Modern Merchant Banking
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Close Brothers Group plc
Annual Report 2018
This is
Modern
Merchant
Banking
To help the people and
businesses of Britain thrive
over the long term
At Close Brothers we provide financial
support and advice to small
businesses and individuals throughout
the UK. Our clients are the makers of
things, the wealth creators, the
investors and the savers. They are
playing an important role driving
growth in the British economy and we
are supporting them as they grow.
Throughout our history, we have
remained focused on upholding our
traditional values of service, expertise
and relationships. At the same time,
we encourage innovation and support
enterprise, reflecting how our clients
do business.
In all market conditions we remain
focused on providing straightforward
products and services, maintaining a
prudent approach and strong financial
position, and building relationships
that stand the test of time.
Culture is the thing that
should be the most
distinctive about the
organisation and we really
think it is.
Preben Prebensen
Chief Executive
Strategic Report 01
04 Our Businesses
06 Chairman’s Statement
08 Chief Executive’s Statement
14 Business Model
18 Strategy and Key Performance Indicators
20 Principal Risks and Uncertainties
26 Financial Overview
34 Banking
38 Securities
40 Asset Management
44 Sustainability Report
Governance 02
58 Board of Directors
60 Executive Committee
61 Directors’ Report
66 Corporate Governance Report
74 Risk Committee Report
76 Audit Committee Report
78 Nomination and Governance
Committee Report
80 Directors’ Remuneration Report
Financial Statements 03
102 Independent Auditors’ Report
108 Consolidated Income Statement
109 Consolidated Statement of
Comprehensive Income
110 Consolidated Balance Sheet
111 Consolidated Statement of Changes
in Equity
112 Consolidated Cash Flow Statement
113 Company Balance Sheet
114 Company Statement of Changes in Equity
115 The Notes
157 Glossary
159 Investor Relations/Cautionary Statement
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.
Our Purpose,
Strategy, Culture…
The “Why”, “What” and “How”
Our Purpose
“The Why”
To help the people
and businesses of
Britain thrive over
the long term.
Our Culture
“The How”
Combines expertise,
service and
relationships with
teamwork, integrity
and prudence.
Our Strategy
“The What”
To provide exceptional
service to our customers
and clients across
lending, savings,
trading and wealth
management.
Close Brothers’ purpose is to help
the people and businesses of Britain
thrive over the long term.
To achieve this, all of our diverse,
specialist businesses have a deep
industry knowledge so they can
understand the challenges and
opportunities that our customers and
clients face. We support the unique
needs of our customers and clients
to ensure that they thrive, rather
than simply survive, whatever
the market conditions.
We believe in putting our customers
and clients first, and we have
developed a way of describing our
approach to ensure that we can
always do this; we call it “the why”,
“the what” and “the how”.
The “why” is our purpose, the “what”
is our strategy and the “how” is our
culture, and these important pillars
are at the heart of our organisation.
Our Culture
Expertise
Integrity
We are committed to fostering a
culture that attracts talent, grows
and builds the expertise of our
employees.
We insist on trustworthy behaviour
and always acting with integrity
– “doing the right thing”, internally
and externally.
Prudence
We take a prudent, robust and
transparent approach to risk
management.
Teamwork
Service
We promote teamwork in a fair
and open environment, where
individuals and their contributions
are valued and respected.
We care about delivering excellent
service and thinking that’s both
entrepreneurial and disciplined.
Relationships
We take the time to understand and
build strong long-term relationships
with our clients, customers and all
our stakeholders.
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Close Brothers Group plc
| Annual Report 2018
01
Financial Highlights1
for the year ended 31 July 2018
Adjusted2 operating profit
£278.6m
2017: £268.7m
Adjusted3 basic earnings per share
140.2p
2017: 133.6p
2018
2017
2016
2015
2014
£278.6m
£268.7m
£233.6m
£224.9m
£193.7m
2018
2017
2016
2015
2014
140.2p
133.6p
128.4p
120.5p
101.0p
Return on opening equity4
Ordinary dividend per share5
17.0%
2017: 18.1%
2018
2017
2016
2015
2014
63.0p
2017: 60.0p
17.0%
18.1%
18.9%
19.5%
17.9%
2018
2017
2016
2015
2014
63.0p
60.0p
57.0p
53.5p
49.0p
Operating profit before tax
Basic earnings per share
Profit attributable to shareholders
£271.2m
136.2p
£202.3m
2017: £262.5m
2017: 130.2p
2017: £191.2m
1 Financial Highlights with the exception of profit attributable to shareholders
presented on the basis of continuing operations, which exclude the unsecured retail
point of sale finance business classified as a discontinued operation for the 2017
and 2018 financial years. See page 27 for more details on the basis of presentation.
2 Adjusted operating profit/(loss) is stated before amortisation of intangible assets
on acquisition of £7.4 million (2017: £6.2 million), exceptional items of £nil
(2017: £nil), and loss from discontinued operations of £2.9 million (2017: £3.9 million).
3 Excludes amortisation of intangible assets on acquisition, discontinued operations
and the tax effect of such adjustment.
4 Return on opening equity calculated as adjusted operating profit after tax and
non-controlling interests on opening equity less non-controlling interests.
5 Represents the final dividend proposed for the respective years together with
the interim dividend declared and paid in those years.
Front cover:
Photographed on location at Bromford Iron & Steel.
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Close Brothers Group plc
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Annual Report 2018
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Strategic Report
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Close Brothers Group plc
| Annual Report 2018
03
Our Culture
Expertise
We are committed to fostering a
culture that attracts talent, grows
and builds the expertise of our
employees.
Photographed on location at Bromford Iron & Steel.
04
Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Our Businesses
Specialist
Businesses
Close Brothers is a leading UK merchant
banking group providing lending, securities
trading and wealth management services.
We operate principally in the UK and
employ around 3,300 people.
Banking Read more about Banking
See pages 34 to 37
Retail
Commercial
Adjusted operating profit1
£81.1m
The Retail segment provides loans to
predominantly retail customers, through
a network of intermediaries.
The Motor Finance business provides
point of sale finance for the acquisition of
predominantly used cars, motorcycles
and light commercial vehicles. It operates
through a network of c.7,000 independent
motor dealers and has approximately
260,000 customers in the UK and Ireland.
Loan book: £1.7 billion
Average loan size: c.£6,000
Typical LTV2: 80-85%
The Premium Finance business
finances insurance payments for over two
million companies and individuals, via a
network of c.1,700 insurance brokers,
allowing their customers to spread the
cost of insurance premiums over a
number of instalments.
Loan book: £1.0 billion
Average loan size: c.£600
Typical LTV2: 90-95%
Adjusted operating profit
£76.1m
The Commercial segment lends
principally to SMEs, both through its
direct sales force and via broker
distribution channels.
The Asset Finance business has c.24,000
customers and provides commercial asset
financing, hire-purchase and leasing
solutions for a diverse range of assets and
sectors, including the financing of
commercial vehicles, machine tools,
contractors’ plant, printing equipment,
aircraft and medical equipment. Our highly
specialist sales force operates through 15
offices throughout the UK and Ireland.
Loan book: £2.1 billion
Average loan size: c.£40,000
Typical LTV2: 85-90%
The Invoice Finance business works
with c.2,300 small businesses, providing
debt factoring, invoice discounting and
asset-based lending, and also includes
our smaller specialist businesses such as
Novitas Loans, a specialist provider of
finance to the legal profession, and
Brewery Rentals, which provides solutions
for brewery equipment and container
maintenance in the UK and Germany.
Loan book: £0.7 billion
Average loan size: c.£400,000
Typical LTV2: 80%
Property
Operating profit
£94.6m
The Property business specialises in
short-term residential development
finance, refurbishment and bridging loans
in London, the South East and selected
regional locations. We lend to c.700
professional property developers with a
focus on small to medium-sized
residential developments.
Loan book: £1.8 billion
Average loan size: c.£1.4 million
Typical LTV2: 50-60%
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Close Brothers Group plc
| Annual Report 2018
05
Securities Read more about Securities
See pages 38 and 39
Asset Management Read more about Asset Management
See pages 40 and 41
Photographed on location at Alicat Workboats Ltd.
Winterflood
Operating profit
£28.1m
Asset Management
Adjusted operating profit
£23.1m
Our Securities division comprises
Winterflood, a leading UK market-maker
for retail stockbrokers and institutions.
