 60% 60% 60% 40% Potential maximum (’000s) £950 £855 £720 £144 Actual per cent awarded 97.7% 97.7% 97.7% 97.7% Actual amount awarded (’000s) £928 £835 £703 £141 Weighting 40% 40% 40% 60% Actual Potential per cent maximum awarded (’000s) 98.5% £634 £570 100.0% 90.0% £480 90.0% £216 Actual amount awarded (’000s) £624 £570 £432 £194 Total bonus awarded (’000s) £1,552 £1,405 £1,135 £335 70 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued Annual bonus: Examples of personal goals for the 2015 financial year All of the EDs have delivered very strong performance against their personal goals. The Committee assessed each ED against their personal objectives and determined that each would be granted the percentages of the maximum bonuses for the personal objectives indicated on page 69. Examples of Personal Goals for the 2015 Financial Year Name Preben Prebensen Stephen Hodges Jonathan Howell Elizabeth Lee Examples of personal goals Execute group strategy, including maintaining the discipline of the Banking model and the momentum in Asset Management. Promote the importance of a sound risk culture, with appropriate governance and remain abreast of regulatory and legislative issues. Maintain the discipline of funding and lending models. Exploit growth opportunities consistent with the model. Maintain cost discipline and prioritise spending. Manage the level of group capital, including both regulatory and economic. Manage the positioning of our strategy with investors and analysts. Play a leadership role in all regulatory issues, including advice on key decisions as we address PRA/FCA requirements and standards. Taking responsibility for management and oversight of all critical legal issues affecting the group. Performance awards The ﬁgures for the performance awards include the 2012 LTIP grant and the 2012 Matching Shares under the SMP. Both of these will vest on 2 October 2015. The performance targets for the 2012 awards vesting in 2015 were weighted 40% adjusted EPS, 40% absolute TSR and 20% Risk Management objectives. The adjusted EPS targets were RPI +3% per annum to RPI +10% per annum and the absolute TSR targets were +10% per annum to +20% per annum. Compounded adjusted EPS growth over the three year period to 2015 was a very strong 21.4% per annum, whilst the TSR was 33.9% per annum, meaning both elements will vest at 100%. The Risk Management objectives of the 2012 LTIP and SMP Matching Shares were assessed at 86.7% by the Committee. More details on the rationale for the assessment are provided in the table below. Accordingly, the 2012 LTIP and SMP Matching Shares will vest at 97.3%. The LTIP and SMP awards vested at 95% in 2014. The share price for the LTIP and SMP Matching Shares increased by 85% over the three year period from the date of grant to the end of the performance period. The average share price used to value the awards due to vest in October 2015 was 1,556.8p (from 1 May 2015 to 31 July 2015, which was the performance measurement period). The 2012 LTIP and SMP awards were originally granted at 839.6p. As a result the EDs have been well rewarded and these rewards are aligned with shareholders who have also beneﬁted due to this signiﬁcant share price increase over the period. The values for Preben Prebensen for 2014 include the ﬁnal tranche of his Matching Share Award (“MSA”) that was granted in 2009. There are no further MSA awards outstanding for Preben Prebensen to be reported in future. The performance awards also include the amount (in cash or shares) equal to the dividends which would have been paid during the period from the beginning of the performance period to the time that the awards vest. The strong, progressive dividend payout also contributed signiﬁcantly to the single ﬁgures for remuneration. The Committee assessed performance against the Risk Management objectives after each of the three years of the LTIP performance period. The results of each assessment are shown below. Details of the Assessment of the Risk Management Objectives for the LTIP and SMP Performance measure Capital and balance sheet management Risk, compliance and controls Year one assessment 100% Year two assessment 100% Year three assessment 100% Overall vesting Comments 100% Capital, balance sheet management, funding and liquidity were very strong in ﬁnancial year 2015, and good progress was made over the year. The prudent approach, strong ﬁnancial position and consistent track record resulted in Moody’s Investor Services upgrading our credit rating. There were no negative incidents of any size during the year. 70% 70% 80% 73.3% Strong regulatory relationships. Strengthened key leadership in risk and compliance, and IT. The Committee recognised that there have been signiﬁcant improvements in risk, compliance and controls but are cognisant that the bar is rising. Overall vesting 86.7% Close Brothers Group plc Annual Report 2015 71 Details of the Overall Vesting for the LTIP and SMP Performance measure Adjusted EPS growth TSR Risk Management objectives Overall vesting Threshold target RPI +3% p.a. +10% p.a. Maximum target RPI +10% p.a. +20% p.a. n/a n/a Actual achieved 21.4% p.a. 33.9% p.a. See table on page 70 Overall vesting 100% 100% 86.7% 97.3% Historical Vesting of LTIP Awards Compared to Adjusted EPS and Absolute TSR The following graph and table show the level of LTIP vesting following performance testing for the last ﬁve years. Adjusted EPS and absolute TSR growth 300 250 200 150 100 50 0 95% 97% 79% 33% 25% 2008 award vested 20111 2009 award vested 20122 2010 award vested 20132 2011 award vested 20142 2012 award vested 20153 Absolute TSR Adjusted EPS LTIP vesting LTIP vesting % 100 80 60 40 20 0 Note: This graph shows the vesting percentage of the LTIP compared with the adjusted EPS rebased to 100 at 31 July 2010, and the TSR based on £100 invested in Close Brothers Group plc on 31 July 2010. LTIP Vesting for the Last Five Years Year awarded 20081 20092 20102 20112 20123 Vesting percentage Year vested 2011 2012 2013 2014 2015 Adjusted EPS – – 66% 100% 100% TSR 100% – 92% 100% 100% Goals n/a 76% 80% 85% 87% Total 33% 25% 79% 95% 97% 1 Vesting was subject to two thirds adjusted EPS and one third TSR for all awards granted up to and including 2008. 2 Vesting was subject to one third adjusted EPS, one third absolute TSR and one third Strategic Goals for all awards granted between 2009 and 2011, inclusive. 3 Vesting was subject to 40% adjusted EPS, 40% absolute TSR and 20% Risk Management objectives for the 2012 award. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 72 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued Performance Graph The graph below shows a comparison of TSR for the company’s shares for the six years ended 31 July 2015 against the TSR for the companies comprising the FTSE 250 Index. TSR has been calculated assuming that all dividends are reinvested on their ex-dividend date. The index has been selected because the company has been a constituent of the index throughout the period. The closing mid-market price of the company’s shares on 31 July 2015 was 1,453p and the range during the year was 1,247p to 1,664p. 300 250 200 150 100 50 0 July 2009 July 2010 July 2011 July 2012 July 2013 July 2014 July 2015 Close Brothers TSR FTSE 250 TSR Source: Thomson Reuters Datastream. Note: This graph shows the value, by 31 July 2015, of £100 invested in Close Brothers Group plc on 31 July 2009 compared with the value of £100 invested in the FTSE 250 Index. The other points plotted are the intervening ﬁnancial year ends. Chief Executive: Historical Information (Audited) Preben Prebensen Single ﬁgure of total remuneration (’000)2 Annual Bonus against maximum opportunity LTIP, SMP and MSA vesting 2010 2011 2012 2013 20141 2015 £1,890 90% 33% £2,187 95% 33% £2,496 90% 25% £5,748 100% 79% £7,411 100% 95% £6,052 98% 97% 1 The ﬁgures for the performance awards for 2014 have been recalculated using the actual share price on the dates of vesting for the MSA, LTIP and SMP Matched shares. These were £14.25 for MSA and £14.60 for LTIP and SMP Matched Shares. As highlighted in the 2014 report, the three month average to 31 July 2014 was used for the 2014 report given that the awards were vesting after publication of the report. 2 The ﬁgures for 2011 to 2014 include the MSA awards that were granted in 2009 at the time of Preben Prebensen’s appointment as chief executive. There are no further outstanding MSA awards to be reported in the future. Close Brothers Group plc Annual Report 2015 73 Change in Remuneration of the Chief Executive The following table shows how the remuneration of the chief executive increased compared to the general employee population for the 2015 ﬁnancial year. The Committee deemed it appropriate that the salary increase for Preben Prebensen should be approximately in line with that for the general employee population. The change in bonus for Preben Prebensen reﬂects the achievement against the RoE and personal goals targets, outlined on page 69. The reduction in average bonus for the general employee population primarily reﬂects the reduction in trading income in Winterﬂood, leading to a reduction in bonuses in that division. The average increase in bonus for the general employee population excluding Winterﬂood was 1%. Preben Prebensen All employee population Average change in salary from 1 August 20141 3% 3% Average change in beneﬁts from 1 August 20142 3% 3% Average change in annual bonus for 20153 1% (4)% 1 Calculated as the average percentage increase in salary for those eligible for an increase at 1 August 2014. 2 Calculated as the average percentage increase in beneﬁts for those eligible for a salary increase at 1 August 2014. 3 The percentage increase in the average bonus calculated as the total bonus spend divided by the average headcount for ﬁnancial years 2014 and 2015. Relative Importance of Spend on Pay The following table shows the total remuneration paid compared to the total distributions to shareholders. Remuneration paid1 Distributions to shareholders2 1 2014 includes remuneration paid to Close Brothers Seydler (£11.8 million). 2 Interim dividend paid and ﬁnal dividend proposed for the ﬁnancial year. 2015 £ million 248.4 79.1 2014 £ million 243.9 71.8 Scheme Interests Awarded during the Year (Audited) The face value and key details of the share awards granted in the 2015 ﬁnancial year are shown in the table below. These were all delivered as nil cost options. The Deferred Share Award (“DSA”) is a mandatory deferral of a portion of the annual bonus. The share price used to calculate the number of shares awarded was £14.294, the average mid-market closing price for the ﬁve days prior to grant. Name Preben Prebensen Stephen Hodges Jonathan Howell Elizabeth Lee Award type DSA1 LTIP SMP – Invested SMP – Matching DSA1 LTIP SMP – Invested SMP – Matching DSA1 LTIP SMP – Invested SMP – Matching DSA1 LTIP SMP – Invested SMP – Matching Vesting period 1–3 years 3 years 3 years 3 years 1–3 years 3 years 3 years 3 years 1–3 years 3 years 3 years 3 years 1–3 years 3 years 3 years 3 years Performance conditions No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes Face value ’000 £513 £1,000 £513 £1,026 £462 £850 £462 £924 £345 £750 £390 £780 – £400 £200 £400 Percentage vesting at threshold n/a 25% n/a 25% n/a 25% n/a 25% n/a 25% n/a 25% n/a 25% n/a 25% Number of shares Vesting/ performance period end date 35,890 30 Sep 2017 69,960 30 Sep 2017 35,890 30 Sep 2017 71,779 30 Sep 2017 32,322 30 Sep 2017 59,466 30 Sep 2017 32,322 30 Sep 2017 64,643 30 Sep 2017 24,137 30 Sep 2017 52,470 30 Sep 2017 27,285 30 Sep 2017 54,569 30 Sep 2017 – 30 Sep 2017 27,984 30 Sep 2017 13,992 30 Sep 2017 27,984 30 Sep 2017 1 The DSA vests one third per year over three years. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 74 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued Performance conditions During the year, the Committee undertook an extensive review of the adjusted EPS and absolute TSR growth targets and determined that the targets for the LTIP and SMP Matching Share award grants this year should be unchanged from the 2014 grants, as outlined in the table below. The Committee believes these are appropriately stretching and effectively align the executives’ interests with those of shareholders. Element Absolute TSR1 Adjusted EPS1 1 There is straight-line vesting between the threshold and maximum targets. Threshold vesting (25% vests) +10% p.a. RPI +3% p.a. Maximum vesting (100% vests) +20% p.a. or greater RPI +10% p.a. or greater External Appointments Jonathan Howell received £77,000 in fees (2014: £71,333) from The Sage Group plc during the Close Brothers ﬁnancial year 2015. None of the other EDs held any external directorships during the year. Payments to Past Directors (Audited) There were no payments to past directors after they had left ofﬁce during the year. Payments for Loss of Ofﬁce (Audited) There were no payments made to directors for loss of ofﬁce during the year. Statement of Voting on the Remuneration Report at the 2014 AGM Directors Remuneration Policy Annual Report on Remuneration For 92.5% 89.0% Against 7.5% 11.0% Number of abstentions 5,247,011 766,968 The primary reasons cited for the votes against, and actions taken in response are as follows: Reason Adjusted EPS targets in the LTIP not challenging enough against analyst forecasts Action taken by the Committee The adjusted EPS targets were reviewed this year and not adjusted, as outlined above. The Committee believes these targets are challenging and align with the company’s long-term strategic objectives. Analyst forecasts frequently assume a continuation of the current strong performance, and whilst they are used as a point of reference, they are not an appropriate measure to be used in isolation. Level of disclosure on annual bonus determination We have improved the level of disclosure about the determination of annual bonuses. Please see pages 69 and 70. EDs’ Shareholding and Share Interests (Audited) The interests of the directors in the ordinary shares of the company at 31 July 2015 are set out below: Name Preben Prebensen Stephen Hodges Jonathan Howell Elizabeth Lee Number of shares owned outright2 2015 700,028 776,616 263,596 54,917 Outstanding share awards not subject to performance conditions3 Outstanding share awards subject to performance conditions4 2015 202,683 176,909 115,276 33,273 2014 214,539 231,963 117,367 33,323 2015 540,919 407,323 347,403 150,992 2014 742,618 490,705 436,101 154,714 Shareholding requirement1 72,678 65,382 55,059 24,777 Outstanding options5 2015 1,745 – – 1,745 2014 1,745 1,645 – 1,745 1 Based on the closing mid-market share price of 1,453p on 31 July 2015. 2 This includes shares owned outright by connected persons. 3 This includes DSA and SMP Invested Shares. 4 This includes LTIP awards, SMP Matching Shares and MSA (MSA only for Preben Prebensen in 2014). 5 This comprises SAYE options. No EDs held shares that were vested but unexercised at 31 July 2015. There were no changes in notiﬁable interests between 31 July 2015 and 11 September 2015, other than the purchase by Preben Prebensen within the SIP which increased his shareholding to 700,048 shares. Close Brothers Group plc Annual Report 2015 75 Details of EDs’ Share Exercises During the Year (Audited) Award type Stephen Hodges Held at 1 August 2014 Name Preben Prebensen 2013 DSA 42,801 138,768 2011 LTIP 2011 SMP – Invested 69,384 2011 SMP – Matching 138,768 2009 MSA2 65,902 46,406 2009 DSA 1,131 2011 DSA 74,474 2013 DSA 112,767 2011 LTIP 47,362 2011 SMP – Invested 94,724 2011 SMP – Matching 29,105 2013 DSA 108,093 2011 LTIP 43,822 2011 SMP – Invested 87,644 2011 SMP – Matching 2011 LTIP3 37,282 2011 LTIP3 8,366 14,042 2011 SMP – Invested 14,042 2011 SMP – Matching Jonathan Howell Elizabeth Lee Market price on award p 1,168.2 684.6 684.6 684.6 643.0 793.0 684.6 1,168.2 684.6 684.6 684.6 1,168.2 684.6 684.6 684.6 684.6 684.6 684.6 684.6 Total value Market price on calling1 on calling p £ 1,400.0 199,528 1,400.0 1,845,620 1,400.0 971,376 1,400.0 1,845,620 892,012 1,424.8 716,973 1,545.0 16,456 1,455.0 360,825 1,455.0 1,455.0 1,558,727 1,455.0 689,117 1,455.0 1,309,325 1,493.2 144,707 1,592.0 1,634,809 1,592.0 697,646 1,592.0 1,325,531 469,350 1,341.0 130,230 1,556.7 218,585 1,556.7 207,658 1,556.7 Dividends paid on vested shares £ 7,284 188,956 99,450 188,956 178,523 123,492 1,621 12,675 153,552 67,886 128,983 8,453 204,808 87,401 166,061 62,806 15,012 25,198 23,938 Lapsed – 6,938 – 6,938 3,295 – – – 5,638 – 4,736 – 5,404 – 4,382 2,282 – – 702 Called1 14,252 131,830 69,384 131,830 62,607 46,406 1,131 24,799 107,129 47,362 89,988 9,691 102,689 43,822 83,262 35,000 8,366 14,042 13,340 1 These are the actual number of shares and values realised on calling and may not sum due to rounding. 2 This is the fourth and ﬁnal tranche of the MSA which vested in September 2014. 3 Total 2011 LTIP award of 45,648 called over two separate occasions. Notes to the details of directors’ share exercises during the year The DSA is a mandatory deferral of a portion of the annual bonus. The DSA, LTIP and SMP consist of the right for EDs to call for shares in the company from the employee beneﬁt trust or treasury shares, at nil cost, together with a cash amount representing accrued notional dividends thereon. The DSA, LTIP and SMP awards may be forfeited if the ED leaves employment in certain circumstances preceding the vesting date. They may be called for at any time up to 12 months from the date of vesting. The value of the awards is charged to the group’s income statement in the year to which the award relates for the DSA and SMP Invested Shares, and spread over the vesting period for the LTIP and SMP Matching Share awards. The LTIP awards are held under the 2009 LTIP and are subject to the performance criteria described in the remuneration policy on page 63. The SMP Matching Shares are subject to the same performance criteria. Preben Prebensen joined the group as chief executive on 1 April 2009. His remuneration package as agreed prior to the commencement of his employment included a MSA. The MSA was subject to a personal investment in shares of £500,000, satisfaction of the same performance conditions as the 2009 LTIP and continued employment until the vesting date. The ﬁnal annual tranche of Preben Prebensen’s MSA vested on 23 September 2014, with vesting subject to the 2011 LTIP award performance conditions. As outlined in the section Performance Awards on page 70, this vested at 95%. Details of EDs’ Option Exercises during the Year (Audited) Name Stephen Hodges Award type 2011 SAYE Held at 1 August 2014 1,645 Exercised 1,645 Lapsed – Exercise price 547p Market price on exercise 1,552p Gain on calling £16,532 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 76 Close Brothers Group plc Annual Report 2015 Report of the Board on Directors’ Remuneration continued Single Total Figure of Remuneration for Non-executive Directors (Audited) Name Bruce Carnegie-Brown1 Oliver Corbett2 Geoffrey Howe3 Lesley Jones4 Bridget Macaskill5 Strone Macpherson Fees Total 2015 £’000 32 95 83 94 89 210 2014 £’000 105 13 76 52 53 210 2015 £’000 32 95 83 94 89 210 2014 £’000 105 13 76 52 53 210 1 Bruce Carnegie-Brown resigned as a director on 20 November 2014. 2 Oliver Corbett was appointed a director on 3 June 2014. 3 Geoffrey Howe acted as interim chairman of the Audit Committee in July 2014 and was appointed senior independent director on 20 November 2014. 4 Lesley Jones was appointed a director on 23 December 2013. 5 Bridget Macaskill was appointed a director on 21 November 2013 and chairman of the Remuneration Committee in November 2014. Notes to the single total figure of remuneration for non-executive directors The fees payable to non-executive directors for the 2015 and 2016 ﬁnancial years are as follows: Role Chairman1 Non-executive director Supplements Senior independent director Chairman of Audit Committee Chairman of Remuneration Committee Chairman of Risk Committee Committee membership2 1 The chairman receives no other fees for chairmanship or membership of board committees. 2 No fees are payable to the chairman, or for membership, of the Nomination and Governance Committee. Non-executive Directors’ Share Interests (Audited) The interests of the directors in the ordinary shares of the company are set out below: Name Bruce Carnegie-Brown2 Oliver Corbett Geoffrey Howe Lesley Jones Bridget Macaskill Strone Macpherson 1 Or the date of retirement, if earlier. 2 Bruce Carnegie-Brown resigned as a director on 20 November 2014. There were no changes in notiﬁable interests between 31 July 2015 and 11 September 2015. 