Winterflood deals in c.15,000 securities in
the UK and overseas, and trades with
over 600 retail stockbrokers, wealth
managers, platforms, institutional asset
managers and other market
counterparties, providing continuous
liquidity through our market-leading
execution services, supported by our
strong proprietary technology. Our traders
have extensive experience of executing
orders in a range of market conditions,
enabling us to trade successfully and
profitably over many years.
Average bargains per day: c.68,000
Total counterparties: c.600
Close Brothers Asset Management
provides financial advice and investment
management services to private clients in
the UK. We offer financial planning advice
with over 110 professional advisers across
the country. We also provide a range of
investment management services,
including full bespoke management,
managed portfolios and funds, distributed
both directly via our own advisers and
bespoke investment managers, and
through third party IFAs.
Total client assets: £12.2 billion
Managed assets: £10.4 billion
Note:
Loan to value ratios are for illustrative purposes only and may not be representative of all
loan types. The profile of individual loans may vary significantly.
1 Presented as continuing operations excluding the unsecured retail point of sale
finance business, which has been classified as a discontinued operation in the
group’s income statement.
2 Typical LTV on new business. Motor Finance LTV is the average LTV in the UK, based
on the retail price of the vehicle financed. Premium Finance LTV is based on premium
advanced.
06
Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Chairman’s Statement
Strong and distinctive
Culture
Having completed my first full year as
chairman of the board, I am delighted
to introduce this year’s Annual Report.
This has been another successful year for
Close Brothers, as we have continued to
deliver strong returns to our shareholders,
while maintaining high levels of service for
our customers and partners and strong
engagement and commitment from our
employees.
The group has delivered continued
growth in profit and earnings, with a
strong return on opening equity of 17.0%.
The Banking businesses have continued
to deliver growth at good returns in a
competitive market. Winterflood achieved
another strong year and the Asset
Management business has made
significant progress with strong growth
in both client assets and profits.
The board is pleased to recommend a
final dividend of 42.0p per share. If
approved at the Annual General Meeting,
this will take the full-year dividend to
63.0p, a 5% increase on last year, in line
with our progressive dividend policy.
Dividend per share
63.0p
2017: 60.0p
Business Model and Strategy
Close Brothers has a distinctive and
long-established business model, and we
take a long-term, sustainable approach to
every aspect of our business. This means
maintaining prudent and consistent
underwriting standards, even in
competitive markets, treating our
customers and partners fairly and
supporting and developing our
employees. The business has continued
to invest for the future so that we can
continue to deliver value to our customers
and maximise opportunities over the
long term.
We remain strongly committed to this
distinctive model, which is deeply
embedded in the organisation and in our
corporate culture. At the same time, we
constantly challenge ourselves on
strategy to ensure that our business
continues to meet customers’ needs and
maximise our business opportunities in
the longer term. The board has spent
significant time debating the risks and
opportunities that arise from changing
customer behaviour, technology,
regulation and the wider economic and
political environment, to ensure the
decisions we make today continue to
deliver value in years to come.
A Strong and Distinctive Culture
Across its diverse businesses and
employee base, the group has a strong
and distinctive culture which recognises
both a common sense of purpose and
the differentiation of our individual
businesses. During the last year the
board has overseen work to develop a
statement of the group’s overriding
purpose and the cultural attributes which
support it: service, expertise and
relationships together with teamwork,
prudence and integrity.
These help us to define and articulate the
common attributes which underpin our
long track record of acting ethically and
responsibly in our dealings both with
external stakeholders and with each
other. They support the strong reputation
we have built with customers, clients,
partners, and other stakeholders, which is
critical to the long-term sustainability of
our business.
Customer Engagement
In the last year I have had the opportunity
to experience first hand the genuine
engagement our people have with
customers and partners across our
businesses, and the diversity of our
customer base. In all parts of our
business, our personal approach and
local presence give us a deep
understanding of our customers’ needs
and what they value most in our
interaction with them.
During the year we have further
formalised our collection and analysis
of customer feedback. This has helped
us to understand better where our
personal service matters most, and
where we can best use technology to
improve our customers’ experience
and serve them more effectively
— both now and in the future.
A Talented and Diverse Workforce
I have also been deeply impressed by
the continued passion and engagement
of our people, in serving our clients and in
doing the right thing for the organisation
and for the communities we interact with.
Building a deep and diverse talent pool,
and maintaining the engagement of our
people, remains a core strategic priority
for the group.
We also continue to make good progress
on increasing the diversity of our
workforce. During the year we have
become signatories of the Women in
Finance Charter, with a target of 30%
female senior managers by 2020, and
have further initiatives in place to extend
our diversity beyond gender and to
support social mobility.
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Close Brothers Group plc
| Annual Report 2018
07
We remain strongly
committed to our
distinctive model, which is
deeply embedded in the
organisation and in our
corporate culture.
Michael N. Biggs
Chairman
Our wider corporate responsibility is
important to our people, and we maintain
a range of programmes to support the
causes that matter most to them, as well
as promoting charitable work and
community engagement amongst our
wider employee base. Some of these are
detailed further in the Sustainability
Report on pages 44 to 54.
Board Changes
During the year, we announced that
Jonathan Howell would be stepping down
from his role as group finance director
following the Annual General Meeting in
November, and on behalf of the board
I would like to thank him for his very
substantial contribution to the group over
the last 10 years.
We were pleased to appoint Mike Morgan,
chief financial officer of the group’s
Banking division, as his successor
following an extensive search process.
Mike brings a wealth of experience and
deep knowledge of the group, and his
appointment ensures strong continuity in
the management team.
Our Employees
Finally, I would personally like to thank all
of our employees for their hard work and
very significant contribution over the last
year. Their relentless engagement and
support is critical to delivering service to
our clients and continuing to help the
people and businesses of Britain thrive
over the long term.
Michael N. Biggs
Chairman
25 September 2018
Photographed on location at Alicat Workboats Ltd.
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Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Chief Executive’s Statement
Managing for the
Long term
I am pleased to report another good
performance, achieving both strong
profitability and significant strategic
progress in the last financial year. All of our
businesses have continued to maximise
performance, while at the same time
focusing on opportunities for future years.
The consistent application of our business
model underpins our long track record of
performance in a range of market
conditions. We continue to prioritise
margins and underwriting over growth,
and we maintain our investment through
the cycle and for the long term. We
maintain strong funding and capital
positions and a prudent level of dividend
cover, which supports a long track record
of holding or increasing our dividend.
Our strategic priorities are clear and
unchanged: to protect, improve and
extend our successful business model,
providing exceptional service to our
customers and clients across lending,
savings, trading and wealth management.
Together with our distinctive culture, this
ensures that we can continue to deliver
on our collective purpose over the
long term.
Strong, Sustainable Profitability
The group achieved another year of
strong profitability, with adjusted
operating profit up 4% to £279 million and
a return on opening equity of 17.0%,
reflecting good performance in all three of
our divisions. On a statutory basis,
operating profit before tax from continuing
operations increased 3% to £271 million.
In Banking we achieved 2% growth in
adjusted operating profit to £252 million.
We have seen no significant change in the
operating environment for our lending
businesses, and the market overall
remains competitive. We continue to
focus on maintaining our prudent
approach to lending, evidenced by our
strong net interest margin at 8.0%, and
conservative loan to value ratios across
our businesses. The credit environment
remains benign, and bad debts have
remained near historical lows with no
significant change in credit performance
across the portfolio.
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Close Brothers Group plc
| Annual Report 2018
09
Return on opening equity
17.0%
2017: 18.1%
Adjusted basic earnings
per share
140.2p
2017: 133.6p
Retaining and attracting
engaged and expert
employees is critical to the
delivery of our service
proposition to customers.
Preben Prebensen
Chief Executive
Notwithstanding our disciplined
approach, we have achieved another year
of loan book growth, with underlying
growth broadly in line with last year at
6.6%. This reflects our strong customer
proposition and the diversification benefits
of our loan portfolio, with our core
Property, Premium and Invoice Finance
businesses in particular continuing to
achieve good growth. Our Asset Finance
business also grew, despite significant
competition in this market, while the
Motor Finance loan book contracted
slightly. We have also seen an increasing
contribution from some of our smaller
specialist businesses.
Winterflood delivered another strong
result, with operating profit in line with the
prior year at £28 million, benefiting from
consistently high trading activity across
the UK market. Trading performance was
consistently strong throughout the year,
with no loss days.
The Asset Management business has
moved forward significantly in the last
year, reporting 17% growth in managed
assets, which now exceed £10 billion, and
a 33% increase in adjusted operating
profit to £23 million. This reflects good
new business levels across both our
direct and intermediated distribution
channels, and continued strong demand
for both our advice and investment
management product offerings.
Managing our Business for the
Long Term
We take a long-term approach to
managing our business, ensuring that our
lending criteria, funding and capital
position are sustainable as the market
environment changes. This in turn
allows us to deliver good returns to
shareholders and support our customers
in a wide range of market conditions.
During the year, we further strengthened
and diversified our funding position, and
we have maintained a strong capital
position, with a common equity tier 1
capital ratio well ahead of minimum
requirements at 12.7%.
We also work continuously to respond
to evolving regulatory requirements. The
last year has seen the successful
implementation of a number of regulatory
initiatives, including GDPR and MiFID II,
as well as the transition to IFRS 9. We are
also investing in cyber security to ensure
we protect our business and our
clients’ data.
We continue to carefully monitor
developments with regard to the UK’s exit
from the European Union.
Service, Expertise and Relationships
Providing exceptional service to our
customers and clients is at the heart of
our strategy, and manifests itself in
long-term customer relationships, high
levels of repeat business and strong net
promoter scores across our businesses.
Our core values of service, expertise and
relationships are central to our proposition
to customers and our corporate culture,
and we operate in markets where high
quality, personal service is a real and
sustainable differentiator.
Our customers are varied and diverse,
comprising over two million individuals
and SMEs, across a range of both
regulated and unregulated financial
services. We access our clients both
directly and through a wide network of
intermediaries and distribution partners.
Across our group we have close to 900
customer-facing staff, delivering a
tailored, personal service proposition to
their clients and intermediaries.
During the last year we have undertaken a
significant review to understand better the
evolving needs of our customer base,
making it easier for them to do business
with us, and make better use of
technology. This has included a detailed
mapping of the customer journey across
our Retail businesses, resulting in a
number of process enhancements. We
have also rolled out an extensive “Voice of
the Customer and Partner” programme,
creating a framework to more formally
listen, analyse and act upon feedback
from our customers and partners.
Retaining and attracting engaged
and expert employees is critical
to the delivery of our service
proposition to customers, and we are
pleased that our regular employee
surveys continue to demonstrate
strong employee engagement.
Our distinctive culture is the foundation of
our organisation, which unites our people,
our strategy, and our collective sense of
purpose. During the year we have
conducted an extensive piece of work to
articulate and define the cultural attributes
which unite our workforce, and have
added prudence, integrity and teamwork
to our long standing core values of
service, expertise and relationships.
Together these define our culture and the
positive behaviours that underpin the high
service levels we deliver to our customers.
In the last year we have also formalised
our corporate purpose statement – to
help the people and businesses of Britain
thrive over the long term – which has
generated strong engagement and
positive feedback from employees
across the group.
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Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Chief Executive’s Statement continued
Our strategic priorities remain
unchanged: to protect, improve
and extend our model to deliver
long-term value.
Preben Prebensen
Chief Executive
Photographed on location at Biggin Hill Heritage Hangar Ltd.
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Close Brothers Group plc
| Annual Report 2018
11
Investing for the Long Term
Maintaining our investment through the
cycle is critical to sustaining high levels of
service for customers and adapting our
offering as their needs evolve. We have a
number of investment programmes under
way to enhance our customer proposition
and maximise the potential of our
business for the long term.
Our ongoing investment in the Premium
Finance business and associated
technology has supported strong new
business levels in recent years. We
have also commenced a multi-year
investment programme in our Motor
Finance business, to enhance our
service to dealers and end customers,
and respond to evolving customer
behaviour in this market.
We are also investing to optimise our
funding and capital efficiency. Next year
we will roll out our new deposit platform,
which will enable us to provide a wider
range of retail deposit products and an
online offering, while further improving the
customer experience. We are also making
good progress on developing the models,
systems and processes required to use
the Internal Ratings Based (“IRB”)
approach, which will optimise our capital
position and better reflect the risk profile
of our lending portfolio longer term.
We recognise that the disciplined
management of costs is critical to our
ability to maintain profitability and invest
through the cycle. We remain focused on
controlling our expenditure alongside
continued investment, while maintaining
the high service levels and personal touch
which are at the heart of our client
proposition.
Expanding to Maximise our Potential
We are constantly looking to maximise
market opportunities for our businesses,
both in existing and new markets. In
recent years this has included the
expansion of our Property business into
UK regional markets, focusing on
commuter hubs around major cities
where there is strong, structural demand
for new family housing. The last year has
also seen the successful expansion of our
Invoice Finance business, and growth in
the Brewery Rentals business which
provides financing and servicing of beer
kegs and casks to the brewery industry.
In the 2017 financial year we acquired
Novitas, a specialist provider of loans to
the legal profession. The business has
seen strong growth since acquisition and
expansion of its product offering in the
litigation finance market with a loan book
of over £80 million at the year end.
Winterflood is diversifying its income by
expanding its presence in the institutional
market, and we continue to develop
Winterflood Business Services, which
provides outsourced dealing and
execution services to fund managers
in the UK.
We have seen strong growth in our Asset
Management business with net inflows
exceeding £1 billion in the last year. We
continue to see good long-term growth
potential in this business, and have further
expanded its growth capacity by
optimising our adviser force and recruiting
additional portfolio managers.
In addition to maximising growth within
existing markets, we continue to actively
explore new business and adjacent
market opportunities which fit with our
business model and risk appetite and
have a number of new business initiatives
at various stages of maturity.
We are continuing to assess the market
opportunity for asset finance and other
services in the German market, albeit this
remains at an early stage.
On 14 September we announced the sale
of our unsecured retail point of sale
finance business, which had a loan book
at 31 July 2018 of £66.2 million. After
gradually and incrementally developing
this business and assessing the market
opportunity over the last several years, we
have concluded that it does not provide a
long-term fit with our predominantly
secured business model. The sale is
expected to complete in the current
calendar year, subject to regulatory
approval and other customary conditions.
Management Changes
During the year we announced that
Jonathan Howell, group finance director
since 2007, has decided to leave the
group to pursue the next stage of his
career. I would like to extend my personal
thanks to Jonathan for his excellent
contribution over many years.
Mike Morgan, currently chief financial
officer of the group’s Banking division, will
take up the position of group finance
director and I look forward to working
closely with him.
Finally I would like to thank all our
employees who continue to work
relentlessly to support the success of
the group, and to help the people and
businesses of Britain thrive over the
long term.
Outlook
In the Banking division, we will maintain
our disciplined approach and expect
continued growth at good returns
benefiting from the diversity of our
portfolio. Bad debts remain low, with no
significant change in credit performance
to date, and our strong margins and
service led customer relationships
position us well to respond to any change
in market conditions.
Winterflood has performed well since the
financial year end, but remains sensitive
to any change in trading conditions.
In Asset Management, we are focused on
building further scale in the business, by
growing client assets both organically and
through selective hires and opportunistic
acquisitions.
Overall, we remain well positioned to
continue performing well in a range of
market conditions.
Preben Prebensen
Chief Executive
25 September 2018
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Close Brothers Group plc
Close Brothers Group plc
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Annual Report 2018
Annual Report 2018
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Strategic Report
Strategic Report
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Our Culture
Integrity
We insist on trustworthy behaviour
and always acting with integrity
– “doing the right thing” internally
and externally.
Photographed on location at Alicat Workboats Ltd.
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Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Business Model
Close Brothers has an established reputation
as a responsible bank with a distinctive,
prudent business model and a long-term
approach. We focus on providing straight-
forward products and services in sectors
we know and understand, and delivering
quality and reliability for our clients.
Our business model is
based on building leading
positions in specialist
markets. We focus on the
quality and returns of our
business rather than overall
growth or market share.
It provides long-term
returns for our shareholders
while also maintaining a
strong capital base and
balance sheet.
This allows us to reinvest
in our business through
the economic cycle and
consistently support our
clients and customers.
Close Brothers Group plc
| Annual Report 2018
15
The consistent application of
our business model underpins
our long track record of
performance.
Preben Prebensen
Chief Executive
We remain committed to our
traditional values of service, expertise
and relationships alongside teamwork,
integrity and prudence, to help the
people and businesses of Britain
thrive over the long term.
Our Distinctive Approach
• We focus on our core values which drive
strong employee engagement and customer
loyalty and are the foundations of our Modern
Merchant Banking approach.
• Each of our businesses is a specialist in
its own niche market, driven by a strong
customer led proposition and long-term
client relationships.
• Across our businesses we have a deep
knowledge of the industry sectors and asset
classes we serve, which allows us to provide
firmer lending decisions and faster access to
funds when clients need them most.