2016 £220,000 £65,000 2015 £210,000 £60,000 £15,000 £25,000 £25,000 £25,000 £5,000 £10,000 £25,000 £25,000 £25,000 £5,000 Shares held beneﬁcially at 31 July 20151 20,000 – 5,000 – 2,500 13,300 Shares held beneﬁcially at 31 July 2014 20,000 – 5,000 – 2,500 13,300 Close Brothers Group plc Annual Report 2015 77 Advice During the year under review and up to the date of this report, the Committee consulted and took advice from the following advisers and executives: • PwC; • Chairman of the board; • Chief executive; • Group head of human resources; • Head of reward and HR operations; • Group chief risk ofﬁcer; and • Group company secretary. Where the Committee seeks advice from employees this never relates to their own remuneration. PwC also provided consultancy services to the group during the ﬁnancial year and were originally engaged to advise on remuneration in 2008. PwC is a member of, and adheres to, the Remuneration Consultants Group Voluntary Code of Conduct. PwC were paid £103,825 in fees for remuneration services related to the 2015 ﬁnancial year. The Committee has satisﬁed themselves that the advice received from all parties named above was objective and independent. Statement of Implementation of Remuneration Policy in the Following Financial Year Salary The Committee approved the following salary increases for the EDs with effect from 1 August 2015: • Preben Prebensen to £540,000 (2.3% increase); • Stephen Hodges to £485,000 (2.1% increase); • Jonathan Howell to £408,000 (2.0% increase); and • Elizabeth Lee to £367,500 (2.1% increase). These were determined with reference to the ED’s role and experience, increases for the broader population and external factors. The Committee determined that it was appropriate for the increases for the EDs to be lower than the average for the general employee population of approximately 3%. Benefits The EDs will receive beneﬁts in line with those outlined in the Remuneration Policy table on page 61. There will be no increases to the allowances or beneﬁts, other than any potential increase in the cost of providing them. Annual bonus The annual bonuses will be subject to the caps and determined based on assessment against the performance measures outlined in the Remuneration Policy table on page 62. Because of commercial sensitivity, the details of the performance targets and achievement against those will be outlined in the 2016 Annual Report on Remuneration. Performance awards The LTIP awards will be subject to the caps and determined in line with the objectives outlined in the Remuneration Policy table. The performance measures will be in line with those outlined in the Remuneration Policy table. The details of the achievement against performance targets will be outlined in the 2016 Annual Report on Remuneration. Pension The EDs will continue to receive a cash allowance in lieu of a pension equivalent to 22.5% of base salary. Given the small salary increases outlined above for ﬁnancial year 2016, the absolute values will increase slightly. This report was approved by the board of directors on 22 September 2015 and signed on its behalf by: Bridget Macaskill Chairman of the Remuneration Committee i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 78 Close Brothers Group plc Annual Report 2015 Close Brothers Group plc Annual Report 2015 79 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Financial Statements 80 Independent Auditor’s Report to the Members of Close Brothers Group plc 83 Consolidated Income Statement 84 Consolidated Statement of Comprehensive Income 85 Consolidated Balance Sheet 86 Consolidated Statement of Changes in Equity 87 Consolidated Cash Flow Statement 88 Company Balance Sheet 89 The Notes 132 Investor Relations 132 Cautionary Statement Photographed on location at Cosworth Ltd. 80 Close Brothers Group plc Annual Report 2015 Independent Auditor’s Report to the Members of Close Brothers Group plc Opinion on Financial Statements of Close Brothers Group plc 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 July 2015 and of the group’s proﬁt for the year then ended; • The group ﬁnancial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; • The parent company ﬁnancial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • The ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group ﬁnancial statements, Article 4 of the International Accounting Standards (“IAS”) Regulation. The ﬁnancial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement, the Company Balance Sheet and the related notes 1 to 31. The ﬁnancial reporting framework that has been applied in the preparation of the group ﬁnancial statements is applicable law and IFRSs as adopted by the European Union. The ﬁnancial reporting framework that has been applied in the preparation of the parent company ﬁnancial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Going concern As required by the Listing Rules we have reviewed the directors’ statement contained within Corporate Governance that the group is a going concern. We conﬁrm that: • We have not identiﬁed any material uncertainties that may cast signiﬁcant doubt on the group’s ability to continue as a going concern; and • We have concluded that the directors’ use of the going concern basis of accounting in the preparation of the ﬁnancial statements is appropriate. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s ability to continue as a going concern. Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team: Risk Loan impairment provisions As detailed in note 2, Critical accounting estimates and judgements on page 94, loan impairment provisions in the Banking division reﬂect estimates of the amount and timing of future recoveries which require an assessment of matters such as future economic conditions and the value of collateral. Loan impairment provisions of £56.1 million represented approximately 1% of loans and advances to customers. The income statement charge for the year was £41.9 million. Revenue recognition Interest income and fee commission income is detailed in note 2, critical accounting estimates and judgements on page 94. The group’s revenue recognition policy is detailed in note 1, signiﬁcant accounting policies on page 90. • Interest income Interest income on loans and advances made by the group is recognised using the effective interest rate method and any fees and direct transaction costs that form an integral part of the yield are included in the effective interest rate. The identiﬁcation of fees and direct costs to be included in the effective interest rate can be judgemental. The group’s net interest income was £399.3 million. How the scope of our audit responded to the risk Our procedures included understanding and testing the controls in respect of the group’s loan impairment process, such as the timely recognition of impairment provisions, the completeness and accuracy of reports used in the loan impairment process and management review process over the calculation of collective and speciﬁc provisions. We tested the inputs used in collective impairment models and considered whether those inputs reﬂected default and recovery experience across each of the Banking division’s portfolios appropriately adjusted to reﬂect current experience and economic conditions where relevant. We audited a sample of speciﬁc provisions against individually signiﬁcant impaired loans including challenging collateral values and discount rates assumed in the provisions and, where relevant, with the assistance of our property valuation specialists. We audited the effective interest rate models by testing controls, challenging the assumptions used to estimate the effective interest rates used in determining interest income and reperforming a sample of effective interest rate calculations. This included using our computer audit specialists to test the extraction of data used in the calculations. We audited a sample of lending arrangements by agreeing them to loan agreements and cash receipts and we assessed whether the appropriate fees and costs had been reﬂected in the effective interest rate. Close Brothers Group plc Annual Report 2015 81 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Risk Revenue recognition continued • Fee and commission income Fee and commission income primarily arises in the Banking and Asset Management divisions. The group’s fee and commission income was £192.9 million. The timing of recognition of fees can be judgemental. Fees may be recognised immediately or over a period depending on the nature of the service provided and determining accrued fees can involve the use of estimates. • Gains less losses arising from dealing in securities Gains less losses arising from dealing in securities comprise realised and unrealised gains on securities which are recorded at fair value. Given the high volume nature of transactions in the Securities division, robust internal controls over trade recording, settlement, reconciliation and valuation are important to ensure the completeness and accuracy of revenues. Gains and losses arising from dealing in securities were £72.0 million. Goodwill impairment As detailed in note 2, critical accounting estimates and judgements on page 94, the directors assess the carrying value of goodwill for impairment on an annual basis and when there are indicators of impairment. The carrying value of goodwill was £84.2 million. Determining whether goodwill is impaired requires estimation of the recoverable amount of the group’s cash generating units (“CGUs”). The recoverable amount is determined using forecast future cash ﬂows and growth rates discounted at a rate appropriate to the relevant business and hence involve a number of assumptions and estimates. How the scope of our audit responded to the risk We obtained a sample of Asset Management client agreements and checked that accrued fees had been calculated in accordance with the agreements, recognised appropriately and challenged related estimates. We tested controls over revenue recognition in the Banking division. We audited a sample of lending fees receivable by agreeing them to loan agreements and cash receipts; and we assessed the accounting treatment and timing of recognition of the fee. We tested the operating effectiveness of controls related to trade recording, settlement, reconciliation and valuation including related IT system controls. We agreed positions in securities at the year end to central securities depositaries. We tested securities valuations using independently sourced market prices and we recalculated a sample of both realised and unrealised gains less losses from dealing in securities. Particular focus was given to gains and losses recorded around the year end to ensure they were recognised in the correct period. We challenged management’s assumptions used in the impairment model for goodwill. This included challenging cash ﬂow forecasts and considering the accuracy of past cash ﬂow projections, and using our internal valuations specialists to independently derive discount rates, which we compared to those used by management. We also benchmarked discount and growth rates to available external peer group data. We performed sensitivity analysis and considered the impact of changes to each of the key assumptions used in management’s impairment model. Management’s consideration of these risks is set out in note 2, Critical accounting estimates and judgements, on page 94. The Audit Committee’s consideration of these risks is set out on page 54. Operating proﬁt before tax was used as the basis for determining materiality as we believe is the key metric used by members of the company in assessing ﬁnancial performance. Our audit procedures relating to these matters were designed in the context of our audit of the ﬁnancial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the ﬁnancial statements is not modiﬁed with respect to any of the risks described above, and we do not express an opinion on these individual matters. We agreed with the Audit Committee that we would report all audit differences in excess of £200,000 (2014: £200,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identiﬁed when assessing the overall presentation of the ﬁnancial statements. Our application of materiality We deﬁne materiality as the magnitude of misstatement in the ﬁnancial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or inﬂuenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We determined materiality for the group ﬁnancial statements as a whole to be £11.0 million (2014: £9.5 million) based on 5% of operating proﬁt before tax (2014: 5% of operating proﬁt before tax). Materiality has increased in line with increases in the group’s proﬁts. An overview of the scope of our audit Our group audit scope focused on the three operating divisions of the group, all of which comprise subsidiaries which are subject to full scope audits for the year ended 31 July 2015. Our audits of each subsidiary were planned using levels of materiality appropriate for each subsidiary on a standalone basis, up to a maximum of £8.3 million (2014: £7.5 million). Together with the group’s central functions, which were also subject to a full scope audit, our audit scope covered the entire group. The group audit team worked closely with the divisional and subsidiary audit teams throughout the audit and the senior statutory auditor met with divisional senior management during the year. 82 Close Brothers Group plc Annual Report 2015 Independent Auditor’s Report to the Members of Close Brothers Group plc continued Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • The part of the Report of the Board on Directors’ Remuneration to be audited has been properly prepared in accordance with the Companies Act 2006; and • The information given in the Strategic Report and the Directors’ Report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • We have not received all the information and explanations we require for our audit; or • 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 are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Report of the Board on Directors’ Remuneration to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from our review. Corporate Governance Statement Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the company’s compliance with 10 provisions of the UK Corporate Governance Code. We have nothing to report arising from our review. Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • Materially inconsistent with the information in the audited ﬁnancial statements; or Respective responsibilities of directors and auditor As explained more fully in the Statement of Directors’ Responsibilities, the directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁnancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. 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. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufﬁcient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates made by the directors; and the overall presentation of the ﬁnancial statements. In addition, we read all the ﬁnancial and non- ﬁnancial information in the annual report to identify material inconsistencies with the audited ﬁnancial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. • Apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or • Otherwise misleading. Robert Topley (Senior statutory auditor) For and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom In particular, we are required to consider whether we have identiﬁed any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We conﬁrm that we have not identiﬁed any such inconsistencies or misleading statements. 22 September 2015 An audit does not provide assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular on whether any changes may have occurred to the ﬁnancial statements since ﬁrst published. These matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements differs from legislation in other jurisdictions. Close Brothers Group plc Annual Report 2015 83 Consolidated Income Statement for the year ended 31 July 2015 Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Gains less losses arising from dealing in securities Other income Non-interest income Operating income Administrative expenses Impairment losses on loans and advances Total operating expenses before amortisation of intangible assets on acquisition Operating proﬁt before amortisation of intangible assets on acquisition Amortisation of intangible assets on acquisition Operating proﬁt before tax Tax Proﬁt after tax from continuing operations Proﬁt from discontinued operations, net of tax Proﬁt after tax Proﬁt attributable to non-controlling interests from continuing operations Proﬁt attributable to shareholders From continuing operations Basic earnings per share Diluted earnings per share From continuing and discontinued operations Basic earnings per share Diluted earnings per share Interim dividend per share paid Final dividend per share 1 Restated – see note 7. Note 4 4 4 4 4 11 15 6 7 8 8 8 8 9 9 2015 £ million 528.8 (132.3) 20141 £ million 491.2 (139.1) 396.5 352.1 195.7 (30.2) 72.0 55.5 177.9 (27.4) 87.3 38.0 293.0 275.8 689.5 627.9 (422.7) (41.9) (464.6) 224.9 (5.0) 219.9 (45.4) 174.5 11.2 185.7 – (390.1) (44.1) (434.2) 193.7 (4.9) 188.8 (43.2) 145.6 4.6 150.2 0.4 185.7 149.8 117.8p 116.5p 98.4p 96.9p 125.4p 124.0p 101.5p 100.0p 18.0p 35.5p 16.5p 32.5p i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 84 Close Brothers Group plc Annual Report 2015 Consolidated Statement of Comprehensive Income for the year ended 31 July 2015 Proﬁt after tax Other comprehensive (expense)/income that may be reclassiﬁed to income statement from continuing operations Currency translation losses (Losses)/gains on cash ﬂow hedging (Losses)/gains on equity shares classiﬁed as available for sale Available for sale investment gains transferred to income statement on disposal Tax relating to items that may be reclassiﬁed Other comprehensive (expense)/income that will not be reclassiﬁed to income statement from continuing operations Deﬁned beneﬁt pension scheme losses Tax relating to items that will not be reclassiﬁed Other comprehensive (expense)/income, net of tax from continuing operations Other comprehensive expense, net of tax from discontinued operations Total comprehensive income Attributable to Non-controlling interests Shareholders 1 Restated – see note 7. 2015 £ million 185.7 20141 £ million 150.2 (3.0) (5.5) (0.5) (6.8) 2.5 (13.3) (2.0) 0.4 (1.6) (14.9) (1.2) (1.7) 4.7 0.4 – (0.8) 2.6 (1.6) 0.3 (1.3) 1.3 (2.5) 169.6 149.0 – 169.6 0.4 148.6 169.6 149.0 Consolidated Balance Sheet at 31 July 2015 Close Brothers Group plc Annual Report 2015 85 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Assets Cash and balances at central banks Settlement balances Loans and advances to banks Loans and advances to customers Debt securities Equity shares Loans to money brokers against stock advanced Derivative ﬁnancial instruments Intangible assets Property, plant and equipment Deferred tax assets Prepayments, accrued income and other assets Total assets Liabilities Settlement balances and short positions Deposits by banks Deposits by customers Loans and overdrafts from banks Debt securities in issue Loans from money brokers against stock advanced Derivative ﬁnancial instruments Current tax liabilities Accruals, deferred income and other liabilities Subordinated loan capital Total liabilities Equity Called up share capital Share premium account Retained earnings Other reserves Total shareholders’ equity Non-controlling interests Total equity Total liabilities and equity Note 2015 £ million 2014 £ million 10 11 12 13 14 15 16 6 17 18 19 19 19 19 14 17 20 21 1,038.0 398.3 84.6 5,737.8 149.5 41.2 38.4 19.7 144.2 148.4 39.4 117.8 1,171.8 465.8 87.4 5,289.7 94.2 76.1 63.9 27.8 146.3 117.0 31.7 128.7 7,957.3 7,700.4 404.3 35.1 4,481.4 381.2 1,365.0 – 7.1 17.9 209.0 46.4 494.0 49.6 4,513.7 9.4 1,354.4 28.4 19.5 24.1 212.5 77.2 6,947.4 6,782.8 37.7 284.0 694.4 (6.3) 37.7 283.8 589.8 5.2 1,009.8 916.5 0.1 1.1 1,009.9 917.6 7,957.3 7,700.4 Approved and authorised for issue by the Board of Directors on 22 September 2015 and signed on its behalf by: P.S.S. Macpherson Chairman P. Prebensen Chief Executive Registered number: 520241 86 Close Brothers Group plc Annual Report 2015 Consolidated Statement of Changes in Equity for the year ended 31 July 2015 Called up share capital £ million 37.7 – Share premium account £ million 283.7 – Available for sale movements reserve £ million 9.1 – Retained earnings £ million 511.9 149.8 Other reserves Share- based payments reserve £ million (13.1) – Exchange movements reserve £ million 5.2 – Cash ﬂow hedging reserve £ million (1.7) – Total attributable to equity holders £ million 832.8 149.8 Non- controlling interests £ million 3.7 0.4 Total equity £ million 836.5 150.2 – (1.3) 0.5 – (4.2) 3.8 (1.2) – (1.2) At 1 August 2013 Proﬁt for the year Other comprehensive (expense)/income Total comprehensive income/(expense) for the year Exercise of options Dividends paid Shares purchased Shares issued Shares released Other movements Income tax – – – – – – – – – – – – – 0.1 – – – 148.5 – (67.1) – – – (5.7) 2.2 At 31 July 2014 37.7 283.8 589.8 Proﬁt for the year Other comprehensive (expense)/income Total comprehensive income/(expense) for the year Exercise of options Dividends paid Shares purchased Shares issued Shares released Other movements Income tax – – – – – – – – – – – – – 0.1 – – 0.1 – – – 185.7 184.1 – (74.3) – – – (8.3) 3.1 (1.6) (6.3) – – – (7.8) – 13.7 (0.3) – (7.5) – – – – – (18.2) – 20.5 0.7 – 0.5 – – – – – – – 9.6 – (6.3) – – – – – – – 3.3 (4.2) – – – – – – – 1.0 – 3.8 – – – – – – – 2.1 148.6 – (67.1) (7.8) 0.1 13.7 (6.0) 2.2 0.4 – (0.2) – – – (2.8) – 149.0 – (67.3) (7.8) 0.1 13.7 (8.8) 2.2 916.5 1.1 917.6 – 185.7 (3.8) (4.4) (16.1) (3.8) – – – – – – – (4.4) – – – – – – – 169.6 0.1 (74.3) (18.2) 0.1 20.5 (7.6) 3.1 – – – – (0.1) – – – (0.9) – 185.7 (16.1) 169.6 0.1 (74.4) (18.2) 0.1 20.5 (8.5) 3.1 At 31 July 2015 37.7 284.0 694.4 (4.5) (2.8) (2.3) 1,009.8 0.1 1,009.9 Consolidated Cash Flow Statement for the year ended 31 July 2015 Close Brothers Group plc Annual Report 2015 87 Net cash (outﬂow)/inﬂow from operating activities Net cash (outﬂow)/inﬂow from investing activities Purchase of: Property, plant and equipment Intangible assets – software Equity shares held for investment Non-controlling interests Sale of: Property, plant and equipment Equity shares held for investment Subsidiary Net cash (outﬂow)/inﬂow before ﬁnancing activities Financing activities Issue of ordinary share capital, net of transaction costs Purchase of own shares for employee share award schemes Equity dividends paid Dividends paid to non-controlling interests Interest paid on subordinated loan capital and debt ﬁnancing Net (decrease)/increase in cash Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 1 Restated – see note 7. Note 28(a) 2015 £ million (18.0) 20141 £ million 339.6 28(b) 28(c) 28(d) (14.8) (19.1) – (1.0) 0.1 5.6 23.2 (5.9) (19.9) (0.1) (7.5) – 8.7 – (6.0) (24.7) (24.0) 314.9 0.1 (18.2) (74.2) (0.1) (18.6) 0.1 (7.8) (67.1) (0.2) (18.6) (135.0) 1,238.7 221.3 1,017.4 28(e) 1,103.7 1,238.7 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 88 Close Brothers Group plc Annual Report 2015 Company Balance Sheet at 31 July 2015 Fixed assets Intangible assets Property, plant and equipment Investments in subsidiaries Interest free loan to subsidiary Current assets Cash at bank Amounts owed by subsidiaries Other investments Corporation tax receivable Deferred tax assets Other debtors Creditors: Amounts falling due within one year Accruals and deferred income Provisions Other creditors Net current assets Total assets less current liabilities Creditors: Amounts falling due after more than one year: Debt securities in issue Net assets Capital and reserves Share capital Share premium account Proﬁt and loss account Other reserves Shareholders’ funds Note 15 16 31 2015 £ million 2014 £ million 0.1 0.5 287.0 192.7 0.1 1.1 287.0 192.7 480.3 480.9 0.3 358.7 2.2 5.1 3.3 5.0 0.3 352.8 3.5 5.8 3.2 6.5 374.6 372.1 8.4 9.7 1.1 19.2 8.3 10.8 1.0 20.1 355.4 352.0 835.7 832.9 205.6 205.2 630.1 627.7 37.7 284.0 309.8 (1.4) 37.7 283.8 313.3 (7.1) 630.1 627.7 6 17 21 22 22 Approved and authorised for issue by the Board of Directors on 22 September 2015 and signed on its behalf by: P.S.S. Macpherson Chairman P. Prebensen Chief Executive Close Brothers Group plc Annual Report 2015 89 The Notes 1. Signiﬁcant accounting policies (a) Reporting entity Close Brothers Group plc (“the company”), a public limited company incorporated and domiciled in the UK, together with its subsidiaries (collectively, “the group”), operates through three divisions: Banking, Securities and Asset Management, and is primarily located within the UK. The company ﬁnancial statements (“the company accounts”) have been prepared and approved by the directors in accordance with Section 395 of the Companies Act 2006, the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 and with applicable UK Generally Accepted Accounting Practice. The company has taken advantage of the exemption in Section 408 of the Companies Act 2006 not to present its company income statement and related notes. (b) Compliance with International Financial Reporting Standards The consolidated ﬁnancial statements (“the consolidated accounts”) have been prepared and approved by the directors in accordance with all relevant IFRSs as issued by the International Accounting Standards Board, and interpretations issued by the IFRS Interpretations Committee, endorsed by the EU. Standards and amendments adopted during year In the current year, the group adopted the following standards, amendments, and interpretations: • IFRS 10 “Consolidated ﬁnancial statements”. • IFRS 11 “Joint arrangements”. • IFRS 12 “Disclosure of interests in other entities”. • IAS 27 “Separate ﬁnancial statements”. • IAS 28 “Investments in associates”. • IAS 32 “Presentation: Offsetting ﬁnancial assets and ﬁnancial liabilities”. • IFRIC 21 “Levies”. • IFRS Annual Improvements 2010 to 2012 and 2011 to 2013. The adoption of these standards, amendments and interpretations did not have a material impact on the ﬁnancial statements. Standards issued with effective dates, subject to EU endorsement, which do not impact on these financial statements: • IFRS 15 “Revenue from contracts with customers” – Effective for annual periods beginning on or after 1 January 2017. • IFRS 9 “Financial instruments” – Effective for annual periods beginning on or after 1 January 2018. The impact of these standards on the ﬁnancial statements is being assessed by the group. (c) Basis of preparation The consolidated and company accounts have been prepared under the historical cost convention, except for the revaluation of ﬁnancial assets and liabilities held at fair value through proﬁt or loss, available for sale ﬁnancial assets and all derivative ﬁnancial instruments (“derivatives”). The ﬁnancial statements are prepared on a going concern basis as disclosed in the Report of the Directors. (d) Consolidation Subsidiaries Subsidiaries are all entities over which the group has control. The group controls an entity when it is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Such power, generally accompanies a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which the group effectively obtains control. They are de- consolidated from the date that control ceases. The acquisition method of accounting is used to account for the acquisition of subsidiaries. Under the acquisition method of accounting, with some limited exceptions, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any non-controlling interest is measured either at fair value or at the non-controlling interest’s proportion of the net assets acquired. Acquisition related costs are accounted for as expenses when incurred, unless directly related to the issue of debt or equity securities. Any excess of the cost of acquisition over net assets is capitalised as goodwill. All intra group balances, transactions, income and expenses are eliminated. (e) Discontinued operations The results of discontinued operations are shown as a single amount on the face of the consolidated income statement comprising the post-tax proﬁt or loss of discontinued operations and the post-tax gain or loss recognised either on measurement to fair value less costs to sell or on the disposal of the discontinued operation. A discontinued operation is a CGU or a group of CGUs that either has been disposed of, or is classiﬁed as held for sale, and represents a separate major line of business or geographical area of operations, is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale. (f) Foreign currency translation For the company and those subsidiaries whose balance sheets are denominated in sterling which is the company’s functional and presentation currency, monetary assets and liabilities denominated in foreign currencies are translated into sterling at the closing rates of exchange at the balance sheet date. Foreign currency transactions are translated into sterling at the average rates of exchange over the year and exchange differences arising are taken to the consolidated income statement. The balance sheets of subsidiaries denominated in foreign currencies are translated into sterling at the closing rates. The income statements for these subsidiaries are translated at the average rates and exchange differences arising are taken to equity. Such exchange differences are reclassiﬁed to the consolidated income statement in the period in which the subsidiary is disposed of. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 90 Close Brothers Group plc Annual Report 2015 The Notes continued 1. Signiﬁcant accounting policies continued (g) Revenue recognition Interest income Interest on loans and advances made by the group, and fee income and expense and other direct costs relating to loan origination, restructuring or commitments are recognised in the consolidated income statement using the effective interest rate method. The effective interest rate method applies a rate that discounts estimated future cash payments or receipts relating to a ﬁnancial instrument to its net carrying amount. The cash ﬂows take into account all contractual terms of the ﬁnancial instrument including transaction costs and all other premiums or discounts but not future credit losses. Fees and commissions Where fees that have not been included within the effective interest rate method are earned on the execution of a signiﬁcant act, such as fees arising from negotiating or arranging a transaction for a third party, they are recognised as revenue when that act has been completed. Fees and corresponding expenses in respect of other services are recognised in the consolidated income statement as the right to consideration or payment accrues through performance of services. In particular, upfront commissions paid in respect of managing, as opposed to originating, fund products are initially included within “accruals and deferred income” and then recognised as revenue as the services are provided. To the extent that fees and commissions are recognised in advance of billing they are included as accrued income or expense. Dividends Dividend income is recognised when the right to receive payment is established. Gains less losses arising from dealing in securities Net gains arising from both buying and selling securities and from positions held in securities, including related interest income and dividends. (h) Exceptional items Items of income and expense that are material by size and/or nature and are non-recurring are classiﬁed as exceptional items on the face of the consolidated income statement. The separate reporting of these items helps give an indication of the group’s underlying performance. (i) Financial assets and liabilities (excluding derivatives) Classification The group classiﬁes its ﬁnancial assets into the following measurement categories: (i) ﬁnancial assets held at fair value through proﬁt or loss; (ii) loans and receivables; and (iii) available for sale. Financial liabilities are classiﬁed as either held at fair value through proﬁt or loss, or at amortised cost using the effective interest method. Management determines the classiﬁcation of its ﬁnancial assets and liabilities at initial recognition. Financial assets and liabilities held at fair value through profit or loss This category has two sub-categories: Financial assets and liabilities held for trading, and those designated at fair value through proﬁt or loss at inception. A ﬁnancial asset or liability is classiﬁed as trading if acquired principally for the purpose of selling in the short term, which for the group relates to Winterﬂood. Financial assets and liabilities may be designated at fair value through proﬁt or loss when: • The designation eliminates or signiﬁcantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities on a different basis; • A group of ﬁnancial assets and/or liabilities is managed and its performance evaluated on a fair value basis; or • The assets or liabilities include embedded derivatives and such derivatives are required to be recognised separately. Financial assets and liabilities held at fair value through proﬁt or loss are subsequently carried at fair value, with gains and losses arising from changes in fair value taken directly to the consolidated income statement. Loans and receivables Loans and receivables are non-derivative ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active market and it is expected that substantially all of the initial investment will be recovered, other than because of credit deterioration. Loans and receivables are subsequently carried at amortised cost using the effective interest method and recorded net of provisions for impairment losses. Available for sale Available for sale assets are those non-derivative ﬁnancial assets intended to be held for an indeﬁnite period of time, which may be sold in response to liquidity requirements or changes in interest rates, exchange rates or equity prices. Available for sale ﬁnancial assets are subsequently carried at fair value, with gains and losses arising from changes in fair value taken to a separate component of equity until the asset is sold, or is impaired, when the cumulative gain or loss is transferred to the consolidated income statement. The fair values of quoted ﬁnancial assets or ﬁnancial liabilities in active markets are based on current prices. If the market for a ﬁnancial asset or ﬁnancial liability is not active, or they relate to unlisted securities, the group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, discounted cash ﬂow analysis, and other valuation techniques commonly used by market participants. Derecognition Financial assets are derecognised when the rights to receive cash ﬂows from the ﬁnancial assets have expired or where the group has transferred substantially all risks and rewards of ownership. If substantially all the risks and rewards have been neither retained nor transferred and the group has retained control, the assets continue to be recognised to the extent of the group’s continuing involvement. Financial liabilities are derecognised when they are extinguished. Close Brothers Group plc Annual Report 2015 91 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s (j) Impairment of financial assets The group assesses at each balance sheet date whether there is any objective evidence that a ﬁnancial asset or group of ﬁnancial assets classiﬁed as available for sale or loans and receivables is impaired. A ﬁnancial asset or group of ﬁnancial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash ﬂows from the asset. Financial assets at amortised cost If there is objective evidence that an impairment loss on a ﬁnancial asset or group of ﬁnancial assets classiﬁed as loans and receivables has been incurred, the group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash ﬂows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition. Impairment losses are assessed individually for ﬁnancial assets that are individually signiﬁcant and individually or collectively for assets that are not individually signiﬁcant. In making collective assessment of impairment, ﬁnancial assets are grouped into portfolios on the basis of similar risk characteristics. For loans and receivables, the amount of the loss is measured as the difference between the loan’s carrying amount and the present value of estimated future cash ﬂows, excluding future credit losses that have not been incurred, discounted at the original effective interest rate. As the loan amortises over its life, the impairment loss may amortise. All impairment losses are reviewed at least at each reporting date. If subsequently the amount of the loss decreases as a result of a new event, the relevant element of the outstanding impairment loss is reversed. Interest on impaired ﬁnancial assets is recognised at the original effective interest rate applied to the carrying amount as reduced by an allowance for impairment. For loans that are not considered individually signiﬁcant, the group adopts a formulaic approach which allocates a loss rate dependent on the overdue period. Loss rates are based on the discounted expected future cash ﬂows and are regularly benchmarked against actual outcomes to ensure they remain appropriate. Financial assets carried at fair value When a decline in the fair value of a ﬁnancial asset classiﬁed as available for sale has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss is removed from equity and recognised in the consolidated income statement. The loss is measured as the difference between the amortised cost of the ﬁnancial asset and its current fair value. Impairment losses on available for sale equity instruments are not reversed through the consolidated income statement, but those on available for sale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event. (k) Settlement accounts Settlement balance debtors and creditors are the amounts due to and from counterparties in respect of the group’s market-making activities, and are carried at amortised cost. The balances are short term in nature, do not earn interest and are recorded at the amount receivable or payable. (l) Loans to and from money brokers against stock advanced Loans to money brokers against stock advanced is the cash collateral provided to these institutions for stock borrowing by the group’s market-making activities, and is carried at amortised cost. Interest is paid on the stock borrowed and earned on the cash deposits advanced. The stock borrowing to which the cash deposits relate is short term in nature and is recorded at the amount receivable. Loans from money brokers against stock collateral provided is recorded at the amount payable. Interest is paid on the loans payable. (m) Finance leases, operating leases and hire purchase contracts A ﬁnance lease is a lease or hire purchase contract that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. Finance leases are recognised as loans at an amount equal to the gross investment in the lease discounted at its implicit interest rate. Finance charges on ﬁnance leases are taken to income in proportion to the net funds invested. Rental costs under operating leases and hire purchase contracts are charged to the consolidated income statement in equal instalments over the period of the leases. Rental income from operating leases is recognised in equal instalments over the period of the leases and included in other income in the consolidated income statement. (n) Sale and repurchase agreements and other secured lending and borrowings Securities may be sold subject to a commitment to repurchase them. Such securities are retained on the consolidated balance sheet when substantially all the risks and rewards of ownership remain with the group. The transactions are treated as collateralised borrowing and the counterparty liability is included within loans and overdrafts from banks. Similar secured borrowing transactions including securities lending transactions and collateralised short-term notes are treated and presented in the same way. These secured ﬁnancing transactions are initially recognised at fair value, and subsequently valued at amortised cost, using the effective interest rate method. (o) Securitisation transactions Where the group securitises its own ﬁnancial assets, this is achieved via the sale of these assets to special purpose entities, which in turn issues securities to investors. All ﬁnancial assets continue to be held on the group’s consolidated balance sheet and debt securities in issue are recognised for the proceeds of the funding transaction. (p) Offsetting financial instruments Financial assets and ﬁnancial liabilities are offset and the net amount presented on the consolidated balance sheet if, and only if, there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle the liability simultaneously. 92 Close Brothers Group plc Annual Report 2015 The Notes continued 1. Signiﬁcant accounting policies continued (q) Derivatives and hedge accounting In general, derivatives are used to minimise the impact of interest, currency rate and equity price changes to the group’s ﬁnancial instruments. They are carried on the consolidated balance sheet at fair value which is obtained from quoted market prices in active markets, including recent market transactions and discounted cash ﬂow models. On acquisition, certain derivatives are designated as a hedge and the group formally documents the relationship between these derivatives and the hedged item. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivative is highly effective in offsetting changes in fair values or cash ﬂows of hedged items. If a hedge was deemed partially ineffective but continues to qualify for hedge accounting, the amount of the ineffectiveness, taking into account the timing of the expected cash ﬂows where relevant, would be recorded in the consolidated income statement. If the hedge is not, or has ceased to be, highly effective the group discontinues hedge accounting. For fair value hedges, changes in the fair value are recognised in the consolidated income statement, together with changes in the fair value of the hedged item. For cash ﬂow hedges, the fair value gain or loss associated with the effective proportion of the cash ﬂow hedge is recognised initially directly in equity and recycled to the consolidated income statement in the period when the hedged item affects income. Some contracts (“hybrid contracts”) contain both a derivative (“embedded derivative”) and a non-derivative (“host contract”). Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract and the host contract itself is not carried at fair value through proﬁt or loss, the embedded derivative is bifurcated and reported at fair value and gains and losses are recognised in the consolidated income statement. (r) Intangible assets Computer software (acquired and costs associated with development) and intangible assets on acquisition (excluding goodwill) are stated at cost less accumulated amortisation and provisions for impairment. Amortisation is calculated to write off their cost on a straight-line basis over the estimated useful lives as follows: Computer software Intangible assets on acquisition 3 to 5 years 8 to 20 years Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is assessed annually for impairment and carried at cost less any accumulated impairment. (s) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and provisions for impairment. Depreciation is calculated to write off their cost on a straight- line basis over their estimated useful lives as follows: Long leasehold property Short leasehold property Fixtures, ﬁttings and equipment Assets held under operating leases Motor vehicles 40 years Over the length of the lease 3 to 5 years 1 to 15 years 5 years (t) Share capital Share issue costs Incremental costs directly attributable to the issue of new shares or options including those issued on the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are paid or, if earlier, approved by shareholders. Treasury shares Where the company or any member of the group purchases the company’s share capital, the consideration paid is deducted from shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity. (u) Employee benefits The group operates deﬁned contribution pension schemes for eligible employees as well as a deﬁned beneﬁt pension scheme which is closed to new members and further accrual. Under the deﬁned contribution scheme the group pays ﬁxed contributions into a fund separate from the group’s assets. Contributions are charged in the consolidated income statement when they become payable. The expected cost of providing pensions within the funded deﬁned beneﬁt scheme, determined on the basis of annual valuations using the projected unit method, is charged to the consolidated income statement. Actuarial gains and losses are recognised in full in the period in which they occur and recognised in other comprehensive income. The retirement beneﬁt obligation recognised in the balance sheet represents the present value of the deﬁned beneﬁt obligation, as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets at the balance sheet date. Both the return on investment expected in the period and the expected ﬁnancing cost of the liability, as estimated at the beginning of the period are recognised in the results for the period. Any variances against these estimates in the year form part of the actuarial gain or loss. The assets of the scheme are held separately from those of the group in an independently managed fund. Close Brothers Group plc Annual Report 2015 93 (v) Share-based payments to employees The group operates ﬁve share-based award schemes, an annual bonus plan and four long-term incentive schemes (“Incentive Schemes”); the Share Matching Plan (“SMP”), the 2009 Long Term Incentive Plan (“LTIP”), the 1995 Executive Share Option Scheme and the Inland Revenue approved Save As You Earn scheme. The costs of the awards granted under the annual bonus plan are based on the salary of the individual at the time the award is made. The value of the share award at the grant date is charged to the group’s consolidated income statement in the year to which the award relates. The cost of the Incentive Schemes is based on the fair value of awards on the date of grant. Fair values for market based performance conditions are determined using a stochastic (Monte Carlo simulation) pricing model for the SMP and LTIP and the Black-Scholes pricing model for the other schemes. Both models take into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the company’s share price over the life of the option award and other relevant factors. For non- market based performance conditions, vesting conditions are not taken into account when measuring fair value, but are reﬂected by adjusting the number of shares in each award such that the amount recognised reﬂects the number that are expected to, and then actually do, vest. The fair value is expensed in the consolidated income statement on a straight line basis over the vesting period, with a corresponding credit to the share-based payments reserve. At the end of the vesting period, or upon exercise, lapse or forfeit if earlier, this credit is transferred to retained earnings. Further information on the group’s schemes is provided in note 27 and in the Report of the Board on Directors’ Remuneration. (w) Provisions and contingent liabilities Provisions are recognised in respect of present obligations arising from past events where it is probable that outﬂows of resources will be required to settle the obligations and they can be reliably estimated. Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those present obligations where the outﬂows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the ﬁnancial statements but are disclosed unless they are remote. (x) Taxes, including deferred taxes Current tax is the expected tax payable on the taxable proﬁt for the year. Taxable proﬁt differs from net proﬁt as reported in the consolidated income statement because it excludes items of income and expense that are taxable or deductible in other years and items that are never taxable or deductible. The group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. To enable the tax charge to be based on the proﬁt for the year, deferred tax is provided in full on temporary timing differences, at the rates of tax expected to apply when these differences crystallise. Deferred tax assets are recognised only to the extent that it is probable that sufﬁcient taxable proﬁts will be available against which temporary differences can be set. All deferred tax liabilities are offset against deferred tax assets in accordance with the provisions of IAS 12 “Income taxes”. (y) Cash and cash equivalents For the purposes of the cash ﬂow statement, cash and cash equivalents comprises cash and demand deposits with banks together with short-term highly liquid investments that are readily convertible to known amounts of cash. (z) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Committee which is considered the group’s 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 on consolidation. Income and expenses directly associated with each segment are included in determining business segment performance. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 94 Close Brothers Group plc Annual Report 2015 The Notes continued (b) Revenue Interest income The effective interest rate method applies a rate that discounts estimated future cash payments or receipts relating to a ﬁnancial instrument to its net carrying amount. The estimated future cash ﬂows take into account all contractual terms of the ﬁnancial instrument including transaction costs and all other premiums or discounts but not future credit losses. Models are reviewed at least annually to assess expected lives of groups of assets based upon actual repayment proﬁles. Fee and commission income Fee and commission income is recognised depending on the nature of service provided: • Income which forms an integral part of the effective interest rate is recognised as an adjustment to the effective interest rate and recorded in interest income; • Income earned from provision of services is recognised as the services are provided; and • Income earned on the execution of a signiﬁcant act is recognised when the act is completed. (c) Goodwill impairment The directors review goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. The recoverable amounts of relevant CGUs are based on value in use calculations using management’s best estimate of future cash ﬂows and performance, discounted at a rate which the directors estimate to be the return appropriate to the business. 2. Critical accounting estimates and judgements The reported results of the group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its ﬁnancial statements. UK company law and IFRS require the directors, in preparing the group’s ﬁnancial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. The group’s estimates and assumptions are based on historical experience and expectation of future events and are reviewed periodically. The actual outcome may be materially different from that anticipated. The judgements and assumptions involved in the group’s accounting policies that are considered by the board to be the most important to the portrayal of its ﬁnancial condition are as follows: (a) Loan impairment provisions Allowances for loan impairment represent management’s estimate of the losses incurred in the loan portfolios at the balance sheet date. Changes to the allowances for loan impairment are reported in the consolidated income statement as impairment losses on loans and advances. Impairment provisions are made if there is objective evidence of impairment as a result of one or more subsequent events regarding a signiﬁcant loan or a portfolio of loans. Individual impairment losses are determined as the difference between the carrying value and the present value of estimated future cash ﬂows, discounted at the loans’ original effective interest rate. Impairment losses determined on a portfolio basis are calculated using a formulaic approach which allocates a loss rate dependent on the overdue period. Loss rates are based on the discounted expected future cash ﬂows and are regularly benchmarked against actual outcomes to ensure they remain appropriate. Estimating the amount and timing of future recoveries involves signiﬁcant judgement, and considers the level of arrears as well as the assessment of matters such as future economic conditions and the value of collateral. All impairment losses are reviewed at least annually. Close Brothers Group plc Annual Report 2015 95 3. Segmental analysis The Executive Committee, which is considered to be the group’s chief operating decision maker, manages the group by class of business as determined by the products and services offered and presents the segmental analysis on that basis. The group’s activities are organised in three primary operating divisions: Banking, Securities and Asset Management. A description of the activities, including products and services offered by these divisions, is given in the Strategic Report. The Group segment includes the group’s central functions which comprise Group Executive, Finance, Marketing, Communications, Investor Relations, Legal, Human Resources, Audit, Compliance, Corporate Development, Company Secretariat and Risk. Group administrative expenses include staff costs, legal and professional fees and property costs attributable to the central functions which support and assist the development of the divisions. Income within Group is typically immaterial and will include interest on cash balances at Group. In the segmental reporting information which follows, Group consists of the central functions described above as well as various non-trading head ofﬁce companies and consolidation adjustments, in order that the information presented reconciles to the consolidated income statement and balance sheet. Divisions charge market prices for services rendered to other parts of the group. Funding charges between Banking businesses are determined by the Banking division’s Treasury operation taking into account commercial demands. Funding arrangements between other segments is limited. More than 90% of all the group’s activities, revenue and assets are located in the UK. Summary Income Statement for the year ended 31 July 2015 Net interest income/(expense) Non-interest income Operating income Administrative expenses Depreciation and amortisation Impairment losses on loans and advances Banking £ million Securities £ million Asset Management £ million Group £ million Continuing operations £ million Discontinued operations £ million Total £ million 396.5 102.1 (0.9) 95.5 498.6 94.6 (214.6) (33.4) (41.9) (69.0) (1.0) – 0.2 95.4 95.6 (76.4) (1.4) – 0.7 – 0.7 396.5 293.0 689.5 – 11.7 396.5 304.7 11.7 701.2 (26.3) (0.6) – (386.3) (36.4) (41.9) (10.4) – – (396.7) (36.4) (41.9) Total operating expenses (289.9) (70.0) (77.8) (26.9) (464.6) (10.4) (475.0) Adjusted operating proﬁt/(loss)1 Amortisation of intangible assets on acquisition Proﬁt on disposal of discontinued operations Operating proﬁt/(loss) before tax Tax Non-controlling interests Proﬁt/(loss) after tax and non-controlling interests External operating income/(expense) Inter segment operating (expense)/income Segment operating income 208.7 (0.5) – 208.2 (43.3) – 164.9 511.8 (13.2) 498.6 24.6 – – 24.6 (4.7) – 19.9 94.6 – 94.6 17.8 (4.5) – 13.3 (2.6) – (26.2) – – (26.2) 5.2 – 224.9 (5.0) – 219.9 (45.4) – 1.3 – 10.3 11.6 (0.4) – 226.2 (5.0) 10.3 231.5 (45.8) – 10.7 (21.0) 174.5 11.2 185.7 96.5 (0.9) 95.6 (13.4) 14.1 689.5 – 11.7 – 701.2 – 0.7 689.5 11.7 701.2 1 Adjusted operating proﬁt/(loss) is stated before amortisation of intangible assets on acquisition, proﬁt on disposal of discontinued operations and tax. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 96 Close Brothers Group plc Annual Report 2015 The Notes continued 3. Segmental analysis continued The following table provides further detail on operating income: Banking Retail Commercial Property Treasury income Securities Market-making and related activities Asset Management Advice and other services Investment management Other income Group Operating income from continuing operations Operating income from discontinued operations Operating income 2015 £ million 2014 £ million 181.1 207.3 96.8 13.4 164.6 187.3 75.4 19.4 94.6 96.1 36.1 54.1 5.4 0.7 36.6 47.2 0.6 0.7 689.5 11.7 627.9 31.3 701.2 659.2 Summary Balance Sheet at 31 July 2015 Assets Cash and loans and advances to banks Settlement balances, long trading positions and loans to money brokers Loans and advances to customers Non-trading debt securities Intangible assets Other assets Banking £ million Securities £ million Asset Management £ million Group £ million Total £ million 1,080.8 20.6 – 5,737.8 135.4 65.7 283.4 481.9 – – 25.5 10.7 20.9 – – – 52.9 27.3 0.3 1,122.6 – – – 0.1 14.0 481.9 5,737.8 135.4 144.2 335.4 Total assets 7,303.1 538.7 101.1 14.4 7,957.3 Liabilities Settlement balances, short trading positions and loans from money brokers Deposits by banks Deposits by customers Borrowings Other liabilities Intercompany balances Total liabilities Equity – 35.1 4,481.4 1,583.7 140.8 351.0 404.3 – – 3.3 35.5 23.7 – – – – 41.9 11.6 – – – 205.6 15.8 (386.3) 404.3 35.1 4,481.4 1,792.6 234.0 – 6,592.0 466.8 53.5 (164.9) 6,947.4 711.1 71.9 47.6 179.3 1,009.9 Total liabilities and equity 7,303.1 538.7 101.1 14.4 7,957.3 Other segmental information for the year ended 31 July 2015 Property, plant, equipment and intangible asset expenditure Employees (average number) 74.7 1,910 3.5 232 2.6 562 0.1 63 80.9 2,767 Close Brothers Group plc Annual Report 2015 97 Summary Income Statement for the year ended 31 July 2014 Net interest income/(expense) Non-interest income Operating income Administrative expenses Depreciation and amortisation Impairment losses on loans and advances Banking £ million Securities £ million Asset Management £ million Group £ million Continuing operations £ million Discontinued operations £ million Total £ million 352.9 93.8 (1.2) 97.3 446.7 96.1 (194.7) (26.3) (44.1) (68.6) (0.9) – (0.3) 84.7 84.4 (73.1) (1.4) – 0.7 – 0.7 352.1 275.8 – 31.3 352.1 307.1 627.9 31.3 659.2 (24.4) (0.7) – (360.8) (29.3) (44.1) (23.9) (0.5) – (384.7) (29.8) (44.1) Total operating expenses (265.1) (69.5) (74.5) (25.1) (434.2) (24.4) (458.6) Adjusted operating proﬁt/(loss)1 Amortisation of intangible assets on acquisition Proﬁt on disposal of discontinued operations Operating proﬁt/(loss) before tax Tax Non-controlling interests 181.6 (0.5) – 181.1 (42.0) (0.3) Proﬁt/(loss) after tax and non-controlling interests 138.8 External operating income/(expense) Inter segment operating (expense)/income Segment operating income 459.5 (12.8) 446.7 26.6 – – 26.6 (5.5) – 21.1 96.1 – 96.1 9.9 (4.4) – 5.5 (0.9) – (24.4) – – (24.4) 5.2 (0.1) 193.7 (4.9) – 188.8 (43.2) (0.4) 6.9 – – 6.9 (2.3) – 200.6 (4.9) – 195.7 (45.5) (0.4) 4.6 (19.3) 145.2 4.6 149.8 85.5 (1.1) 84.4 (13.2) 13.9 627.9 – 31.3 – 659.2 – 0.7 627.9 31.3 659.2 1 Adjusted operating proﬁt/(loss) is stated before amortisation of intangible assets on acquisition, proﬁt on disposal of discontinued operations and tax. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 98 Close Brothers Group plc Annual Report 2015 The Notes continued 3. Segmental analysis continued Summary Balance Sheet at 31 July 2014 Assets Cash and loans and advances to banks Settlement balances, long trading positions and loans to money brokers Loans and advances to customers Non-trading debt securities Intangible assets Other assets Banking £ million Securities £ million Asset Management £ million Group £ million Total £ million 1,225.1 16.2 – 5,289.7 45.6 61.7 251.6 634.8 – – 28.1 19.6 17.5 – – – 56.4 34.0 0.4 1,259.2 – – – 0.1 19.6 634.8 5,289.7 45.6 146.3 324.8 Total assets 6,873.7 698.7 107.9 20.1 7,700.4 Liabilities Settlement balances, short trading positions and loans from money brokers Deposits by banks Deposits by customers Borrowings Other liabilities Intercompany balances Total liabilities Equity – 49.6 4,510.3 1,229.7 145.5 330.6 522.4 – 3.4 6.0 40.8 27.1 – – – – 52.7 18.8 – – – 205.3 17.1 (376.5) 522.4 49.6 4,513.7 1,441.0 256.1 – 6,265.7 599.7 71.5 (154.1) 6,782.8 608.0 99.0 36.4 174.2 917.6 Total liabilities and equity 6,873.7 698.7 107.9 20.1 7,700.4 Other segmental information for the year ended 31 July 2014 Property, plant, equipment and intangible asset expenditure Employees (average number) 70.1 1,776 0.8 321 0.3 567 0.7 67 71.9 2,731 Close Brothers Group plc Annual Report 2015 99 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 4. Operating proﬁt before tax Interest income Cash and balances at central banks Loans and advances to banks Loans and advances to customers Other interest income Interest expense Deposits by banks Deposits by customers Borrowings Other interest expense Net interest income 1 Restated – see note 7. Fee and commission income Banking Asset Management Securities Fee and commission expense Net fee and commission income 1 Restated – see note 7. 2015 £ million 20141 £ million 4.9 0.5 521.4 2.0 5.0 – 484.4 1.8 528.8 491.2 0.3 83.5 39.3 9.2 0.4 93.7 42.9 2.1 132.3 139.1 396.5 352.1 2015 £ million 20141 £ million 83.3 95.7 16.7 78.1 90.2 9.6 195.7 177.9 (30.2) (27.4) 165.5 150.5 Fee income and expense (other than amounts calculated using the effective interest rate method) on ﬁnancial instruments that are not at fair value through proﬁt or loss were £83.3 million (2014: £78.1 million) and £23.8 million (2014: £20.2 million) respectively. Fee income and expense arising from trust and other ﬁduciary activities amounted to £95.7 million (2014: £90.2 million) and £6.0 million (2014: £6.8 million) respectively. Administrative expenses Staff costs: Wages and salaries Social security costs Share-based awards Pension costs Depreciation and amortisation Other administrative expenses 1 Restated – see note 7. 2015 £ million 20141 £ million 201.0 30.5 7.8 9.1 248.4 36.4 137.9 186.7 29.7 7.3 8.4 232.1 29.3 128.7 422.7 390.1 100 Close Brothers Group plc Annual Report 2015 The Notes continued 5. Information regarding the auditor Fees payable Audit of the company’s annual accounts Audit of the company’s subsidiaries pursuant to legislation Other services pursuant to legislation Tax services Other services 1 Restated – see note 7. The auditor of the group is Deloitte LLP. 6. Taxation Tax charged/(credited) to the income statement Current tax: UK corporation tax Foreign tax Adjustments in respect of previous years Deferred tax: Deferred tax credit for the current year Adjustments in respect of previous years Tax on items not (credited)/charged to the income statement Current tax relating to: Share-based transactions tax allowance in excess of expense recognised Deferred tax relating to: Cash ﬂow hedging Deﬁned beneﬁt pension scheme Financial instruments classiﬁed as available for sale Share-based transactions tax allowance in excess of expense recognised Currency translation losses Reconciliation to tax expense UK corporation tax for the year at 20.7% (2014: 22.3%) on operating proﬁt Effect of different tax rates in other jurisdictions Disallowable items and other permanent differences Deferred tax impact of reduced UK corporation tax rate Prior year tax provision 2015 £ million 20141 £ million 0.2 0.9 0.3 0.2 0.1 1.7 0.2 0.8 0.3 0.2 0.5 2.0 2015 £ million 20141 £ million 49.1 2.6 (0.2) 51.5 (6.5) 0.4 48.8 1.2 0.4 50.4 (7.2) – 45.4 43.2 (4.1) (3.0) (1.1) (0.4) (1.0) 1.0 (0.4) (6.0) 45.5 (0.8) 0.3 0.2 0.2 45.4 0.9 (0.3) (0.1) 0.8 – (1.7) 42.2 (0.6) 0.6 0.6 0.4 43.2 1 Restated – see note 7. The effective tax rate for the year is 20.6% (2014: 22.9%) which is in line with the UK corporation tax rate of 20.7% (2014: 22.3%). On 8 July 2015, the Government proposed reductions in the UK corporation tax rate to 19% from April 2017 and 18% from April 2020, and an additional 8% tax surcharge on proﬁts of banking companies from January 2016. These proposals are expected to be enacted later in 2015. Close Brothers Group plc Annual Report 2015 101 Movements in deferred tax assets and liabilities were as follows: Capital allowances £ million Pension scheme £ million Share-based payments and deferred compensation £ million Available for sale assets £ million Cash ﬂow hedging £ million Intangible assets £ million Other £ million Total £ million Group At 1 August 2013 Credit/(charge) to the income statement Credit/(charge) to other comprehensive income Charge to equity Acquisition At 31 July 2014 Credit/(charge) to the income statement Credit/(charge) to other comprehensive income Charge to equity Acquisition At 31 July 2015 21.2 6.6 – – – 27.8 4.9 0.4 – – (1.2) (0.1) 0.3 – – (1.0) – 0.4 – – 11.9 (0.2) – (0.8) – 10.9 0.3 – (1.0) – (1.8) – 0.1 – – (1.7) – 1.0 – – 33.1 (0.6) 10.2 (0.7) 0.4 – (0.9) – – (0.5) – 1.1 – – 0.6 (5.2) 1.0 – – – (4.2) 0.9 – – (0.3) 0.5 (0.1) – – – 0.4 – – – – 25.8 7.2 (0.5) (0.8) – 31.7 6.1 2.9 (1.0) (0.3) (3.6) 0.4 39.4 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Company At 1 August 2013 Credit/(charge) to the income statement Credit to statement of recognised gains and losses At 31 July 2014 (Charge)/credit to the income statement Credit to statement of recognised gains and losses At 31 July 2015 Capital allowances £ million Pension scheme £ million Share-based payments and deferred compensation £ million Total £ million 0.2 0.1 – 0.3 – – 0.3 (2.3) (0.1) 1.4 (1.0) – 0.4 (0.6) 4.6 (0.7) – 3.9 (0.3) – 3.6 2.5 (0.7) 1.4 3.2 (0.3) 0.4 3.3 As the group has been and is expected to continue to be consistently proﬁtable, it is appropriate to recognise the full deferred tax assets. 