• We apply our lending criteria consistently at
all stages in the financial cycle, which protects
the quality and returns of our lending while
providing continuity of service for our clients.
• We take a prudent approach to managing
our financial resources. We maintain a prudent
maturity profile, with diverse sources of
funding, and a conservative capital position
throughout the cycle.
• Our lending is predominantly secured, with
conservative loan to value ratios, small loan
sizes and short maturities.
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Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Business Model continued
Long established proven
business model
Driving sustainable outcomes
and business performance
Resulting in positive outcomes
for our stakeholders
Strong customer led proposition
Our specialist expertise and personal
approach give us a deep understanding
of our customers’ needs and values,
which allows us to offer high service
levels and fast, flexible solutions for our
clients and intermediaries.
Disciplined approach
through the cycle
We consistently apply our disciplined
underwriting criteria, conservative loan
to value ratios and strong margin at all
stages of the financial cycle. Combined
with maintaining prudent levels of
funding, liquidity and capital this
ensures we remain resilient in a range
of market conditions.
Continuous investment within
the model
We continue to invest in our businesses
to enhance our customer proposition
and identify new products and
opportunities within the boundaries of
our model. Our focus on quality of
returns and prudent funding and capital
management enables us to reinvest
through the cycle.
Consistent client service in all
market conditions
Our prudent approach to managing our
financial position and capital base
enables us to lend consistently to our
clients under responsible terms in all
market conditions. We are there for our
clients even when others may pull back,
and this has contributed to high repeat
business and strong customer loyalty
across our businesses.
Engaged employees
We continue to recruit, develop and
retain high calibre employees by
recognising their values, supporting and
motivating them to realise their fullest
potential. Our staff underpin our culture
of service, expertise and relationships,
alongside teamwork, integrity and
prudence, and are proud of the positive
impact we have on our clients and the
communities we operate in.
Sustained business performance
Our strong customer focus and
disciplined approach have supported a
consistently strong return on net loan
book at all stages of the financial cycle,
ranging from 2.3% to 3.7% over the last
10 years. Our consistent application of
underwriting discipline and responsible
lending criteria has resulted in a low bad
debt ratio ranging from 0.6% to 2.6%
over the same period.
Strong shareholder returns
We have achieved consistent profitability
and strong returns for shareholders in a
range of market conditions, and continue
to deliver over the long term. This is
reflected in our progressive dividend
policy, which has returned a sustained
and growing dividend to our shareholders
over many years.
Sustained loan book growth
We do not manage our businesses to a
growth target, but instead prioritise the
consistency of our lending criteria and
maintaining our strong returns. The
strength of our client proposition has
supported a loan book growth of between
6% and 23% over the last 10 years across
a range of market conditions.
Strong net inflows
We continue to increase the scale and
profitability of the Asset Management
division through strong net inflows from a
range of channels. This year we generated
net inflows of 12% on opening managed
assets, ahead of our range of between
6% to 10% annually in previous years.
Consistent trading profitability
Winterflood has a long track record of
profitable trading in a wide range of
market conditions, with no loss days in
the last financial year.
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Close Brothers Group plc
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Strong returns
Growth
Good stakeholder outcomes
17.0%1
Return on opening equity, ranging
from 10% to 20% over the last
10 years.
£7.3bn 2
89%
Our loan book is now over £7 billion,
and our lending to SMEs and
individuals has more than trebled over
the last 10 years.
Our latest employee survey once again
demonstrates strong employee
engagement across our businesses, with
an overall score of 89%.
63.0p
Since listing in 1984, our dividend
has grown progressively to 63.0p
in 2018.
12%
Annual net inflows are 12% of opening
managed assets, and have ranged
from 6% to 10% in the previous
four years.
+50
Net promoter scores in excess of +50
across a number of our businesses,
including +50 in Premium Finance, +73 in
retail deposits and +61 in bespoke
asset management, demonstrate
consistently high customer satisfaction.
Read more about our employee engagement
and net promoter scores
See pages 46 and 48
1 Based on results from continuing
operations, excluding the unsecured retail
point of sale finance business, which has
been classified as a discontinued
operation in the group’s income
statement.
2 The loan book at 31 July 2018 excludes
the unsecured retail point of sale finance
loan book of £66.2 million, which was
classified as held for sale at the balance
sheet date.
Photographed on location at
Haynes Ford Ltd.
18
Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Strategy and Key Performance Indicators
Our overriding strategic objective is to
provide exceptional service to our
customers and clients across lending,
savings, trading and wealth management.
Strategic objectives
2018 progress
Future priorities
Protect: A long-term
approach to how we run
our business.
1. Maintain prudent underwriting
and strong margins in our
lending
2. Maintain a sound level of
funding, liquidity and capital
3. Maintain a disciplined
approach to cost management
and operational efficiency
Improve: Engaging and
investing to strengthen
our proposition.
4. Invest in technology, people
and products to improve our
customer proposition and
operating efficiency
5. Help our customers do
business with us by adapting
to their needs and leveraging
new technology
6. Empower our employees
through training, development
and diversity
Extend: Creating future
value through maximising
our potential and
identifying new
opportunities.
7. Maximise the opportunity in
each of our markets, within the
boundaries of the model
8. Identify new products and
adjacent market opportunities
• Maintained disciplined underwriting,
prudent loan to value ratios and strong
margin in a competitive environment.
• Maintained prudent capital position
with good headroom to regulatory
requirements.
• Further strengthened and diversified
funding position with issue of senior
unsecured bond and second motor
securitisation.
• Consistent trading profitability at
Winterflood, with no loss days.
• Successful implementation of MiFID II,
GDPR and IFRS 9 requirements.
• Maintain disciplined underwriting and
margin in competitive environments.
• Maintain capital flexibility in an evolving
regulatory environment and progress
plans towards an Internal Ratings
Based approach.
• Monitor and ensure compliance with
regulatory change, including MiFID II
and the FCA’s key focus areas.
• Monitor developments with the UK’s
exit from the EU, and maintain our
disciplined business model to minimise
any impact.
• Continue to invest in operational
resilience and cyber capabilities.
• Continued high repeat business across
the group.
• Positive feedback from customers and
partners via strong net promoter scores
across a range of our businesses.
• Ongoing investment in Premium
Finance and Motor Finance to improve
customer and intermediary service.
• Investment in a new customer deposit
platform, increasing our range of
deposit products, providing our
customers with more ways to access
us through online self-service channels,
and improving customer experience.
• Developed an extensive Voice of the
Customer and Partner programme to
listen, analyse and act upon feedback
from our customers and partners.
• Strong net inflow levels in Asset
Management from both direct and
intermediated channels.
• Selective regional expansion in
Property Finance targeted at major
cities and family housing with strong
structural demand.
• Novitas contributing strong growth
since acquisition.
• Continued to grow Winterflood’s
volumes in the institutional market.
• Invest in our customer propositions
and technology to improve product
offering, increase customer retention
and generate new income streams.
• Monitor customer needs, preferences
and trends in technology through
research and responding to
customer feedback and engagement
to continue to adapt and compete.
• Ensure we retain and attract staff and
maximise productivity by responding
to employee feedback, training and
developing our people and
empowering them through investment
in tools and technology.
• Maximise lending opportunities
while maintaining disciplined
approach.
• Continue growing client assets and
making opportunistic acquisitions in
Asset Management.
• Continue to identify and explore new
business areas that fit with our
specialist business model and
generate strong returns.
• Develop new customer centric
capabilities in treasury deposit
platform.
• Maximise trading opportunities for
Winterflood in both retail and
institutional markets.
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Creating long-term
shareholder value
Group return on opening
equity2 per cent
2018
2017
2016
17.0
18.1
18.9
Adjusted basic earnings
per share2 pence
Close Brothers Group plc
| Annual Report 2018
19
We take a long term, sustainable approach by focusing on ways
to protect, improve and extend our model. This in turn allows us
to deliver excellent client outcomes, engaged and productive
employees and strong returns to shareholders in a wide range of
market conditions.