7. Discontinued operations On 5 January 2015, the group completed the sale of Close Brothers Seydler (“Seydler”) to Oddo & Cie for a gross cash consideration of €46.5 million (£36.4 million), which includes a post year end adjustment of £0.5 million following ﬁnalisation of completion accounts. The proﬁt on disposal was £10.3 million. Based in Frankfurt, Seydler provided equity and debt capital markets services, securities trading and research primarily in German small and mid-sized companies and was part of the Securities division. The transaction fulﬁlled the requirements of IFRS 5 to be classiﬁed as “Discontinued operations” in the consolidated income statement, the results of which are set out below: Results of discontinued operations Operating income Operating expenses Operating proﬁt before tax Tax Proﬁt after tax Proﬁt on disposal of discontinued operations, net of tax Proﬁt from discontinued operations 1 Proﬁt after tax is up until the point of disposal. 20151 £ million 11.7 (10.4) 1.3 (0.4) 0.9 10.3 11.2 2014 £ million 31.3 (24.4) 6.9 (2.3) 4.6 – 4.6 102 Close Brothers Group plc Annual Report 2015 The Notes continued 7. Discontinued operations continued Cash flow from discontinued operations Net cash ﬂow from operating activities Net cash ﬂow from investing activities Net cash ﬂow from ﬁnancing activities 1 Up until the point of disposal. 20151 £ million 6.6 (0.1) – 2014 £ million (9.5) (0.2) – 8. Earnings per share The calculation of basic earnings per share is based on the proﬁt attributable to shareholders and the number of basic weighted average shares. When calculating the diluted earnings per share, the weighted average number of shares in issue is adjusted for the effects of all dilutive share options and awards. Continuing operations Basic Diluted Adjusted basic2 Adjusted diluted2 Continuing and discontinued operations Basic Diluted Discontinued operations Basic Diluted 1 Restated – see note 7. 2 Excludes amortisation of intangible assets on acquisition, discontinued operations and their tax effects. Proﬁt attributable to shareholders Less proﬁt from discontinued operations, net of tax Proﬁt attributable to shareholders on continuing operations Adjustments: Amortisation of intangible assets on acquisition Tax effect of adjustments Adjusted proﬁt attributable to shareholders on continuing operations 1 Restated – see note 7. Average number of shares Basic weighted Effect of dilutive share options and awards Diluted weighted 9. Dividends For each ordinary share Final dividend for previous ﬁnancial year paid in November 2014: 32.5p (2013: 29.5p) Interim dividend for current ﬁnancial year paid in April 2015: 18.0p (2014: 16.5p) 2015 20141 117.8p 116.5p 120.5p 119.2p 98.4p 96.9p 101.0p 99.5p 125.4p 124.0p 101.5p 100.0p 7.6p 7.5p 3.1p 3.1p 2015 £ million 185.7 11.2 174.5 20141 £ million 149.8 4.6 145.2 5.0 (1.0) 4.9 (1.0) 178.5 149.1 2015 million 2014 million 148.1 1.7 147.6 2.2 149.8 149.8 2015 £ million 2014 £ million 47.6 26.7 74.3 42.9 24.2 67.1 A ﬁnal dividend relating to the year ended 31 July 2015 of 35.5p, amounting to an estimated £52.4 million, is proposed. This ﬁnal dividend, which is due to be paid on 24 November 2015 to shareholders on the register at 16 October 2015, is not reﬂected in these ﬁnancial statements. Close Brothers Group plc Annual Report 2015 103 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 10. Loans and advances to banks At 31 July 2015 At 31 July 2014 11. Loans and advances to customers On demand £ million 65.9 74.0 Within three months £ million 7.4 2.1 Between three months and one year £ million – 3.8 Between one and two years £ million 3.8 7.5 Between two and ﬁve years £ million 7.5 – Total £ million 84.6 87.4 At 31 July 2015 At 31 July 2014 On demand £ million 45.4 60.9 Within three months £ million 1,543.5 1,463.3 Between three months and one year £ million 1,797.8 1,660.8 Between one and two years £ million 1,108.2 1,038.3 Between two and ﬁve years £ million 1,254.1 1,093.3 After more than ﬁve years £ million 44.9 21.4 Impairment provisions Total £ million £ million (56.1) 5,737.8 (48.3) 5,289.7 Impairment provisions on loans and advances to customers At 1 August Charge for the year Amounts written off net of recoveries At 31 July Loans and advances to customers comprise Hire purchase agreement receivables Finance lease receivables Other loans and advances At 31 July 2015 £ million 2014 £ million 48.3 41.9 (34.1) 61.9 44.1 (57.7) 56.1 48.3 2,552.9 473.0 2,711.9 2,341.4 466.5 2,481.8 5,737.8 5,289.7 At 31 July 2015, gross impaired loans were £162.3 million (31 July 2014: £159.9 million) and equate to 3% (31 July 2014: 3%) of the gross loan book before impairment provisions. The majority of the group’s lending is secured and therefore the gross impaired loans quoted do not reﬂect the expected loss. The following table shows a reconciliation between gross investment in ﬁnance lease and hire purchase agreement receivables to present value of minimum lease and hire purchase payments: Gross investment in ﬁnance leases and hire purchase agreement receivables due: Within one year Between one and ﬁve years After more than ﬁve years Unearned ﬁnance income Present value of minimum lease and hire purchase agreement payments Of which due: Within one year Between one and ﬁve years After more than ﬁve years 2015 £ million 2014 £ million 1,318.8 2,193.5 26.0 3,538.3 (494.1) 1,239.6 2,023.4 18.3 3,281.3 (459.2) 3,044.2 2,822.1 1,134.6 1,887.4 22.2 1,066.1 1,740.3 15.7 3,044.2 2,822.1 The aggregate cost of assets acquired for the purpose of letting under ﬁnance leases and hire purchase agreements was £5,182.8 million (2014: £4,576.6 million). The average effective interest rate on ﬁnance leases approximates to 10.6% (2014: 10.8%). The present value of minimum lease and hire purchase agreement payments reﬂects the fair value of ﬁnance lease and hire purchase agreement receivables before deduction of impairment provisions. 104 Close Brothers Group plc Annual Report 2015 The Notes continued 12. Debt securities Long trading positions Certiﬁcates of deposit Gilts At 31 July 2015 Long trading positions Certiﬁcates of deposit Gilts At 31 July 2014 Movements on the book value of gilts and ﬂoating rate notes comprise: At 1 August 2013 Disposals Redemptions at maturity Currency translation differences Movement in value At 31 July 2014 Disposals Redemptions at maturity Currency translation differences Movement in value At 31 July 2015 13. Equity shares Long trading positions Other equity shares Held for trading £ million 14.1 – – Available for sale £ million – – 20.1 Loans and receivables £ million – 115.3 – Total £ million 14.1 115.3 20.1 14.1 20.1 115.3 149.5 Held for trading £ million 48.6 – – Available for sale £ million – – 45.6 Loans and receivables £ million – – – Total £ million 48.6 – 45.6 48.6 45.6 – 94.2 Available for sale Gilts £ million 46.7 – – – (1.1) 45.6 – (25.0) – (0.5) 20.1 Floating rate notes £ million 39.4 (37.8) – (1.6) – – – – – – – 31 July 2015 £ million 31.1 10.1 Total £ million 86.1 (37.8) – (1.6) (1.1) 45.6 – (25.0) – (0.5) 20.1 31 July 2014 £ million 56.5 19.6 41.2 76.1 Close Brothers Group plc Annual Report 2015 105 Available for sale £ million 27.1 0.1 (8.2) (1.8) Fair value through proﬁt or loss £ million 0.6 – (0.5) – 2.3 19.5 – (8.1) (0.4) (1.0) – 0.1 – – – – Total £ million 27.7 0.1 (8.7) (1.8) 2.3 19.6 – (8.1) (0.4) (1.0) 10.0 0.1 10.1 i S t r a t e g c R e p o r t G o v e r n a n c e Movements on the book value of other equity shares held during the year comprise: At 1 August 2013 Additions Disposals Currency translation differences Movement in value of: Equity shares classiﬁed as available for sale At 31 July 2014 Additions Disposals Currency translation differences Movement in value of: Equity shares classiﬁed as available for sale At 31 July 2015 14. Derivative ﬁnancial instruments The group enters into derivative contracts with a number of ﬁnancial institutions as a principal only to minimise the impact of interest and currency rate changes to its ﬁnancial instruments. The group’s total derivative asset and liability position as reported on the consolidated balance sheet is as follows: Exchange rate contracts Interest rate contracts Equity derivatives 31 July 2015 31 July 2014 Notional value £ million 170.1 3,979.2 – Assets £ million 0.8 18.9 – Liabilities £ million 0.9 6.2 – Notional value £ million 254.6 4,245.7 128.1 Assets £ million 4.8 8.0 15.0 Liabilities £ million 0.3 3.8 15.4 4,149.3 19.7 7.1 4,628.4 27.8 19.5 Notional amounts of interest rate contracts totalling £2,386.2 million (31 July 2014: £3,127.6 million) and exchange rate contracts totalling £nil (31 July 2014: £nil) have a residual maturity of more than one year. Included in the derivatives above are the following cash ﬂow and fair value hedges: Cash ﬂow hedges Interest rate contracts Fair value hedges Interest rate contracts 31 July 2015 31 July 2014 Notional value £ million Assets £ million Liabilities £ million Notional value £ million Assets £ million Liabilities £ million 1,339.7 0.5 3.8 1,384.0 1,328.8 16.9 0.4 1,558.2 3.2 3.3 0.6 1.6 The cash ﬂow hedges relate to exposure to future interest payments or receipts on recognised ﬁnancial instruments and on forecast transactions for periods of up to eight (2014: eight) years; there was immaterial ineffectiveness. The cash ﬂow hedge amounts that were removed from equity and included in the consolidated income statement for the years ended 31 July 2015 and 2014 were immaterial. The loss recognised in equity for cash ﬂow hedges during the year was £4.4 million (2014: £3.8 million gain). The fair value hedges hedge the interest rate risk in recognised ﬁnancial instruments; the loss on the hedged items was £14.9 million (2014: £5.2 million) which was largely offset by a gain of £15.0 million (2014: £5.3 million) on the hedging instrument. i F n a n c a i l S t a t e m e n t s 106 Close Brothers Group plc Annual Report 2015 The Notes continued 15. Intangible assets Cost At 1 August 2013 Additions Disposals Foreign exchange At 31 July 2014 Additions Disposals Foreign exchange At 31 July 2015 Amortisation and impairment At 1 August 2013 Amortisation charge for the year Disposals At 31 July 2014 Amortisation charge for the year Disposals At 31 July 2015 Net book value at 31 July 2015 Net book value at 31 July 2014 Net book value at 1 August 2013 Goodwill £ million Software £ million Intangible assets on acquisition £ million Group total £ million Company software £ million 156.5 – – (0.4) 156.1 0.3 (10.4) – 51.6 19.9 (2.7) – 68.8 20.3 (8.1) – 42.4 – – – 42.4 1.5 – – 250.5 19.9 (2.7) (0.4) 267.3 22.1 (18.5) – 146.0 81.0 43.9 270.9 68.0 – – 68.0 – (6.2) 61.8 84.2 88.1 88.5 28.0 9.8 (2.6) 35.2 13.5 (6.5) 42.2 38.8 33.6 23.6 12.9 4.9 – 17.8 5.0 (0.1) 108.9 14.7 (2.6) 121.0 18.5 (12.8) 22.7 126.7 21.2 144.2 24.6 146.3 29.5 141.6 0.3 0.1 – – 0.4 – – – 0.4 0.2 0.1 – 0.3 – – 0.3 0.1 0.1 0.1 Additions in goodwill of £0.3 million relate to the 100% acquisition of Mackay Stewart and Brown Limited, a Scottish Independent Financial Adviser with £72.0 million of client assets, for cash consideration of £1.1 million for the equity of the business. This acquisition is not regarded as material in the context of the group’s ﬁnancial statements and therefore information required for material acquisitions by IFRS 3 has not been disclosed. The goodwill disposals of £10.4 million relate to the Seydler disposal of £4.2 million and the write off of fully impaired goodwill of £6.2 million relating to the wind up Fortune Asset Management Limited. Intangible assets on acquisition relates to broker and customer relationships and are amortised over a period of eight to 20 years. In the 2015 ﬁnancial year, £5.0 million (2014: £4.9 million) of the amortisation charge is included in amortisation of intangible assets on acquisition and £13.5 million (2014: £9.8 million) of the amortisation charge is included in administrative expenses shown in the consolidated income statement. Impairment tests for goodwill At 31 July 2015, goodwill has been allocated to nine individual CGUs of which seven are within the Banking division, one is the Securities division and the remaining one is the Asset Management division. Goodwill impairment reviews are carried out annually by assessing the recoverable amount of the group’s CGUs, which is the higher of fair value less costs to sell and value in use. The recoverable amounts for all CGUs were measured based on value in use. A value in use calculation uses discounted cash ﬂow projections based on the most recent board approved budgets and three year plans to determine the recoverable amount of each CGU. The key assumptions underlying management’s three year plans, which are based on past experience and forecast market conditions, are expected market-making conditions in the Securities CGU, expected total client asset growth rate and revenue margin in the Asset Management CGU and expected loan book growth rates and net return on loan book in the Banking CGUs. Close Brothers Group plc Annual Report 2015 107 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s For cash ﬂows beyond the group’s three year planning horizon, a terminal value was calculated using a prudent annual growth rate of 0% (2014: 0%), except for the Close Brothers Asset Management CGU where a growth rate of 2% (2014: 2%) is considered more appropriate as the business is expected to grow at a steady rate in line with GDP growth rates. These cash ﬂows are discounted using a pre-tax estimated weighted average cost of capital that reﬂects current market rates appropriate to the CGU as set out in the table below. For the 2015 calculation, the pre-tax discount rates have been adjusted in each year to reﬂect the expected future change in corporation tax rate in each CGU as announced by the Chancellor in his Summer Budget 2015. As such, the pre-tax discount rates in the table are an average of the rate used in that CGU. At 31 July 2015, the results of the review indicate there is no goodwill impairment. The inputs used in the value in use calculations are sensitive, primarily to the impact of changes in the assumptions for future cash ﬂows, discount rates, and long-term growth rates. Having performed stress tested value in use calculations, the group believes that any reasonably possible change in the key assumptions which have been used would not lead the carrying value of any CGU to exceed its recoverable amount. Details of the CGUs in which the goodwill carrying amount is signiﬁcant in comparison with total goodwill, together with the pre-tax discount rate used in determining value in use are disclosed separately in the table below: Cash generating unit Winterﬂood Securities Close Brothers Asset Management Close Brothers Asset Finance Other 16. Property, plant and equipment Group Cost At 1 August 2013 Additions Disposals At 31 July 2014 Additions Disposals At 31 July 2015 Depreciation At 1 August 2013 Charge for the year Disposals At 31 July 2014 Charge for the year Disposals At 31 July 2015 Net book value at 31 July 2015 Net book value at 31 July 2014 Net book value at 1 August 2013 31 July 2015 31 July 2014 Pre-tax discount rate % 12.5 11.0 12.3 11.0 –12.5 Goodwill £ million 23.3 33.7 7.4 19.8 84.2 Pre-tax discount rate % 10.8 10.4 12.5 10.8 –12.5 Goodwill £ million 23.3 33.5 7.4 23.9 88.1 Leasehold property £ million Fixtures, ﬁttings and equipment £ million Assets held under operating leases £ million Motor vehicles £ million Total £ million 9.3 0.8 – 10.1 7.4 (0.1) 40.9 4.6 (10.6) 34.9 7.7 (8.0) 99.1 46.1 (12.5) 132.7 43.7 (11.3) 1.2 0.5 (0.5) 1.2 – (0.4) 150.5 52.0 (23.6) 178.9 58.8 (19.8) 17.4 34.6 165.1 0.8 217.9 4.4 1.3 – 5.7 1.6 (0.1) 7.2 32.6 4.5 (10.4) 26.7 4.5 (7.5) 23.1 13.9 (8.1) 28.9 16.7 (7.5) 23.7 38.1 10.2 10.9 127.0 4.4 4.9 8.2 8.3 103.8 76.0 0.7 0.3 (0.4) 0.6 0.1 (0.2) 0.5 0.3 0.6 0.5 60.8 20.0 (18.9) 61.9 22.9 (15.3) 69.5 148.4 117.0 89.7 108 Close Brothers Group plc Annual Report 2015 The Notes continued 16. Property, plant and equipment continued Assets held under operating leases relate to our rentals businesses within the Banking division. In addition to the depreciation charged in the year of £16.7 million (2014: £13.9 million), these assets generated other income of £39.1 million (2014: £32.4 million) and interest and fee expense of £12.5 million (2014: £11.1 million). The gains/(losses) from the sale of assets held under operating leases for the year ended 31 July 2015 was £nil (2014: £0.3 million gain). Future minimum lease rentals receivable under non-cancellable operating leases Within one year Between one and ﬁve years After more than ﬁve years Company Cost At 1 August 2013 Additions At 31 July 2014 Additions At 31 July 2015 Depreciation At 1 August 2013 Charge for the year At 31 July 2014 Charge for the year At 31 July 2015 Net book value at 31 July 2015 Net book value at 31 July 2014 Net book value at 1 August 2013 The net book value of leasehold property comprises: Long leasehold property Short leasehold property 31 July 2015 £ million 31 July 2014 £ million 24.0 48.4 0.2 72.6 Leasehold property £ million Fixtures, ﬁttings and equipment £ million 2.6 0.5 3.1 0.1 3.2 1.6 0.5 2.1 0.7 2.8 0.4 1.0 1.0 1.3 0.1 1.4 – 1.4 1.2 0.1 1.3 – 1.3 0.1 0.1 0.1 22.4 40.0 – 62.4 Total £ million 3.9 0.6 4.5 0.1 4.6 2.8 0.6 3.4 0.7 4.1 0.5 1.1 1.1 Group Company 31 July 2015 £ million 0.7 9.5 31 July 2014 £ million 0.8 3.6 31 July 2015 £ million – 0.4 31 July 2014 £ million – 1.0 10.2 4.4 0.4 1.0 Close Brothers Group plc Annual Report 2015 109 17. Other assets and other liabilities Prepayments, accrued income and other assets Prepayments and accrued income Trade and other receivables Accruals, deferred income and other liabilities Accruals and deferred income Trade and other payables Provisions Provisions movement in the year: Group At 1 August 2013 Additions Utilised Released At 31 July 2014 Additions Utilised Released At 31 July 2015 Company At 1 August 2013 Additions Utilised Released At 31 July 2014 Additions Utilised Released At 31 July 2015 31 July 2015 £ million 31 July 2014 £ million 83.5 34.3 79.5 49.2 117.8 128.7 116.3 71.3 21.4 111.9 78.6 22.0 209.0 212.5 Claims £ million Property £ million Other £ million Total £ million 0.6 1.3 (0.6) (0.6) 0.7 0.6 (0.3) (0.6) 0.4 13.2 1.9 (2.2) (2.0) 10.9 3.7 (2.4) (1.0) 11.2 10.0 5.3 (4.5) (0.4) 10.4 4.2 (4.7) (0.1) 23.8 8.5 (7.3) (3.0) 22.0 8.5 (7.4) (1.7) 9.8 21.4 Property £ million Other £ million Total £ million 3.4 0.2 – (1.4) 2.2 – – – 2.2 8.4 4.3 (4.1) – 8.6 2.9 (4.0) – 7.5 11.8 4.5 (4.1) (1.4) 10.8 2.9 (4.0) – 9.7 Claims and other items for which provisions are made arise in the normal course of business and include those related to employee beneﬁts. The timing and outcome of these claims and other items are uncertain. Property provisions are in respect of leaseholds where rents payable exceed the value to the group, in respect of potential dilapidations and onerous leases. These property provisions will be utilised and released over the remaining lives of the leases which range from one to 10 years. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 110 Close Brothers Group plc Annual Report 2015 The Notes continued 18. Settlement balances and short positions Settlement balances Short positions held for trading: Debt securities Equity shares 19. Financial liabilities Deposits by banks Deposits by customers Loans and overdrafts from banks Debt securities in issue 31 July 2015 £ million 376.5 13.7 14.1 27.8 31 July 2014 £ million 444.1 34.3 15.6 49.9 404.3 494.0 Between three months and one year £ million 22.8 2,347.7 123.7 1.1 Within three months £ million 0.3 828.4 99.1 6.7 Between one and two years £ million 0.5 851.2 59.9 747.8 Between two and ﬁve years £ million – 299.3 89.9 299.3 After more than ﬁve years £ million – – – 298.9 Total £ million 35.1 4,481.4 381.2 1,365.0 On demand £ million 11.5 154.8 8.6 11.2 At 31 July 2015 186.1 934.5 2,495.3 1,659.4 688.5 298.9 6,262.7 Deposits by banks Deposits by customers Loans and overdrafts from banks Debt securities in issue On demand £ million 21.1 165.0 4.4 – Within three months £ million 20.0 1,256.5 5.0 6.7 Between three months and one year £ million 8.5 1,532.5 – 350.5 Between one and two years £ million – 1,399.3 – 227.8 Between two and ﬁve years £ million – 160.4 – 470.4 After more than ﬁve years £ million – – – 299.0 Total £ million 49.6 4,513.7 9.4 1,354.4 At 31 July 2014 190.5 1,288.2 1,891.5 1,627.1 630.8 299.0 5,927.1 Of the debt securities in issue, £298.9 million mature on 27 June 2021, £199.4 million mature on 10 February 2017 and £847.7 million relate to the insurance premium and motor loan receivables securitisations as discussed in note 29(c). As discussed in note 29(c) the group has repurchase agreements at 31 July 2015 (2014: none) whereby £375.0 million Treasury Bills have been drawn and lent in exchange for cash which is included within loans and overdrafts from banks. Residual maturities of the repurchase agreements are as follows: Between three months and one year £ million Between one and two years £ million Within three months £ million On demand £ million Between two and ﬁve years £ million After more than ﬁve years £ million Total £ million At 31 July 2015 – 99.1 123.7 59.9 89.9 – 372.6 20. Subordinated loan capital Final maturity date 2020 2026 2026 Prepayment date Initial interest rate 31 July 2015 £ million 31 July 2014 £ million 2015 2021 2021 7.39% 7.42% 7.62% – 15.5 30.9 46.4 30.8 15.5 30.9 77.2 All the subordinated loan capital has been issued by Close Brothers Limited (“CBL”) and is denominated in sterling. If CBL opts not to prepay at the prepayment date, the interest rate is reset to a margin over the yield on ﬁve year UK Treasury securities. In March 2015 CBL exercised its option to prepay £30.0 million of its subordinated loan capital. Close Brothers Group plc Annual Report 2015 111 i S t r a t e g c R e p o r t G o v e r n a n c e 31 July 2015 31 July 2014 million £ million million £ million 150.6 37.7 150.6 37.7 Proﬁt and loss account £ million 306.1 80.8 (67.1) – – (6.5) 313.3 79.9 (74.1) – – (9.3) Other reserves £ million (11.6) – – (7.8) 13.7 (1.4) (7.1) – – (18.2) 20.5 3.4 309.8 (1.4) 21. Share capital Group and company Allotted, issued and fully paid Ordinary shares of 25p each 22. Company reserves At 1 August 2013 Proﬁt attributable to shareholders Dividends paid Shares purchased Shares released Other movements At 31 July 2014 Proﬁt attributable to shareholders Dividends paid Shares purchased Shares released Other movements At 31 July 2015 i F n a n c a i l S t a t e m e n t s Movements in the group reserves are presented in the consolidated statement of changes in equity. 23. Capital The group’s policy is to be well capitalised and its approach to capital management is driven by strategic and organisational requirements, while also taking into account the regulatory and commercial environments in which it operates. The Prudential Regulation Authority (“PRA”) supervises the group on a consolidated basis and receives information on the capital adequacy of, and sets capital requirements for, the group as a whole. In addition, a number of subsidiaries are regulated for prudential purposes by either the PRA or the Financial Conduct Authority (“FCA”). The aim of the capital adequacy regime is to promote safety and soundness in the ﬁnancial system. It is structured around three “pillars”: Pillar 1 on minimum capital requirements; Pillar 2 on the supervisory review process; and Pillar 3 on market discipline. The group’s Pillar 1 information is presented in the following table. Under Pillar 2, the group completes an annual self assessment of risks known as the “Internal Capital Adequacy Assessment Process” (“ICAAP”). The ICAAP is reviewed by the PRA which culminates in the PRA setting “Individual Capital Guidance” (“ICG”) on the level of capital the group and its regulated subsidiaries are required to hold. Pillar 3 requires ﬁrms to publish a set of disclosures which allow market participants to assess information on that ﬁrm’s capital, risk exposures and risk assessment process. The group’s Pillar 3 disclosures can be found on the group’s website www.closebrothers.com/investor-relations/investor-information/results-reports-and-presentations. The group maintains a strong capital base to support the development of the business and to ensure the group meets the Pillar 1 capital requirements and ICG at all times. As a result, the group maintains capital adequacy ratios above minimum regulatory requirements. The group’s individual regulated entities complied with all of the externally imposed capital requirements to which they are subject for the years ended 31 July 2015 and 2014. A full analysis of the composition of regulatory capital and Pillar 1 risk weighted assets is shown in the following table, including a reconciliation between equity and common equity tier 1 capital after deductions. At 31 July 2015, the group’s common equity tier 1 capital ratio increased to 13.7% (31 July 2014: 13.1%). Common equity tier 1 capital increased to £813.2 million (31 July 2014: £710.8 million) primarily due to growth in proﬁt attributable to shareholders. Risk weighted assets increased to £5,932.1 million (31 July 2014: £5,445.8 million) as a result of growth in credit and counterparty risk associated with the loan book, which was partly offset by a reduction in market risk due to the disposal of Seydler as well as lower trading balances at Winterﬂood. Notional risk weighted assets for operational risk also increased reﬂecting increased performance over recent years. 112 Close Brothers Group plc Annual Report 2015 The Notes continued 23. Capital continued The composition of capital remained broadly stable with 95.9% (31 July 2014: 91.1%) of the total capital consisting of common equity tier 1 capital. Common equity tier 1 capital Called up share capital Share premium account Retained earnings Other reserves recognised for common equity tier 1 capital Deductions from common equity tier 1 capital Intangible assets, net of associated deferred tax liabilities Foreseeable dividend1 Investment in own shares Pension asset, net of associated deferred tax liabilities Additional valuation adjustments Common equity tier 1 capital Tier 2 capital Subordinated debt2 Unrealised gains on available for sale equity shares Tier 2 capital Total regulatory capital Risk weighted assets (notional) – unaudited Credit and counterparty credit risk Operational risk3 Market risk3 Common equity tier 1 capital ratio Total capital ratio 31 July 2015 £ million 37.7 284.0 694.4 18.3 (140.6) (52.4) (25.6) (2.5) (0.1) 31 July 2014 £ million 37.7 283.8 589.8 21.4 (142.1) (47.7) (27.9) (3.9) (0.3) 813.2 710.8 31.5 3.3 34.8 60.0 9.6 69.6 848.0 780.4 5,103.2 753.5 75.4 4,564.5 695.5 185.8 5,932.1 5,445.8 13.7% 13.1% 14.3% 14.3% 1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2015 and 31 July 2014 for a foreseeable dividend being the proposed ﬁnal dividend as set out in note 9. 2 Under the Capital Requirements Regulation’s transitional arrangements, 70% (31 July 2014: 80%) of the principal value of subordinated debt is recognised. 3 Operational and market risk include a notional adjustment at 8% in order to determine notional risk weighted assets. The following table shows a reconciliation between equity and common equity tier 1 capital after deductions: Equity Regulatory deductions from equity: Intangible assets, net of associated deferred tax liabilities Foreseeable dividend1 Pension asset, net of associated deferred tax liabilities Additional valuation adjustments Other reserves not recognised for common equity tier 1 capital: Available for sale movements reserve Cash ﬂow hedging reserve Non-controlling interests Common equity tier 1 capital 31 July 2015 £ million 1,009.9 (140.6) (52.4) (2.5) (0.1) (3.3) 2.3 (0.1) 31 July 2014 £ million 917.6 (142.1) (47.7) (3.9) (0.3) (9.6) (2.1) (1.1) 813.2 710.8 1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2015 and 31 July 2014 for a foreseeable dividend being the proposed ﬁnal dividend as set out in note 9. Close Brothers Group plc Annual Report 2015 113 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 24. Contingent liabilities, guarantees and commitments Contingent liabilities Financial Services Compensation Scheme (“FSCS”) A principal subsidiary of the group, CBL, by virtue of being a regulated deposit-taker, contributes to the FSCS which provides compensation to customers of ﬁnancial institutions in the event that an institution is unable, or is likely to be unable, to pay claims against it. The FSCS raises levies on UK licensed deposit-taking institutions to meet such claims based on their share of UK deposits on 31 December of the year preceding the scheme year (which runs from 1 April to 31 March). At 31 July 2015, the group has accrued £1.9 million (2014: £2.2 million) for its share of levies that will be raised by the FSCS. Compensation has previously been paid out by the FSCS funded by loan facilities provided by HM Treasury to FSCS in support of FSCS’s obligations to the depositors of banks declared in default. The facilities are expected to be repaid wholly from recoveries from the failed deposit takers, except for an estimated shortfall of £1.0 billion which the FSCS is recovering by levying the industry in three equal instalments beginning in 2013/2014, in addition to the ongoing interest charges on the outstanding loans. The amount of future levies payable by the group depends on a number of factors including the potential recoveries of assets by the FSCS, the group’s participation in the deposit-taking market at 31 December, the level of protected deposits and the population of FSCS members. Guarantees Guarantees and irrevocable letters of credit Group Company 31 July 2015 £ million 136.7 31 July 2014 £ million 112.1 31 July 2015 £ million 114.0 31 July 2014 £ million 110.5 Where the group undertakes to make a payment on behalf of its subsidiaries for guarantees issued, such as bank facilities or property leases or as irrevocable letters of credit for which an obligation to make a payment to a third party has not arisen at the reporting date, they are included in these consolidated ﬁnancial statements as contingent liabilities. Commitments Undrawn facilities, credit lines and other commitments to lend Within one year After more than one year 31 July 2015 £ million 1,177.9 31.7 31 July 2014 £ million 1,250.4 12.7 1,209.6 1,263.1 Operating lease commitments Minimum operating lease payments recognised in the consolidated income statement amounted to £10.8 million (2014: £10.9 million). At 31 July 2015, the group had outstanding commitments for future minimum lease rentals payable under non-cancellable operating leases, which fall due as follows: Within one year Between one and ﬁve years After more than ﬁve years 31 July 2015 31 July 2014 Premises £ million 10.4 39.3 15.8 Other £ million 2.7 3.8 – Premises £ million 10.6 35.1 9.2 Other £ million 2.4 3.2 – 65.5 6.5 54.9 5.6 Other commitments Subsidiaries had contracted capital commitments relating to capital expenditure of £15.1 million (2014: £3.2 million). 114 Close Brothers Group plc Annual Report 2015 The Notes continued 25. Related party transactions Transactions with key management Details of directors’ remuneration and interests in shares are disclosed in the Report of the Board on Directors’ Remuneration on pages 58 to 77. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the group’s key management are the members of the group’s Executive Committee, which includes all executive directors, together with its non-executive directors. The table below details, on an aggregated basis, key management personnel emoluments: Emoluments Salaries and fees Beneﬁts and allowances Performance related awards in respect of the current year: Cash Deferred Share-based awards 2015 £ million 2014 £ million 3.6 0.7 3.4 3.0 10.7 5.7 16.4 3.6 0.6 3.2 3.1 10.5 5.4 15.9 Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £20.3 million (2014: £16.2 million). Key management have banking relationships with group entities which are entered into in the normal course of business. Amounts included in deposits by customers at 31 July 2015 attributable, in aggregate, to key management were £2.3 million (31 July 2014: £2.6 million). Close Brothers Group plc Annual Report 2015 115 26. Pensions The group operates deﬁned contribution pension schemes for eligible employees as well as a deﬁned beneﬁt pension scheme which is closed to new members and further accrual. Assets of all schemes are held separately from those of the group. Defined contribution schemes During the year the charge to the consolidated income statement for the group’s deﬁned contribution pension schemes was £9.3 million (2014: £8.9 million) representing contributions payable by the group and is included in administrative expenses. Defined benefit pension scheme The group’s only deﬁned beneﬁt pension scheme (“the scheme”) is a ﬁnal salary scheme which operates under trust law. The scheme is managed and administered in accordance with the scheme’s Trust Deed and Rules and all relevant legislation by a trustee board made up of trustees nominated by both the company and the members. The scheme was closed to new entrants in August 1996 and closed to further accrual during 2012. At 31 July 2015 this scheme had 61 (2014: 64) deferred members and 35 (2014: 34) pensioners and dependants. Funding position The scheme’s most recent triennial actuarial valuation at 31 July 2012 identiﬁed a £6.0 million funding deﬁcit. The group contributed £3.3 million towards this deﬁcit during the year ended 31 July 2013 and has agreed to fund the remaining £2.7 million deﬁcit plus interest over the period to 31 July 2017 subject to the next triennial valuation at 31 July 2015. The contribution that is due to be made during the year to 31 July 2016 is £1.4 million. IAS 19 (Revised) valuation at 31 July 2015 The following disclosures are reported in accordance with IAS 19 (Revised). Signiﬁcant actuarial assumptions used: i S t r a t e g c R e p o r t G o v e r n a n c e Inﬂation rate (RPI) Inﬂation rate (CPI) Discount rate for scheme liabilities1 Expected interest/expected long-term return on plan assets Mortality assumptions2: Existing pensioners from age 65, life expectancy (years): Men Women Non-retired members currently aged 50, life expectancy from age 65 (years): Men Women 2015 % 3.3 2.3 3.6 3.6 24.6 26.0 25.3 28.1 2014 % 3.3 2.3 4.2 4.2 24.5 25.9 25.2 28.0 1 Based on market yields at 31 July 2015 and 2014 on high quality sterling-denominated corporate bonds, adjusted to be consistent with the estimated term of the post employment beneﬁt obligation, using the Towers Watson model “Global RATE:Link”. 2 Based on standard tables SAPS S1 Light produced by the CMI Bureau of the Institute and Faculty of Actuaries with adjusted mortality multipliers for pensioners and non-pensioners, together with projected future improvements in line with the CMI 2011 core projection model with a long-term trend of 1.5% per annum. The surplus of the scheme disclosed below has been accounted for as an asset of the group within note 17 Prepayments, accrued income and other assets. The group has the unconditional right to any surpluses that arise within the scheme once all beneﬁts have been secured in full. As such no asset ceiling has been applied. Fair value of scheme assets: Equities1 Bonds1 Cash Total fair value of scheme assets Present value of scheme liabilities Surplus/(deﬁcit) 1 These assets have quoted market prices. 2015 £ million 2014 £ million 2013 £ million 2012 £ million 2011 £ million 33.0 8.5 0.2 41.7 (38.6) 31.8 7.9 0.2 39.9 (35.0) 30.7 7.4 – 38.1 (31.9) 28.1 7.0 – 35.1 (34.7) 25.4 6.6 3.3 35.3 (39.9) 3.1 4.9 6.2 0.4 (4.6) i F n a n c a i l S t a t e m e n t s 116 Close Brothers Group plc Annual Report 2015 The Notes continued 26. Pensions continued Movement in the present value of scheme liabilities during the year: Carrying amount at 1 August Interest expense Beneﬁts paid Actuarial losses Carrying amount at 31 July Movement in the fair value of scheme assets during the year: Carrying amount at 1 August Interest income Beneﬁts paid Return on scheme assets, excluding interest income Carrying amount at 31 July Historical experience of actuarial gains/(losses) are shown below: 2015 £ million (35.0) (1.4) 2.7 (4.9) 2014 £ million (31.9) (1.4) 1.6 (3.3) (38.6) (35.0) 2015 £ million 39.9 1.6 (2.7) 2.9 2014 £ million 38.1 1.7 (1.6) 1.7 41.7 39.9 Experience gains/(losses) on scheme assets Experience (losses)/gains on scheme liabilities Impact of changes in assumptions on scheme liabilities Total actuarial (losses)/gains on scheme liabilities 2015 £ million 2.9 – (4.9) (4.9) 2014 £ million 1.7 (0.1) (3.2) (3.3) 2013 £ million 4.6 0.5 (2.7) (2.2) 2012 £ million (0.8) 0.6 2.0 2.6 2011 £ million 1.3 (1.8) (5.7) (7.5) Total actuarial (losses)/gains (2.0) (1.6) 2.4 1.8 (6.2) Total actuarial losses have been recognised in other comprehensive income. Income of £0.2 million (2014: £0.3 million) from the interest on the scheme surplus has been recognised within administrative expenses in the consolidated income statement. The valuation of the scheme’s liabilities is sensitive to the key assumptions used in the valuation. The effect of a change in those assumptions in 2015 and 2014 is set out below. The analysis reﬂects the variation of the individual assumptions. The variation in price inﬂation includes all inﬂation-linked pension increases in deferment and in payment. Impact on deﬁned beneﬁt obligation increase/(decrease) 2015 2014 Key assumption Discount rate Price inﬂation (RPI and CPI) Mortality Sensitivity 0.25% increase 0.25% increase Increase in life expectancy at age 65 by one year % (5.0) 2.5 3.0 £ million (1.9) 1.0 1.2 % (5.0) 2.5 3.0 £ million (1.7) 0.9 1.0 Changes in the assumptions used in the valuation due to external factors would affect the carrying value of the scheme. The most signiﬁcant risks are: • Market factors (movements in equity and bond markets): 79% of the scheme’s assets are invested in global equities and the scheme’s liabilities are measured with reference to corporate bond yields. The performance of both of these asset classes can be volatile. Underperformance of either of these markets would have an adverse impact on the carrying value of the scheme. • Inﬂation: Deferred pensions and pensions in payment increase at speciﬁed periods in line with inﬂation subject to certain caps and ﬂoors in place. Changes in inﬂation may impact scheme liabilities. • Life expectancy: Change in the life expectancy of the scheme’s members may impact scheme liabilities. The weighted average duration of the beneﬁt payments reﬂected in the scheme liabilities is 20 years. Close Brothers Group plc Annual Report 2015 117 27. Share-based awards The 1995 Executive Share Option Scheme (“ESOS”), Save As You Earn (“SAYE”) scheme, 2009 Long Term Incentive Plan (“LTIP”), Deferred Share Awards (“DSA”) and Share Matching Plan (“SMP”) share-based awards have been granted under the group’s share schemes. The general terms and conditions for these share-based awards are described in the Report of the Board on Directors’ Remuneration on pages 58 to 77. In order to satisfy a number of the awards below the company has purchased company shares into Treasury and the Close Brothers Group Employee Share Trust has purchased company shares. At 31 July 2015, 1.2 million (2014: 1.7 million) and 1.7 million (2014: 2.1 million) of these shares were held respectively and in total £25.6 million (2014: £27.9 million) was recognised within the share-based payments reserve. During the year £20.5 million (2014: £13.7 million) of these shares were released to satisfy share-based awards to employees. The share-based payments reserve as shown in the consolidated statement of changes in equity also includes the cumulative position in relation to unvested share-based awards charged to the consolidated income statement of £21.1 million (2014: £20.4 million). The share-based awards charge of £7.8 million (2014: £7.3 million) is included in administrative expenses shown in the consolidated income statement. Movements in the number of share-based awards outstanding and their weighted average share prices are as follows: ESOS SAYE LTIP DSA1 SMP Weighted average exercise price Weighted average exercise price Number Number At 1 August 2013 361,389 689.5p 1,194,612 Granted Exercised Forfeited Lapsed – (11,796) 714.1p – – (215,937) 709.2p 708,536 1,041.4p (459,850) 475.9p (132,086) 654.9p (10,872) 576.7p Number 541.7p 2,316,359 494,604 (595,807) – (167,463) – Weighted average exercise price – – – – – Number 928,766 305,294 (481,471) – (21,729) Weighted average exercise price Number – 1,489,378 392,918 – (508,217) – – – (78,466) – Weighted average exercise price – – – – – At 31 July 2014 133,656 655.6p 1,300,340 825.4p 2,047,693 Granted Exercised Forfeited Lapsed – – (13,147) 656.0p – – (120,509) 655.5p 272,172 1,143.0p (389,471) 559.0p (37,614) 1,049.2p (66,703) 940.5p 510,680 (796,622) – (52,932) At 31 July 2015 – – 1,078,724 – 1,708,819 Exercisable at: 31 July 2015 31 July 2014 – – 133,656 655.6p 658 – 547.0p – 13,878 16,030 – – – – – – – – 730,860 – 1,295,613 276,675 (435,116) – (18,539) – – – – 373,938 (541,517) – (18,001) 553,880 – 1,110,033 38,471 171,754 – – – – – – – – – – – – 1 Includes all awards made under the group’s DSA and Matching and Restricted awards granted to new employees on commencement of employment with the group. The