Key performance indicators
Common equity tier 1
capital ratio per cent
Funding cover of
loan book per cent
2018
2017
2016
Net interest margin1
per cent
2018
2017
2016
12.7
12.6
13.5
8.0
8.1
8.2
2018
2017
2016
Bad debt ratio1
per cent
2018
2017
2016
132
127
127
0.6
0.6
0.6
140.2
133.6
128.4
63.0
60.0
57.0
Banking expense/income ratio2
per cent
Employee engagement
per cent
2018
2017
2016
49
48
49
2018
2017
89
89
2018
2017
2016
Dividend per share
pence
2018
2017
2016
Net promoter scores
2018
Property repeat business
per cent
Retail deposits
brand
Bespoke asset
management
Premium
Finance
73
61
50
2018
2017
2016
Loan book growth3
per cent
Net inflows
per cent
2018
2017
2016
7
7
12
2018
2017
2016
77
75
57.0
12
9
6
1 The calculation of the net interest margin and bad debt ratio for 2018 and 2017,
excludes the unsecured retail point of sale finance loan book from both the opening
and closing loan book. This does not result in any change to the ratios previously
published for the 2017 financial year.
2 Numbers for 2017 and 2018 are in respect of continuing operations.
3 For 2018, underlying loan book growth of 6.6% excludes the unsecured retail point of
sale finance book of £66.2 million (31 July 2017: £36.7 million) which was held for sale
at 31 July 2018.
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Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Principal Risks and Uncertainties
Risk Management
The group faces a number of risks
in the normal course of business
providing lending, deposit taking,
wealth management services
and securities trading.
As set out in the strategy section on
the previous pages, the protection
of our established business model
is a key strategic objective. As a
result the management of the risks
we face is central to everything we
do. The key elements to the way
we manage risk are as follows:
• Adhering to our established and proven
business model outlined on pages
14 to 17;
• Implementing an integrated risk
management approach based on the
concept of “three lines of defence”; and
• Setting and operating within clearly
defined risk appetites, monitored with
defined metrics and set limits.
Further details on our approach to risk
management are set out on pages 71 and
72. Risk management is overseen by the
board Risk Committee and its key areas
of focus over the last financial year are
set out on pages 74 and 75. We believe
the key risks facing the group include: the
current economic uncertainty, especially
the impact of the UK’s departure from
the EU and how that may impact our
customers; the regulatory landscape
and how it may impact some or all of our
businesses; the competitive environment;
and maintaining operational resilience
in the face of growing cyber threats.
Risks and Uncertainties
The following pages set out 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. While we constantly
monitor our portfolio for emerging risks,
Key:
No change
Risk decreased
Risk increased
the group’s activities, business model and
strategy remain unchanged. As a result,
the principal risks and uncertainties which
the group faces and our approach to
mitigating them remain broadly consistent
with prior years. This consistency in
approach has underpinned the group’s
track record of trading successfully and
supporting our clients over many years.
The summary below should not be
regarded as a complete and
comprehensive statement of all potential
risks and uncertainties faced by the group
but reflect those which the group currently
believes may have a significant impact on
its performance and future prospects.
Risk/uncertainty
Mitigation
Change
Credit losses
As a lender to small businesses and
individuals, the bank is exposed to credit
losses if customers are unable to repay
loans and outstanding interest and fees.
At 31 July 2018 the group had loans and
advances to customers amounting to
£7.3 billion.
The group also has exposure to
counterparties with which it places
deposits or trades, and also has in place
a small number of derivative contracts to
hedge interest rate and foreign exchange
exposures.
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 tenors;
• Lending on a predominantly secured
basis against identifiable and
accessible assets;
• Maintaining rigorous and timely
collections and arrears management
processes; and
• 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 £1.1 billion placed with
the Bank of England;
• Continuous monitoring of the credit
quality of our counterparties within
approved set limits; and
• Winterflood’s trading relating to
exchange traded cash securities being
settled on a delivery versus payment
basis. Counterparty exposure and
settlement failure monitoring controls
are also in place.
Bad debts have again remained low
during the year to 31 July 2018 while
other counterparty exposures are
broadly unchanged with the majority
of our liquidity requirements and
surplus funding placed with the
Bank of England.
We continue to monitor closely the
uncertainty over Brexit combined with
rising consumer debt levels and
potential increases in interest rates.
This uncertainty, combined with the
low level of current credit losses, could
increase the risk of higher credit losses
in the future.
Further commentary on the credit
quality of our loan book is outlined on
pages 34 to 37. Further details on
loans and advances to customers and
debt securities held are in notes 11
and 12 on pages 127 and 128 of the
financial statements.
Our approach to credit risk
management and monitoring is
outlined in more detail in note 28
on page 149.
Close Brothers Group plc
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Risk/uncertainty
Mitigation
Change
Economic uncertainty remains
elevated in our view. While UK
economic performance has remained
resilient in the last year, the current
period of uncertainty is likely to
continue, reflecting both ongoing Brexit
negotiations and wider global events.
Further commentary on the attributes
and resilience of the group’s business
model is shown on pages 14 to 17.
Financial services businesses remain
the subject of significant regulatory
scrutiny. Minimum capital requirements
are increasing as regulatory buffers are
phased in and remain subject to
change by regulators.
In addition to the regulatory
uncertainties associated with Brexit,
there has been growing regulatory
focus on consumer borrowing,
particularly within Motor Finance, and
on customer experience within the
asset management industry.
Economic environment
Any downturn in economic conditions
may 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 credit losses 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
Failure to comply with existing legal,
regulatory or tax requirements, or to react
to changes to these requirements, may
have negative consequences for the group.
Failing to treat customers fairly, to
safeguard client assets or to provide
advice and products which are in clients’
best interests 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 financial
performance, capital and liquidity and
the markets in which we operate.
The group’s business model aims to
ensure that we are able to trade
successfully and support our clients in all
economic conditions. By maintaining a
strong financial position we aim to be able
to absorb short-term economic
downturns, continuing to lend when
competitors pull back and in doing so
build long-term relationships by supporting
our clients when it really matters.
We test the robustness of our financial
position by carrying out regular stress
testing on our performance and financial
position in the event of adverse economic
conditions.
The group seeks to manage these
risks by:
• Providing straightforward and
transparent products and services to
our clients;
• Maintaining a prudent capital position
with headroom to minimum capital
requirements;
• The implementation of appropriate
policies, standards and procedures and
the use of risk-based monitoring
programmes to test adherence;
• The provision of clear advice on legal
and regulatory requirements, including
in relation to the scope of regulatory
permissions;
• Responding in an appropriate, risk-
based and proportionate manner to any
changes to the legal and regulatory
environment and those driven by any
strategic initiatives;
• Investing in training for all staff including
anti-money laundering, bribery and
corruption, conduct risk, data
protection and information security.
Additional tailored training for relevant
employees is provided in key areas
such as complaint handling;
• Maintaining constructive and positive
relationships and dialogue with
regulatory bodies and tax authorities;
and
• Reviewing and approving new products
and services through a clear
governance and approval process.
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Close Brothers Group plc
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Strategic Report
Principal Risks and Uncertainties continued
Risk/uncertainty
Mitigation
Change
Technology and
operational resilience
Robust, contemporary and secure
technology is fundamental to enabling
the group to:
• Provide a high quality customer
experience across our businesses;
• Respond and adapt to emerging
opportunities and risks;
• Protect client and company data; and
• Counter the evolving cyber threat.
Failure to keep up with changing
customer expectations or provide reliable,
secure IT solutions has the potential to
impact group performance.
The group continues to invest in its
technology with investment projects
underway across a number of businesses
in order to enhance our customer offering.
The group has strong governance in
place to oversee its major projects.
We continue to strengthen our cyber
capabilities through further investment in
tools and technical expertise as well as
specific activities designed to mitigate
cyber security risk. In the last year these
have included a company-wide
awareness campaign, phishing exercises
and crisis management simulations.
We have in place, and regularly test,
operational resilience capabilities,
including crisis management, business
continuity and disaster recovery plans.
Competition
The group operates in competitive
markets and experiences high levels of
competition from both traditional and new
players. Currently we are experiencing
particularly high levels of competition
within the Motor Finance business and
the intermediated part of the asset
finance market.
Elevated levels of competition may impact
the group’s ability to write loans at its
desired risk and return criteria, resulting in
lower new business volumes and loss of
market share.
The group’s long track record of
successful trading is supported by a
consistent and disciplined approach to
pricing and credit quality, even in
competitive markets. This allows us to
lend profitably and continue to support
our customers at all stages in the
financial cycle.
We build long-term relationships with our
clients and intermediaries based on:
• The speed and flexibility of services;
• Our local presence and personal
approach;
• The experience of our people and
subject matter experts; and
• Offering tailored and client-driven
product solutions.
This differentiated approach and the
consistency of our lending results in
strong customer relationships and high
levels of repeat business.
We are further protected by the diversity
of our loan book and product portfolio,
which provides resilience against
competitive pressure in any one part
of our markets.
Industry, market and regulatory focus
on operational resilience has increased
during the year. Recent incidences of
operational disruption to financial
services firms and corresponding
customer impact have demonstrated
the heightened importance of
operational resilience.
This remains a key area of focus for
the group, particularly as the rate of
technology-driven disruption, including
the impact and severity of cyber
attacks, continues to increase. We
continue to invest in and upgrade our
IT infrastructure and operating
practices. This will continue to improve
our customer proposition, simplify our
technology architecture and enhance
resilience to cyber attacks.
For further information on our
response to cyber threats see page 75
of the Risk Committee Report.
Despite high levels of competition
across each of our businesses, our
approach remains unchanged as we
focus on supporting our clients,
maintaining underwriting standards
and investing in our business.
Further commentary on the market
environment of the Banking division is
outlined on page 35. Our business
model is set out on pages 14 to 17.
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Risk/uncertainty
Mitigation
Change
Employees
The quality and expertise of our
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;
• Creating an inclusive environment that
nurtures development;
• Implementing succession planning for
key roles;
• Improving our talent pipeline via our
graduate and school leavers
programmes, and training academy in
asset finance;
• Investing in training and development
for all staff; and
• Delivering leadership development
programmes that identify current and
future leaders for the group.
Funding and liquidity
The Banking division’s access to funding
remains key to support our lending
activities and the liquidity requirements
of the group.
Our funding approach is based on the
principle of “borrow long, lend short”. The
average maturity of funding allocated to
the loan book was 23 months at 31 July
2018. This compares to our weighted
average loan maturity of 14 months.
Our funding is diversified both by source
and channel, and by type and tenor.
Liquidity in our Banking division is
assessed on a daily basis to ensure
adequate liquidity is held and remains
readily accessible in stressed conditions.
At 31 July 2018 the group’s funding
position was strong with total available
funding equal to 132% of the loan book.
This provides a prudent level of liquidity to
support our lending activities.
Our policy is to minimise interest rate risk
by matching fixed and variable interest
rate assets and liabilities and using swaps
where appropriate. The capital and
reserves of the group do not have interest
rate liabilities and as such are not hedged.
Foreign exchange exposures are generally
hedged using foreign exchange forwards
or currency swaps with exposures
monitored daily against approved limits.
Winterflood is a market-maker providing
liquidity to its clients in equity and fixed
income instruments. Our trading is
predominantly short term with most
transactions settling within two days.
Trading positions are monitored on a real
time basis.
Market risk
Market volatility impacting equity and
fixed income exposures and/or changes
in interest and exchange rates have the
potential to impact the group’s
performance.
Our highly skilled people are likely to
be targeted by competitors but we are
confident in our ability to retain key
employees.
Further detail on the employee survey
and our investment in our people is
outlined in the Sustainability Report on
pages 44 to 47.
While economic uncertainty always
has the potential to impact funding
markets, the group remains
conservatively funded and continues
to have access to a wide range of
funding sources and products.
We have further diversified our funding
during the year. This diversity of funding
combined with relatively long tenor
when compared to the average
duration of our lending means we are
well placed to meet any future market
challenges or constraints.
Further commentary on funding and
liquidity is provided on pages 30 and
31. Further financial analysis of our
funding is shown in note 19 on page
134 of the financial statements.
The group’s approach and the
underlying risks are unchanged.
Further detail on the group’s exposure
to market risk is outlined in note 28 on
pages 152 to 153 of the financial
statements.
The sensitivity analysis on interest rate
exposures shown in note 28 on page
152 demonstrates the limited level of
exposure to interest rate and foreign
exchange movements.
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Our Culture
Prudence
We take a prudent, robust
and transparent approach
to risk management.
Photographed on location at Biggin Hill Heritage Hangar Ltd.
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Financial Overview
Our resilient business model
continued to deliver another
good performance in the
2018 financial year.
Photographed on location at Castle Air Ltd.
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Robust and
Transparent
Return on opening equity
Adjusted operating profit
17.0%
2017: 18.1%
£278.6m
2017: £268.7m
Close Brothers achieved another year of
strong profitability, reflecting good
performance in all three of our divisions.
The group delivered another good
performance, with adjusted operating
profit up 4% to £278.6 million (2017:
£268.7 million) and statutory operating
profit before tax from continuing
operations up 3% to £271.2 million (2017:
£262.5 million). The operating margin
remained flat on the prior year at 35%
(2017: 35%).
The Banking division continued to
perform well, delivering an adjusted
operating profit of £251.8 million (2017:
£247.4 million), up 2% on the prior year,
with higher income and continued low
bad debts across the businesses.
Winterflood delivered another strong
result, with operating profit of £28.1 million
(2017: £28.1 million), in line with the prior
year. Asset Management continued its
good performance, achieving strong net
inflows, with adjusted operating profit of
£23.1 million (2017: £17.4 million). Group
net expenses, which include the central
functions such as finance, legal and
compliance, risk and human resources,
were broadly unchanged at £24.4 million
(2017: £24.2 million).
Adjusted operating income increased 6%
to £805.8 million (2017: £761.4 million),
driven by good income growth in the
Banking businesses and in Asset
Management.
Adjusted operating expenses increased
6% to £480.5 million (2017: £453.7 million),
with most of the uplift seen in Banking,
where we continue to invest in a number
of business initiatives and infrastructure
projects. In Asset Management costs
also increased, driven by higher staff
costs reflecting ongoing growth in the
business. Overall, both the group’s
expense/income and compensation ratios
were stable at 60% (2017: 60%) and 37%
(2017: 37%) respectively.
The bad debt ratio remained low at 0.6%
(2017: 0.6%), reflecting the continued
prudent application of our lending criteria
and the current benign credit
environment.
The tax charge in the period was £67.0
million (2017: £68.8 million), which
corresponds to an effective tax rate of
25% (2017: 26%), reflecting the reduction
in the corporation tax rate during the year.
As a result, adjusted basic earnings per
share (“EPS”) from continuing operations
increased 5% to 140.2p (2017: 133.6p),
generating a strong return on opening
equity (“RoE”) of 17.0% (2017: 18.1%).
Basic EPS from continuing operations
increased 5% to 136.2p (2017: 130.2p).
Since the financial year end, the group
has announced the sale of its unsecured
retail point of sale finance business, which
has been treated as a discontinued
operation in the income statement for
2018 and in the comparable year, and as
an asset held for sale on the balance
sheet at 31 July 2018. The loss from
discontinued operations was £2.2 million
(2017: £2.8 million) net of tax.
Basic EPS from continuing and
discontinued operations increased 5% to
134.7p (2017: 128.3p).
The board is proposing a final dividend
per share of 42.0p (2017: 40.0p), resulting
in a full-year dividend per share of 63.0p
(2017: 60.0p), an increase of 5% on the
prior year. This reflects our progressive
dividend policy, which aims to provide
sustainable dividend growth year on year,
while maintaining a prudent level of
dividend cover. Subject to shareholder
approval at the Annual General Meeting,
the final dividend will be paid on
20 November 2018 to shareholders on
the register at 12 October 2018.
Basis of Presentation
The group presents its results on
both a statutory and adjusted basis.
Adjusted measures are presented on
a basis consistent with prior periods
and are used for internal management
reporting purposes. Adjusted measures
exclude amortisation of intangible
assets on acquisition, to present
the performance of the group’s
acquired businesses consistent with
its other businesses; any exceptional
items, which are non-recurring and
do not reflect trading performance;
and discontinued operations.
In the 2018 financial year, adjusted
operating profit excludes amortisation of
intangible assets on acquisition of £7.4
million (2017: £6.2 million), exceptional
items of £nil (2017: £nil), and loss from
discontinued operations of £2.9 million
(2017: £3.9 million). Discontinued
operations relate to the unsecured retail
point of sale finance business, which has
been classified as a discontinued
operation in the group’s income
statement for the 2017 and 2018 financial
years. The related assets and liabilities are
classified as held for sale on the group’s
balance sheet at 31 July 2018.