table below shows the weighted average market price at the date of exercise: ESOS SAYE LTIP DSA SMP 2015 2014 1,430.0p 1,266.2p 1,513.4p 1,336.3p 1,480.9p 1,285.1p 1,463.2p 1,248.0p 1,470.5p 1,258.1p i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 118 Close Brothers Group plc Annual Report 2015 The Notes continued 27. Share-based awards continued The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are as follows: ESOS Between £6 and £7 SAYE Between £5 and £6 Between £6 and £7 Between £9 and £10 Between £11 and £12 LTIP Nil DSA Nil SMP Nil Total 2015 Options outstanding 2014 Options outstanding Weighted average remaining contractual life Years Number outstanding Weighted average remaining contractual life Years Number outstanding – – 133,656 71,327 141,035 304,139 562,223 1.4 1.1 2.5 3.0 421,680 197,054 337,873 343,733 1,708,819 2.1 2,047,693 553,880 1.4 730,860 1,110,033 2.2 1,295,613 4,451,456 2.1 5,508,162 0.2 1.1 1.8 3.4 3.9 2.0 2.2 1.7 2.0 For the share-based awards granted during the year, the weighted average fair value of those options at 31 July 2015 was 945.2p (2014: 677.3p). The main assumptions for the valuation of these share-based awards comprised: Exercise period SAYE 1 December 2017 to 31 May 2018 1 December 2019 to 31 May 2020 LTIP 1 October 2017 to 30 September 2018 30 September 2019 to 29 September 2020 30 September 2020 to 29 September 2021 DSA 1 October 2015 to 30 September 2018 15 March 2016 to 15 March 2019 15 March 2016 to 15 March 2018 15 June 2016 to 15 June 2019 SMP 1 October 2017 to 30 September 2018 Share price at issue Exercise price Expected volatility Expected option life in years Dividend yield Risk free interest rate 1,428.0p 1,143.0p 1,428.0p 1,143.0p 1,431.0p 1,446.0p 1,446.0p 1,431.0p 1,576.0p 1,446.0p 1,446.0p 1,431.0p – – – – – – – – 21.0% 22.0% 21.0% 22.0% 21.0% – – – – 21.0% 3 5 3 4 5 – – – – 3 3.4% 3.4% 3.4% 3.4% 3.4% – – – – 1.0% 1.5% 1.3% 1.1% 1.3% – – – – 3.4% 1.3% Expected volatility was determined mainly by reviewing share price volatility for the expected life of each option up to the date of grant. Close Brothers Group plc Annual Report 2015 119 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 28. Consolidated cash ﬂow statement reconciliation (a) Reconciliation of operating proﬁt before tax to net cash inﬂow from operating activities Operating proﬁt before tax from continuing operations Proﬁt before tax on discontinued operations Tax paid Depreciation and amortisation (Increase)/decrease in: Interest receivable and prepaid expenses Net settlement balances and trading positions Net loans to/from money broker against stock advanced Increase in interest payable and accrued expenses Net cash inﬂow from trading activities Decrease/(increase) in: Loans and advances to banks not repayable on demand Loans and advances to customers Assets let under operating leases Floating rate notes classiﬁed as available for sale Certiﬁcates of deposit Debt securities held for liquidity Other assets less other liabilities (Decrease)/increase in: Deposits by banks Deposits by customers Loans and overdrafts from banks Debt securities in issue, net of transaction costs Net cash inﬂow from operating activities (b) Analysis of net cash outﬂow in respect of the purchase of non-controlling interests Cash consideration paid (c) Analysis of net cash inﬂow in respect of the sale of a subsidiary Cash consideration received Cash and cash equivalents disposed of (d) Analysis of changes in ﬁnancing activities Share capital (including premium) and subordinated loan capital2: Opening balance Shares issued for cash (e) Analysis of cash and cash equivalents3 Cash and balances at central banks Loans and advances to banks repayable on demand 1 Restated – see note 7. 2 Excludes accrued interest. 3 Excludes Bank of England cash reserve account and amounts held as collateral. 31 July 2015 £ million 31 July 20141 £ million 219.9 11.6 (53.4) 41.4 (4.2) 22.8 (2.9) 8.2 188.8 6.9 (35.3) 34.7 4.9 (8.8) 0.2 15.9 243.4 207.3 1.6 (448.1) (39.8) – (115.3) 25.0 (19.1) (14.5) (23.0) 371.8 – (2.6) (644.1) (41.4) 37.8 – – 30.5 (17.0) 498.3 (28.2) 299.0 (18.0) 339.6 (1.0) (7.5) 36.9 (13.7) 23.2 – – – 396.5 0.1 396.4 0.1 396.6 396.5 1,031.2 72.5 1,164.7 74.0 1,103.7 1,238.7 120 Close Brothers Group plc Annual Report 2015 The Notes continued 29. Financial risk management As a ﬁnancial services group, ﬁnancial instruments are central to the group’s activities. The risk associated with ﬁnancial instruments represents a signiﬁcant component of those faced by the group and is analysed in more detail below. The group’s ﬁnancial risk management objectives are summarised within the Risk and Control Framework in Corporate Governance on page 49 and 50. Details of the signiﬁcant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of ﬁnancial asset, ﬁnancial liability and equity instrument are disclosed in note 1. (a) Classification The following tables analyse the group’s assets and liabilities in accordance with the categories of ﬁnancial instruments in IAS 39. Designated at fair value through proﬁt or loss £ million Held for trading £ million Available for sale £ million Loans and receivables £ million Other ﬁnancial instruments amortised cost £ million Derivatives held for hedging £ million At 31 July 2015 Assets Cash and balances at central banks Settlement balances Loans and advances to banks Loans and advances to customers Debt securities Equity shares Loans to money brokers against stock advanced Derivative ﬁnancial instruments Other ﬁnancial assets Liabilities Settlement balances and short positions Deposits by banks Deposits by customers Loans and overdrafts from banks Debt securities in issue Loans from money brokers against stock advanced Subordinated loan capital Derivative ﬁnancial instruments Other ﬁnancial liabilities – – – – 14.1 31.1 – 2.3 – 47.5 27.8 – – – – – – 2.9 – 30.7 – – – – – 0.1 – – – 0.1 – – – – – – – – – – – – – – 20.1 10.0 – – – 1,038.0 398.3 84.6 5,737.8 115.3 – 38.4 – 36.5 30.1 7,448.9 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 376.5 35.1 4,481.4 381.2 1,365.0 – 46.4 – 105.0 Total £ million 1,038.0 398.3 84.6 5,737.8 149.5 41.2 38.4 19.7 36.5 – – – – – – – 17.4 – 17.4 7,544.0 – – – – – – – 4.2 – 404.3 35.1 4,481.4 381.2 1,365.0 – 46.4 7.1 105.0 6,790.6 4.2 6,825.5 Close Brothers Group plc Annual Report 2015 121 At 31 July 2014 Assets Cash and balances at central banks Settlement balances Loans and advances to banks Loans and advances to customers Debt securities Equity shares Loans to money brokers against stock advanced Derivative ﬁnancial instruments Other ﬁnancial assets Liabilities Settlement balances and short positions Deposits by banks Deposits by customers Loans and overdrafts from banks Debt securities in issue Loans from money brokers against stock advanced Subordinated loan capital Derivative ﬁnancial instruments Other ﬁnancial liabilities Designated at fair value through proﬁt or loss £ million Held for trading £ million Available for sale £ million Loans and receivables £ million Other ﬁnancial instruments amortised cost £ million Derivatives held for hedging £ million Total £ million – – – – 48.6 56.5 – 21.3 – 126.4 49.8 – – – – – – 17.3 – 67.1 – – – – – 0.1 – – – 0.1 – – – – – – – – – – – – – – 45.6 19.5 – – – 1,171.8 465.8 87.4 5,289.7 – – 63.9 – 50.5 65.1 7,129.1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 444.2 49.6 4,513.7 9.4 1,354.4 28.4 77.2 – 115.4 – – – – – – – 6.5 – 1,171.8 465.8 87.4 5,289.7 94.2 76.1 63.9 27.8 50.5 6.5 7,327.2 – – – – – – – 2.2 – 494.0 49.6 4,513.7 9.4 1,354.4 28.4 77.2 19.5 115.4 6,592.3 2.2 6,661.6 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s (b) Valuation The fair values of the group’s ﬁnancial assets and liabilities are not materially different from their carrying values, with the exception of subordinated loan capital, and the Close Brothers Group plc (“CBG”) and CBL bonds. Subordinated loan capital CBG bond CBL bond 31 July 2015 31 July 2014 Fair value 56.9 219.7 315.4 Carrying value 46.4 205.6 311.2 Fair value 88.3 224.9 306.5 Carrying value 77.2 205.2 300.2 Valuation hierarchy The group holds ﬁnancial instruments that are measured at fair value subsequent to initial recognition. Each instrument has been categorised within one of three levels using a fair value hierarchy that reﬂects the signiﬁcance of the inputs used in making the measurements. These levels are based on the degree to which the fair value is observable and are deﬁned as follows: • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities where prices are readily available and represent actual and regularly occurring market transactions on an arm’s length basis. An active market is one in which transactions occur with sufﬁcient frequency to provide ongoing pricing information; • Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly as prices or indirectly derived from prices; and • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (“unobservable inputs”). Investments classiﬁed as Level 1 predominantly comprise UK government securities and listed equity shares. Investments classiﬁed as Level 2 predominantly comprise investment grade corporate bonds, less liquid listed equities and over the counter derivatives. 122 Close Brothers Group plc Annual Report 2015 The Notes continued 29. Financial risk management continued Investments classiﬁed as Level 3 predominantly comprise investments in unlisted equity shares including an entity offering post trade services in securities, a legacy investment property fund and the group’s residual shareholding in a derivatives market maker. The valuations of these investments are determined using generally accepted valuation techniques including discounted cash ﬂow models and net asset values. The group believes that there is no reasonably possible change to the inputs used in the valuation of these positions which would have a material effect on the group’s consolidated income statement. The tables below show the classiﬁcation of ﬁnancial instruments held at fair value into the valuation hierarchy at 31 July 2015 and 2014. At 31 July 2015 Assets Debt securities: Long positions in debt securities held for trading Gilts classiﬁed as available for sale Equity shares: Held for trading Fair value through proﬁt or loss Available for sale Derivative ﬁnancial instruments Liabilities Short positions held for trading: Debt securities Equity shares Derivative ﬁnancial instruments At 31 July 2014 Assets Debt securities: Long positions in debt securities held for trading Gilts classiﬁed as available for sale Equity shares: Held for trading Fair value through proﬁt or loss Available for sale Derivative ﬁnancial instruments Liabilities Short positions held for trading: Debt securities Equity shares Derivative ﬁnancial instruments There were no signiﬁcant transfers between Level 1, 2 and 3 in 2015 and 2014. Level 1 £ million Level 2 £ million Level 3 £ million Total £ million 12.6 20.1 31.1 – – – 63.8 11.3 14.1 – 25.4 1.5 – – 0.1 – 19.7 21.3 2.4 – 7.1 9.5 – – – – 10.0 – 10.0 – – – – 14.1 20.1 31.1 0.1 10.0 19.7 95.1 13.7 14.1 7.1 34.9 Level 1 £ million Level 2 £ million Level 3 £ million Total £ million 45.9 45.6 56.5 – – 0.4 148.4 31.1 15.6 – 46.7 2.7 – – – – 27.4 30.1 3.2 – 19.5 22.7 – – – 0.1 19.5 – 48.6 45.6 56.5 0.1 19.5 27.8 19.6 198.1 – – – – 34.3 15.6 19.5 69.4 Close Brothers Group plc Annual Report 2015 123 Movements in ﬁnancial assets categorised as Level 3 were: At 1 August 2013 Total gains recognised in the consolidated income statement Total gains recognised in other comprehensive income Purchases and issues Sales and settlements Transfers out At 31 July 2014 Total losses recognised in the consolidated income statement Total losses recognised in other comprehensive income Purchases and issues Sales and settlements Transfers out At 31 July 2015 Equity shares Available for sale £ million 27.1 – 0.5 0.1 (8.2) – 19.5 (0.9) (0.5) – (8.1) – 10.0 Fair value through proﬁt/(loss) £ million 0.6 – – – (0.5) – 0.1 – – – – (0.1) – i S t r a t e g c R e p o r t G o v e r n a n c e The losses recognised in the consolidated income statement relating to instruments held at the year end amounted to £0.9 million (2014: £nil). (c) Credit risk Credit risk is the risk of a reduction in earnings and/or value, as a result of the failure of a counterparty or associated party with whom the group has contracted to meet its obligations in a timely manner and arises mainly from the lending and treasury activities of the Banking division. The group’s lending activities are spread across asset classes, are generally short-term in nature with low average loan size in order to control concentration risk in the loan book and associated collateral. In addition the group applies consistent and prudent lending criteria mitigating credit risk. i F n a n c a i The Banking division monitors the credit quality of the counterparties with whom the group places deposits, enters into derivative contracts or whose debt securities are held against established limits. Whilst these amounts may be material, the counterparties are all regulated institutions with high credit ratings assigned by international credit rating agencies and fall within the large exposure limits set by the regulatory requirements. Credit risk in the Securities division is limited as Winterﬂood trade in the cash markets with regulated counterparties on a delivery versus payment basis such that any credit exposure is limited to price movements in the underlying securities. Counterparty exposure and settlement failure monitoring controls are in place. l S t a t e m e n t s 124 Close Brothers Group plc Annual Report 2015 The Notes continued 29. Financial risk management continued Maximum exposure to credit risk The table below presents the group’s maximum exposure to credit risk, before taking account of any collateral and credit risk mitigation, arising from its on balance sheet and off balance sheet ﬁnancial instruments at 31 July 2015. For off balance sheet instruments, the maximum exposure to credit risk represents the contractual nominal amounts. On balance sheet Cash and balances at central banks Settlement balances Loans and advances to banks Loans and advances to customers Debt securities Loans to money brokers against stock advanced Derivative ﬁnancial instruments Other ﬁnancial assets Off balance sheet Undrawn commitments Total maximum exposure to credit risk 31 July 2015 £ million 31 July 2014 £ million 1,038.0 398.3 84.6 5,737.8 149.5 38.4 19.7 36.5 7,502.8 1,171.8 465.8 87.4 5,289.7 94.2 63.9 27.8 50.5 7,251.1 1,209.6 1,263.1 8,712.4 8,514.2 Assets pledged and received as collateral The group pledges assets for repurchase agreements and securities borrowing agreements which are generally conducted under terms that are customary to standard securitised borrowing contracts. The group has securitised without recourse and restrictions £1,164.8 million (31 July 2014: £1,134.1 million) of its insurance premium and motor loan receivables in return for debt securities in issue of £847.7 million (31 July 2014: £848.6 million). As the group has retained exposure to substantially all the credit risk and rewards of the residual beneﬁt of the underlying assets it continues to recognise these assets in loans and advances to customers in its consolidated balance sheet. In November 2014 the group accessed the Funding for Lending Scheme which enables it to borrow highly liquid UK Treasury Bills from the Bank of England in exchange for eligible collateral. At 31 July 2015, asset ﬁnance loan receivables of £705.6 million were positioned. The term of these transactions is four years from the date of drawdown. The group also had repurchase agreements whereby £375.0 million Treasury Bills have been drawn and lent in exchange for cash included within loans and overdrafts from banks. The Treasury Bills are not recorded on the group’s consolidated balance sheet as ownership remains with the Bank of England. The risk and rewards of the loans and advances to customers remains with the group and continue to be recognised in the consolidated balance sheet. Loans to money brokers against stock advanced of £38.4 million (31 July 2014: £63.9 million) is the cash collateral provided to these institutions for stock borrowing by Winterﬂood. The stock borrowing to which the cash deposits relate is short term in nature and is recorded at the amount payable. The majority of loans and advances to customers are secured against speciﬁc assets. The security will correspond to the type of lending as detailed in the segmental loan book analysis on page 23 of the Strategic Report. Consistent and prudent lending criteria are applied across the whole loan book with emphasis on the quality of the security provided. Close Brothers Group plc Annual Report 2015 125 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Financial assets: Loans and advances to customers Credit risk management and monitoring The overall credit risk appetite is set by the group board. The monitoring of credit policy is the responsibility of the Banking division’s risk and compliance committees. All large loans are subject to approval by the Banking division’s Credit Committees. Retail, Commercial and Property each use credit underwriting and monitoring measures appropriate to the diverse and specialised nature of their lending. The Banking division has a dual approach to mitigating credit risk by: • Lending on a secured basis with emphasis on both the customers’ ability to repay and the quality of the underlying security to minimise any loss should the customer not be able to repay; and • Where the security collateralising a loan is less tangible, or in cases of higher loan to valuation (“LTVs”), greater scrutiny is applied both analytically and in terms of escalation of sanctioning authority. The Banking division’s collections and recoveries processes are designed to provide a fair, consistent and effective operation for arrears management. The Banking division seeks to engage in early communication with borrowers experiencing difﬁculty in meeting their repayments, to obtain their commitment to maintaining or re-establishing a regular payment plan. The Banking division maintains a forbearance policy to support customers in ﬁnancial difﬁculty and ensures the necessary processes and policies are in place to enable consistently fair treatment of each customer. At the same time, the Banking division ensures these processes and policies do not restrict the ability to manage customers based on their individual circumstances. This includes considering whether it is appropriate to change the terms and conditions of a loan, e.g. by extending its term, changing the type of loan, deferring interest or by capitalising arrears to assist a customer in ﬁnancial difﬁculties. The Bank seeks to ensure that any forbearance results in a fair outcome for the customer and will not repossess an asset unless all other reasonable attempts to resolve the position have failed. The gross carrying amount of exposures with forbearance measures was £81.6 million at 31 July 2015. Retail is predominantly high volume secured lending with a small average loan size. Credit issues are identiﬁed early via predominantly automated tracking processes. Remedial actions are implemented promptly to restore customers to a performing status or recovery methods are applied to minimise potential loss. Commercial is a combination of several niche lending businesses with a diverse mix of loans in terms of assets ﬁnanced, and average loan size and LTV percentage. Credit quality is predominately assessed on an individual loan by loan basis. Recovery activity is executed promptly by experts in the specialised assets. This approach allows remedial action to be implemented at the appropriate time to minimise potential loss. Property is a portfolio of higher value, low volume lending with credit quality assessed on an individual loan by loan basis. Loans are continually monitored to determine whether they are performing satisfactorily. Performing loans with elevated levels of credit risk may be placed on watch lists depending on the perceived severity of the credit risk. Much of the Banking division’s lending is short term and average loan size is small with the result that individual loans have little capacity to materially impact the group’s earnings. Credit risk reporting Loans and advances to customers, as disclosed in note 11, are analysed between the following categories for credit risk reporting: (i) Neither past due nor impaired These loans and advances to customers reﬂect the application of consistent and conservative lending criteria on inception and the quality and level of security held. The contractual repayments are monitored to ensure that classiﬁcation as neither past due nor impaired remains appropriate and also demonstrates the short-term nature of the lending, with £3.1 billion (2014: £2.9 billion) having a contractual maturity of less than 12 months. The following table shows the ageing of loans and advances to customers split by credit assessment method which are neither past due nor impaired. Within one month Between one and three months Between three months and one year Over one year 31 July 2015 Loans and advances to customers 31 July 2014 Loans and advances to customers Individually assessed £ million 512.0 250.6 729.6 642.4 Collectively assessed £ million 269.4 385.3 960.2 1,660.4 Total £ million 781.4 635.9 1,689.8 2,302.8 Individually assessed £ million 389.9 301.8 699.6 536.6 Collectively assessed £ million 254.0 408.8 865.7 1,514.4 Total £ million 643.9 710.6 1,565.3 2,051.0 2,134.6 3,275.3 5,409.9 1,927.9 3,042.9 4,970.8 126 Close Brothers Group plc Annual Report 2015 The Notes continued 29. Financial risk management continued (ii) Past due but not impaired Loans and advances to customers are classiﬁed as past due but not impaired when the customer has failed to make a payment when contractually due but there is no evidence of impairment. This includes loans which are individually assessed for impairment but where the value of security is sufﬁcient to meet the required repayments. This also includes loans to customers which are past due for technical reasons such as delays in payment processing or rescheduling of payment terms. The following table shows the ageing of loans and advances to customers split by credit assessment method which are past due but for which no impairment provision has been raised. Within one month Between one and three months Between three months and one year Over one year 31 July 2015 Loans and advances to customers 31 July 2014 Loans and advances to customers Individually assessed £ million 31.1 61.9 41.9 13.9 Collectively assessed £ million 14.7 4.9 24.7 28.6 Total £ million 45.8 66.8 66.6 42.5 Individually assessed £ million 43.3 65.4 17.3 8.2 Collectively assessed £ million 15.6 7.7 18.7 31.1 Total £ million 58.9 73.1 36.0 39.3 148.8 72.9 221.7 134.2 73.1 207.3 (iii) Impaired The factors considered in determining whether assets are impaired are outlined in the accounting policies in note 1(j). Impaired loans and advances to customers are analysed according to whether the impairment provisions are individually or collectively assessed. Individually assessed provisions are determined on a case by case basis, taking into account the ﬁnancial condition of the customer and an estimate of potential recovery from the realisation of security. Typically this methodology is applied by the Property business and by the invoice ﬁnance business within Commercial. Collectively assessed provisions are considered on a portfolio basis, to reﬂect the homogeneous nature of the assets. A percentage of the portfolio is impaired by evaluating the ageing of missed payments combined with the historical recovery rates for that particular portfolio as discussed in note 2(a). Typically this methodology is applied by the Retail businesses and the asset ﬁnance business within Commercial. The gross impaired loans are quoted without taking account of any collateral or security held, which could reduce the potential loss. The application of conservative loan to value ratios on inception and the emphasis on the quality of the security provided are reﬂected in the low provision to gross impaired balance ratio (“coverage ratio”) of 35% (2014: 30%). The following table shows gross impaired loans and advances to customers and the provision thereon split by assessment method. Gross impaired loans Provisions Net impaired loans 31 July 2015 Loans and advances to customers 31 July 2014 Loans and advances to customers Individually assessed £ million 69.7 (34.7) Collectively assessed £ million 92.6 (21.4) Total £ million 162.3 (56.1) Individually assessed £ million 89.6 (32.2) Collectively assessed £ million 70.3 (16.1) Total £ million 159.9 (48.3) 35.0 71.2 106.2 57.4 54.2 111.6 The amount of interest income accrued on impaired loans and advances to customers was £14.6 million (31 July 2014: £13.4 million). Close Brothers Group plc Annual Report 2015 127 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s The group holds collateral against loans and advances to customers in the form of residential and commercial property, charges over business assets such as equipment, inventory and accounts receivable. Analysis by LTV ratio is provided below based on the group’s lending facilities to customers where the exposure at origination exceeded £1.0 million, excluding Property facilities written pre 2009. Lending below this threshold has greater homogeneity predominately in the motor and premium ﬁnance businesses with typical LTV ratio between 80% to 90%. The value of collateral used in determining the LTV ratio is based upon data captured at loan origination, or where available, a more recent updated valuation. Gross loans and advances to customers where exposure at origination exceeded £1.0 million: LTV Less than 70% 70% to 90% Greater than 90% At 31 July 2015 LTV Less than 70% 70% to 90% Greater than 90% At 31 July 2014 Asset ﬁnance £ million Invoice ﬁnance £ million Property £ million Total £ million 59.3 75.5 88.2 149.8 126.9 2.3 1,002.6 20.3 – 1,211.7 222.7 90.5 223.0 279.0 1,022.9 1,524.9 Asset ﬁnance £ million 45.9 44.5 54.5 Invoice ﬁnance £ million 156.5 102.4 5.1 Property £ million Total £ million 850.3 18.2 4.0 1,052.7 165.1 63.6 144.9 264.0 872.5 1,281.4 Financial assets: Settlement balances Credit risk management and monitoring The credit risk presented by settlement balances in the Securities division is limited as such balances represent delivery versus payment transactions where delivery of securities occurs simultaneously with payment. The credit risk is therefore limited to the change in market price of a security between trade date and settlement date and not the absolute value of the trade. Winterﬂood is a market-maker and trades on a principal only basis with regulated counterparties including stockbrokers, wealth managers, institutions and hedge funds who are either authorised and regulated by the PRA and/or FCA or equivalent regulator in the respective country. Credit risk reporting Settlement balances are classiﬁed as neither past due nor impaired when the respective trades have not yet reached their settlement date. Settlement balances are classiﬁed as past due but not impaired when trades fail to be settled on their contractual settlement date. The credit risk presented by settlement balances which are past due is mitigated by the delivery versus payment mechanism, as well as by Winterﬂood trading only with regulated counterparties. Counterparty exposure and settlement failure monitoring controls are in place as part of an overall risk management framework and settlement balances past due are actively managed. The following table shows the ageing of settlement balances: Within one month Between one and three months Between three months and one year Over one year 31 July 2015 31 July 2014 Neither past due nor impaired £ million 378.9 – – – Past due but not impaired £ million 16.2 1.0 0.9 1.3 Neither past due nor impaired £ million 445.3 – – – Total £ million 395.1 1.0 0.9 1.3 Past due but not impaired £ million 14.7 1.9 2.9 1.0 Total £ million 460.0 1.9 2.9 1.0 378.9 19.4 398.3 445.3 20.5 465.8 128 Close Brothers Group plc Annual Report 2015 The Notes continued 29. Financial risk management continued (d) Market risk Market risk is the risk that a change in the value of an underlying market variable, such as interest or foreign exchange rates, will give rise to an adverse movement in the value of the group’s assets and arises primarily in the Securities division. Interest rate risk The group’s exposure to interest rate ﬂuctuations relates primarily to the returns from its capital and reserves. The group’s policy is to match repricing characteristics of assets and liabilities naturally where possible or by using interest rate swaps where necessary to secure the margin on its loans and advances to customers. These interest rate swaps are disclosed in note 14. The sensitivities below are based upon reasonably possible changes in interest rate scenarios, including parallel shifts in the yield curve. At 31 July 2015 changes in interest rates compared to actual rates would increase/(decrease) the group’s annual net interest income by the following amounts: 1.0% increase 0.5% decrease 2015 £ million 4.3 (2.2) 2014 £ million 4.2 (2.1) At 31 July 2015 changes in interest rates compared to actual rates would increase/(decrease) the group’s equity by the following amounts: 1.0% increase 0.5% decrease 2015 £ million 11.3 (5.7) 2014 £ million 12.6 (6.3) Foreign currency risk The group has a limited number of currency investments and has chosen not to hedge these exposures. These investments are predominantly in euros. Foreign exchange differences which arise from the translation of these operations are recognised directly in equity. At 31 July 2015 a change in the euro exchange rate would decrease the group’s equity by the following amounts: 20% strengthening of sterling against the euro 2015 £ million (5.6) 2014 £ million (5.3) The group has additional material currency assets and liabilities primarily as a result of treasury operations in the Banking division. These assets and liabilities are matched by currency, using exchange rate derivative contracts where necessary. Details of these contracts are disclosed in note 14. Other potential group exposures arise from share trading settled in foreign currency in the Securities division, and foreign currency equity investments. The group has policies and processes in place to manage foreign currency risk, and as such the impact of any reasonably expected exchange rate ﬂuctuations would not be material. Market price risks Trading financial instruments: Equity shares and debt securities The group’s trading activities relate to Winterﬂood. The following table shows the group’s trading book exposure to market price risk. For the year ended 31 July 20151 Equity shares Long Short Debt securities Long Short 1 2015 exposures exclude Seydler which was disposed of in January 2015. Highest exposure £ million Lowest exposure £ million Average exposure £ million Exposure at 31 July £ million 53.7 44.0 27.7 9.5 50.2 56.2 14.0 2.9 37.1 16.2 20.9 25.4 27.5 (2.1) 31.1 14.1 17.0 14.1 13.7 0.4 Close Brothers Group plc Annual Report 2015 129 For the year ended 31 July 2014 Equity shares Long Short Debt securities Long Short Highest exposure £ million Lowest exposure £ million Average exposure £ million Exposure at 31 July £ million 70.4 34.3 37.1 11.0 91.3 100.3 27.4 21.8 53.5 17.6 35.9 47.6 55.1 (7.5) 56.5 15.6 40.9 48.6 34.3 14.3 With respect to the long and short positions on debt securities £nil and £nil (2014: £2.7 million and £5.1 million) were due to mature within one year respectively. The average exposure has been calculated on a daily basis. The highest and lowest exposures occurred on different dates and therefore a net position of these exposures does not reﬂect a spread of the trading book. Based upon the trading book exposure given above, a hypothetical fall of 10% in market prices would result in a £1.7 million decrease (2014: £4.1 million decrease) in the group’s income and net assets on the equity trading book and a £nil impact (2014: £1.4 million decrease) on the debt securities trading book. However, the group’s trading activity is mainly market- making where positions are managed throughout the day on a continuous basis. Accordingly the sensitivity referred to above is purely hypothetical. Non-trading financial instruments Net gains and losses on non-trading ﬁnancial instruments are disclosed in notes 12 and 13. (e) Liquidity risk Liquidity risk is the risk that liabilities cannot be met when they fall due or can only be met at an uneconomic price and arises mainly in the Banking division. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i The group has a prudent liquidity position with total available funding at 31 July 2015 of £7.5 billion (31 July 2014: £7.1 billion). This funding is signiﬁcantly in excess of its loans and advances to customers at 31 July 2015 of £5.7 billion (31 July 2014: £5.3 billion). The group has a large portfolio of high quality liquid assets principally including cash placed on deposit with the Bank of England and gilts. The group measures liquidity risk with a variety of measures including regular stress testing and cash ﬂow monitoring, and reporting to both the group and divisional boards. The following table analyses the contractual maturities of the group’s on-balance sheet ﬁnancial liabilities on an undiscounted cash ﬂow basis. l S t a t e m e n t s At 31 July 2015 Settlement balances Deposits by banks Deposits by customers Loans and overdrafts from banks Debt securities in issue Loans from money brokers against stock advanced Subordinated loan capital Derivative ﬁnancial instruments Other ﬁnancial liabilities On demand £ million In less than three months £ million In more than three months but not more than six months £ million In more than six months but not more than one year £ million In more than one year but not more than ﬁve years £ million In more than ﬁve years £ million – 11.5 149.9 8.6 – – – – 32.9 376.5 1.0 832.8 99.4 10.1 – 1.7 7.7 64.9 – 17.6 954.8 124.1 9.3 – 4.5 1,431.1 0.3 19.3 – 0.5 1,191.8 152.6 1,124.2 – – 1.8 2.7 – 1.7 4.0 1.3 – 13.6 25.4 1.8 – – – – 311.6 – 65.4 5.9 0.2 Total £ million 376.5 35.1 4,560.4 385.0 1,474.5 – 82.4 44.8 103.8 Total 202.9 1,394.1 1,110.3 1,462.2 2,509.9 383.1 7,062.5 130 Close Brothers Group plc Annual Report 2015 The Notes continued 29. Financial risk management continued At 31 July 2014 Settlement balances Deposits by banks Deposits by customers Loans and overdrafts from banks Debt securities in issue Loans from money brokers against stock advanced Subordinated loan capital Derivative ﬁnancial instruments Other ﬁnancial liabilities On demand £ million 0.4 21.1 165.4 4.4 – 28.4 – – 16.2 In less than three months £ million 443.7 20.0 1,263.5 5.0 10.6 – 2.8 13.3 97.7 In more than three months but not more than six months £ million In more than six months but not more than one year £ million In more than one year but not more than ﬁve years £ million – 6.1 370.2 – 10.0 – 2.6 1,203.6 – 369.3 – – 1,601.0 – 784.1 – – 6.3 1.0 – 2.8 10.9 0.3 – 22.5 29.6 0.2 In more than ﬁve years £ million – – – – 323.4 – 103.3 13.6 – Total £ million 444.1 49.8 4,603.7 9.4 1,497.4 28.4 131.4 73.7 115.4 Total 235.9 1,856.6 393.6 1,589.5 2,437.4 440.3 6,953.3 Derivative ﬁnancial instruments in the table above includes net currency swaps. The following table shows the currency swaps on a gross basis: At 31 July 2015 At 31 July 2014 In more than three months but not more than six months £ million 1.8 6.4 In more than six months but not more than one year £ million 4.0 47.9 In more than one year but not more than ﬁve years £ million 25.4 29.6 In less than three months £ million 174.3 210.3 On demand £ million – 13.8 In more than ﬁve years £ million 5.9 13.6 Total £ million 211.4 321.6 30. Post balance sheet event On 14 September 2015, the group agreed the sale of its corporate advice and investment management activities, which are part of the Asset Management division, to JLT Beneﬁt Solutions Ltd. The activities disposed of represented net assets of £0.3 million and operating proﬁt before tax of £0.7 million for the year ended 31 July 2015. The timing for completion is subject to the satisfaction of customary conditions. Close Brothers Group plc Annual Report 2015 131 31. Investments in subsidiaries In accordance with section 409 of the Companies Act 2006 the following is a list of the group’s subsidiaries at 31 July 2015 which are all wholly-owned and incorporated in the UK unless otherwise stated. Group Close Brothers Holdings Limited Close Derivatives Limited Close Securities (Germany) Limited Close Securities Holdings Limited Banking Air & General Finance Limited Armed Services Finance Limited Brook Funding (No.1) Limited1 CBM Holdings Limited CLL I Limited Close Asset Finance Limited Close Brewery Rentals Limited Close Brothers Asset Finance GmbH (Germany) Close Brothers Factoring GmbH (Germany) Close Brothers Finance plc Close Brothers Limited Close Brothers Military Services Limited Close Business Finance Limited Close Credit Management (Holdings) Limited Close Finance (CI) Limited (Jersey) Close International Bank Holdings Limited (Guernsey) Close Invoice Finance Limited Close Leasing Limited Close Motor Finance Limited Close PF Funding I Limited1 Close Trust Nominees Limited Colomberie Finance Limited Commercial Acceptances Limited Commercial Finance Credit Limited Commercial Vehicle Solutions Limited Banking continued Ecasks Limited Kingston Asset Finance Limited Kingston Asset Leasing Limited Metropolitan Factors Limited Micgate Holdings (UK) Limited Rodney Road Car Park Limited Surrey Asset Finance Limited Securities W.S. (Nominees) Limited Winterﬂood Client Nominees Limited Winterﬂood Gilts Limited Winterﬂood Securities Holdings Limited Winterﬂood Securities Limited Asset Management Cavanagh Financial Management Limited Chartwell Private Client Limited Close Asset Management Holdings Limited Close Asset Management Limited Close Asset Management (UK) Limited Close Brothers Properties Guernsey Limited (Guernsey) Close International Asset Management Holdings Limited (Guernsey) Close Investments Limited Close Portfolio Management Limited Close Properties Jersey Limited (Jersey) CPRM Limited (70%) Lion Nominees Limited Mackay Stewart and Brown Limited OLIM Limited Place Campbell Close Brothers Limited (50% joint venture) 1 The share capital of these securitisation vehicles is not owned by the group, but these vehicles are included in the consolidated ﬁnancial statements as they are controlled by the group. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 132 Close Brothers Group plc Annual Report 2015 Investor Relations Financial calendar (provisional) Event Annual General Meeting First quarter trading update Final dividend payment Country-by-country reporting1 Pre-close trading update Half year end Interim results Third quarter trading update Pre-close trading update Financial year end Preliminary results Date 19 November 2015 November 2015 24 November 2015 31 December 2015 January 2016 31 January 2016 March 2016 May 2016 July 2016 31 July 2016 September 2016 1 In accordance with the Capital Requirements (country-by-country) Regulations 2013, the group will publish additional country-by-country information in respect of the year ending 31 July 2015, on or before 31 December 2015. This information will be available on our website. The ﬁnancial calendar is updated on a regular basis throughout the year. Please refer to our website www.closebrothers.com for up to date details. Cautionary Statement Certain statements included or incorporated by reference within this report may constitute “forward-looking statements” in respect of the group’s operations, performance, prospects and/or ﬁnancial condition. Forward-looking statements are sometimes, but not always, identiﬁed by their use of a date in the future or such words as “anticipates”, “aims”, “due”, “could”, “may”, “will”, “should”, “expects”, “believes”, “intends”, “plans”, “potential”, “targets”, “goal” or “estimates”. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. No responsibility or obligation is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Nothing in this report should be construed as a proﬁt forecast. This report does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares or other securities in the company, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares and other securities of the company. Past performance cannot be relied upon as a guide to future performance and persons needing advice should consult an independent ﬁnancial adviser. Statements in this report reﬂect the knowledge and information available at the time of its preparation. Liability arising from anything in this report shall be governed by English Law. Nothing in this report shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws. Auditor Deloitte LLP Solicitor Slaughter and May Corporate Brokers J.P. Morgan Cazenove UBS Investment Bank Registrar Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Shareholder helpline: 0871 664 0300 (Calls cost 12p per minute plus your phone company’s access charge) From overseas: +44 (0)20 8639 3399 Lines are open from 9.00 am to 5.30 pm Monday to Friday, excluding UK public holidays Email: shareholderenquiries@capita.co.uk Website: www.capitashareportal.com Registered Ofﬁce Close Brothers Group plc 10 Crown Place London EC2A 4FT Telephone: +44 (0)20 7655 3100 Email: enquiries@closebrothers.com Website: www.closebrothers.com Company No. 520241 Printed by Park Communications on FSC® certiﬁed paper. Park is EMAS certiﬁed; its Environmental Management System is certiﬁed to ISO14001. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average 99% of any waste associated with this production will be recycled. This document is printed on Carbon Balanced Regency Satin; a paper made from 10% recycled ﬁbre and 90% virgin ﬁbre sourced from responsibly managed forests, certiﬁed in accordance with the Forest Stewardship Council®. The unavoidable carbon emissions generated during the manufacture and delivery of this document, have been reduced to net zero through a veriﬁed carbon offsetting project. Designed by Emperor Design Consultants Limited. Typeset by RR Donnelley. Photography by Richard Davies. Close Brothers Group plc 10 Crown Place London EC2A 4FT Tel: +44 (0)20 7655 3100 www.closebrothers.com LENDING | DEPOSITS | WEALTH MANAGEMENT | SECURITIES

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