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Financial Overview continued
Group Income Statement
Continuing operations
Adjusted operating income
Adjusted operating expenses
Impairment losses on loans and advances
Adjusted operating profit
Banking
Retail
Commercial
Property
Securities
Asset Management
Group
Amortisation of intangible assets on acquisition
Operating profit before tax
Tax
Profit after tax from continuing operations
Loss from discontinued operations
Loss attributable to non-controlling interests
Profit attributable to shareholders:
continuing and discontinued operations
Adjusted basic earnings per share
(continuing operations)
Basic earnings per share
(continuing operations)
Basic earnings per share
(continuing and discontinued operations)
Dividend per share
Return on opening equity
2018
£ million
2017
£ million
Change
%
805.8
(480.5)
(46.7)
761.4
(453.7)
(39.0)
278.6
251.8
81.1
76.1
94.6
28.1
23.1
(24.4)
(7.4)
271.2
(67.0)
204 .2
(2.2)
(0.3)
202.3
268.7
247.4
82.8
72.6
92.0
28.1
17.4
(24.2)
(6.2)
262.5
(68.8)
193.7
(2.8)
(0.3)
191.2
140.2p
133.6p
136.2p
130.2p
134.7p
128.3p
63.0p
17.0%
60.0p
18.1%
6
6
20
4
2
(2)
5
3
–
33
1
19
3
(3)
5
(21)
–
6
5
5
5
5
To maintain consistency with the income
statement and reflect the group’s
continuing operations, the calculation of
the bad debt ratio, net interest margin and
return on net loan book for the Banking
division excludes the unsecured retail
point of sale finance loan book from
both the opening and closing loan book.
This does not result in any change to
the ratios previously published for the
2017 financial year. Underlying loan book
growth of 6.6% excludes the unsecured
retail point of sale loan book of £66.2
million (31 July 2017: £36.7 million).
Balance Sheet
The structure of our balance sheet remains
unchanged, with the majority of assets and
liabilities relating to our lending activities.
Loans and advances to customers make
up the majority of our assets. These are
c.90% secured and short-term in nature,
with an average maturity of approximately
14 months (31 July 2017: 14 months).
Other items on the balance sheet include
treasury assets held for liquidity purposes,
and settlement balances in our Securities
division. Intangibles, property, plant and
equipment, and prepayments are included
as other assets. Liabilities are
predominantly made up of customer
deposits and both secured and unsecured
borrowings to fund the loan book.
In the year, total assets increased by
£965.8 million to £10.3 billion (31 July
2017: £9.3 billion), driven by loan book
growth in the year, as well as an increase
in treasury assets. Total liabilities
increased £853.1 million to £8.9 billion
(31 July 2017: £8.0 billion), driven by
higher customer deposits and an increase
in borrowings, including the issue of a
senior unsecured bond.
Total equity increased to £1.3 billion
(31 July 2017: £1.2 billion), principally
reflecting profit in the period, partially
offset by dividend payments of £91.0
million. The group’s return on assets
remained broadly stable at 2.0%
(31 July 2017: 2.1%).
IFRS 9
The provisions of IFRS 9 Financial
Instruments apply to the group from
1 August 2018. Under IFRS 9, impairment
losses are recognised in the group’s
financial statements on a forward looking
basis, taking into account both the risk
profile of the loan book and the
macroeconomic outlook at the balance
sheet date. This will result in earlier
recognition of bad debts in the group’s
financial statements, and consequently a
higher balance of bad debt provisions on
the balance sheet, compared to the
incurred loss approach under IAS 39.
The implementation of IFRS 9 is expected
to increase bad debt provisions on the
balance sheet by £59.0 million at 1 August
2018, resulting in a £44.9 million reduction
in shareholders’ equity and a £14.1 million
increase in deferred tax assets.
This increase principally reflects the
additional forward looking provision on
performing and underperforming loans,
as well as a broader definition of default
compared to IAS 39 and the addition of a
macroeconomic overlay.
This corresponds to a 49 bps reduction in
the group’s CET1 capital ratio on a fully
loaded basis, in line with the group’s
expectation of a 45-55 bps impact. The
group will be applying the European
Banking Authority’s transitional
arrangements, which phase in the initial
impact over a period of five years and,
therefore, the impact on the group’s
regulatory capital position in the 2019
financial year will be minimal at 2 bps.
The group will be publishing an IFRS 9
transition document with further details
on the implementation of IFRS 9 in early
November.
Capital
The group’s strong capital generation has
allowed us to support continued loan
book growth in the year while maintaining
capital ratios comfortably ahead of
minimum requirements. Overall, the CET1
capital ratio increased marginally to 12.7%
(31 July 2017: 12.6%), reflecting continued
strong profitability and loan book growth
in the period. The total capital ratio
decreased marginally to 15.0% (31 July
2017: 15.2%).
In the last year, we generated £93.8
million of CET1 capital, reflecting £202.3
million of profit in the year, partly offset by
dividends paid and foreseen of £93.9
million, an increase in intangibles, and
other movements in reserves. As a result,
CET1 capital increased 9% to £1,084.4
million (31 July 2017: £990.6 million).
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Risk weighted assets also increased 9%
to £8.5 billion (31 July 2017: £7.9 billion),
reflecting continued loan book growth
and particularly strong growth in our
property development loan book which
is risk weighted at 150% under the
standardised approach.
Our leverage ratio, which is a transparent
measure of capital strength not affected
by risk weightings, remains very strong at
10.6% (31 July 2017: 10.7%).
These capital ratios remain comfortably
ahead of minimum regulatory
requirements. Our fully loaded minimum
CET1 capital ratio requirement, effective
July 2019, is 9.0%, including all applicable
buffers and a 1.1% pillar 2 add-on, with a
total capital requirement of 13.4%.
Accordingly, we continue to have good
headroom of c.370 bps in our CET1
capital ratio, and c.160 bps in the total
capital ratio.
This leaves us well placed to support
continued growth in the loan book and
absorb any foreseen regulatory changes,
including the proposed Basel 3 reforms
and the impact of IFRS 9.
We are also continuing to develop the
models, systems and processes required
to use the Internal Ratings Based
approach for capital, which we believe will
better reflect the risk profile of our lending
longer term. We currently expect to
submit our formal application to the PRA
during the 2019 calendar year.
Group Balance Sheet
Loans and advances to customers
Treasury assets1
Market-making assets2
Other assets
Total assets
Deposits by customers
Borrowings
Market-making liabilities2
Other liabilities
Total liabilities
Equity
Total liabilities and equity
31 July
2018
£ million
7,297.5
1,435.4
635.8
882.3
31 July
2017
£ million
6,884.7
1,029.0
643.4
728.1
10,251.0
9,285.2
5,497.2
2,501.1
565.5
338.5
5,113.1
2,041.2
556.9
338.0
8,902.3
8,049.2
1,348.7
1,236.0
10,251.0
9,285.2
1 Treasury assets comprise cash and balances at central banks and debt securities held to support lending in the
Banking division.
2 Market-making assets and liabilities comprise settlement balances, long and short trading positions and loans to
31 July
2018
£ million
1,084.4
1,282.3
8,547.5
12.7%
15.0%
10.6%
31 July
2017
£ million
990.6
1,196.2
7,859.0
12.6%
15.2%
10.7%
or from money brokers.
Group Capital Position
Common equity tier 1 capital
Total capital
Risk weighted assets
Common equity tier 1 capital ratio
Total capital ratio
Leverage ratio
Common equity tier 1
capital ratio
12.7%
31 July 2017: 12.6%
Photographed on location at
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Financial Overview continued
Funding
The primary purpose of our treasury
function is to manage funding and
liquidity to support the lending
businesses. We maintain a conservative
approach, with diverse funding sources
and a prudent maturity profile, which
increases resilience and helps to manage
changes in the cost of funding.
Overall, the funding environment
remained favourable during the year. Total
funding increased to £9.6 billion (31 July
2017: £8.8 billion) and accounted for
132% (31 July 2017: 127%) of the loan
book at the balance sheet date. Our
average cost of funding of 1.6% (2017:
1.7%) was marginally below the prior year,
reflecting new lower cost funding,
including a £200 million public motor
securitisation issued in November 2017.
The loan book growth in the year was
primarily funded by an increase in
customer deposits and unsecured
funding. Deposits increased 8% to £5.5
billion (31 July 2017: £5.1 billion) with rises
in both retail and corporate deposits.
Total funding
£9.6bn
Treasury assets
£1.4bn
31 July 2017: £8.8bn
31 July 2017: £1.0bn
The latter represents around two-thirds of
the deposit base. Unsecured funding
increased to £1.4 billion (31 July 2017:
£1.1 billion), reflecting the successful
issuance of a £250 million senior
unsecured bond in April 2018.
Our range of secured funding facilities
include securitisations of our Premium
and Motor Finance loan books. We have
made limited use of the Term Funding
Scheme, which accounted for c.5% of our
total funding at the year end.
We have maintained a prudent maturity
profile. Term funding, with a residual
maturity over one year, increased to £5.0
billion (31 July 2017: £4.8 billion) and now
covers 68% (31 July 2017: 69%) of the
loan book. The average maturity of
funding allocated to the loan book
increased to 23 months (31 July 2017: 21
months), while the average loan book
maturity remained at 14 months (31 July
2017: 14 months).
During the year we invested in a new
deposit platform, which will allow us to
offer a wider range of savings products
and to add online capability to our
channels of distribution. The programme
will enable us to further diversify our
funding as well as improve the customer
experience. We anticipate the new
platform to be rolled out during the 2019
financial year.
Our strong credit ratings have been
reaffirmed by both Moody’s Investors
Services (“Moody’s”) and Fitch Ratings
(“Fitch”). Moody’s rates Close Brothers
Group (“CBG”) A3/P2 and Close Brothers
Limited (“CBL”) Aa3/P1, with stable
outlook. Fitch rates both CBG and CBL
A/F1 with stable outlook.
Photographed on location at G&H Sheet Fed Ltd.
Close Brothers Group plc
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Group Funding1
Customer deposits
Secured funding
Unsecured funding2
Equity
31 July
2018
£ million
5,497.2
1,360.3
1,421.2
1,348.7
31 July
2017
£ million
5,113.1
1,297.3
1,120.3
1,236.0
Total available funding
9,627.4
8,766.7
Of which term funding (>1 year)
Total funding as % of loan book
Term funding as % of loan book
Average maturity of term funding (excluding equity)
Average maturity of funding allocated to loan book3
4,958.5
132%
68%
43 months
23 months
4,766.2
127%
69%
38 months
21 months
1 Numbers relate to core funding and exclude working capital facilities at the business level.
2 Unsecured funding excludes £14.6 million (2017: £16.1 million) of non-facility overdrafts included in borrowings
and includes £295.0 million (2017: £295.0 million) of undrawn facilities.
3 Average maturity of total funding excluding equity and funding held for liquidity purposes.
Group Liquidity
Bank of England deposits
Sovereign and central bank debt
High quality liquid assets
Certificates of deposit
31 July
2018
£ million
1,140.4
44.5
1,184.9
250.5
31 July
2017
£ million
805.1
43.6
848.71
180.3
Treasury assets
1,435.4
1,029.0
1 In addition to and not included in the above, at 31 July 2017 the group held £97.5 million of Treasury Bills drawn
under the Funding for Lending Scheme that were not in repurchase agreements.
The group maintains a strong liquidity
position, ensuring it is comfortably ahead
of both internal risk appetite and
regulatory requirements. The majority of
our liquidity requirements and surplus
funding are held in the form of high quality
liquid assets.
We regularly assess and stress test our
liquidity requirements and continue to
comfortably meet the liquidity coverage
ratio requirements under CRD IV, with a
12-month average liquidity coverage ratio
of 1,038%. Treasury assets increased to
£1.4 billion (31 July 2017: £1.0 billion) and
were predominantly held on deposit with
the Bank of England, giving us continued
good headroom to both internal and
external liquidity requirements.
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Our Culture
Teamwork
We promote teamwork in a fair
and open environment, where
individuals and their contributions
are valued and respected.
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Banking
The Banking division delivered another year
of good returns, as we maintain our pricing
and underwriting discipline.
Banking adjusted operating profit was up
2% to £251.8 million (2017: £247.4 million),
as good loan book growth was partly
offset by a marginal reduction in the net
interest margin, increased investment and
the non-recurrence of provision releases
in the prior year. Statutory operating profit
from continuing operations increased 1%
to £249.9 million (2017: £246.5 million).
The loan book grew 6.0% (2017: 7.0%), with
underlying growth of 6.6% excluding the
unsecured retail point of sale finance
portfolio. This growth reflects our strong
customer proposition and the diversification
benefits of our loan portfolio, with growth in
most of our core businesses, as well as an
increasing contribution from some of our
smaller, specialist businesses. The return
on net loan book remained strong at 3.5%
(2017: 3.6%).
Adjusted operating income was up 5% at
£581.0 million (2017: £551.1 million),
supported by loan book growth at strong
margins across the lending businesses.
The net interest margin remained strong
at 8.0% (2017: 8.1%), albeit with slightly
lower yield compared to the prior year.
Our strong margins and service led
customer relationships position us
well to respond to any change in
market conditions.
Adjusted operating expenses increased
7% to £282.5 million (2017: £264.7
million), as we continue to invest in a
number of new strategic projects and new
business initiatives, including a new
multi-year investment programme in
Motor Finance and to support our
planned application for IRB.
Key Financials
Continuing operations1
Adjusted operating income
Adjusted operating expenses
Impairment losses on loans and advances
Adjusted operating profit
Net interest margin2
Expense/income ratio
Bad debt ratio2
Return on net loan book2
Return on opening equity
Change
%
5
7
20
2
2018
£ million
581.0
(282.5)
(46.7)
251.8
8.0%
49%
0.6%
3.5%
20%
2017
£ million
551.1
(264.7)
(39.0)
247.4
8.1%
48%
0.6%
3.6%
23%
Average loan book and operating lease assets3
7,261.1
6,795.6
7
1 Results from continuing operations exclude the unsecured retail point of sale finance business, which has been
classified as a discontinued operation in the group’s income statement for the 2017 and 2018 financial years.
2 The calculation of the bad debt ratio, net interest margin and return on net loan book excludes the unsecured
retail point of sale finance loan book from both the opening and closing loan book. This does not result in any
change to the ratios previously published for the 2017 financial year.
3 Re-presented to exclude the unsecured retail point of sale finance loan book in both the 2017 and 2018 financial
years and is used to calculate net interest margin, bad debt ratio and return on net loan book.
Staff costs, which represent the majority
of the cost base, also increased, reflecting
continued growth in both front office and
support functions. The expense/income
ratio was marginally up to 49% (2017:
48%), while the compensation ratio
remained flat on the prior year at 29%.
We have seen no change in credit
performance and the bad debt ratio
remained low at 0.6% (2017: 0.6%),
although slightly higher on the prior year,
which benefited from £7.5 million of bad
debt provision releases. The credit
environment remained benign overall and
we continue to see low levels of arrears
across the businesses.
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Close Brothers Group plc
| Annual Report 2018
35
Loan Book Analysis
Retail
Motor Finance
Premium Finance
Commercial
Asset Finance
Invoice Finance
Property
Closing loan book
31 July
2018
£ million
2,686.41
1,736.3
950.11
2,783.6
2,071.2
712.4
1,827.5
31 July
2017
£ million
2,702.8
1,761.9
940.9
2,552.6
2,017.0
535.6
1,629.3
7,297.51
6,884.7
Change
%
(0.6)
(1.5)
1.0
9.0
2.7
33.0
12.2
6.0
1 The loan book at 31 July 2018 excludes the unsecured retail point of sale finance loan book of £66.2 million,
which was classified as held for sale at the balance sheet date. The loan book at 31 July 2017 includes £36.7
million in relation to this business.
Photographed on location at
The Morgan Motor Company Ltd.
Net interest margin
8.0%
2017: 8.1%
Return on opening equity
20%
2017: 23%
Key Performance Indicators
Net interest margin (%)
2018
2017
2016
Bad debt ratio (%)
2018
2017
2016
Return on opening equity (%)
2018
2017
2016
Return on net loan book (%)
2018
2017
2016
8.0
8.1
8.2
0.6
0.6
0.6
20
23
26
3.5
3.6
3.6
Return on opening equity remained
strong at 20% (2017: 23%) reflecting
continued profitability of the business,
offset by continued strong growth in the
equity base.
Both Asset and Premium Finance also
delivered good growth in the year, while
Motor Finance saw a slight contraction,
as we prioritise our strict lending criteria in
the face of continued competition.
The Republic of Ireland, where we provide
Motor, Premium, Asset and Invoice
Finance, represents c.10% of the overall
Banking loan book. The Irish portfolio
also grew in the period, although we now
see growth moderating in this market.
Loan book growth has always been an
output of our business model, and we
continue to prioritise margin and credit
quality over growth. Our portfolio is
diverse, which ensures that our business
remains resilient through the cycle. Loan
book growth was 6.0% in the year to £7.3
billion (31 July 2017: £6.9 billion), with
underlying growth of 6.6% excluding the
unsecured retail point of sale finance loan
book, which was classified as held for
sale at the balance sheet date.
We achieved particularly good growth in
Property, which has remained resilient to
competitive pressure, as well as Invoice
Finance, with growth in both the core
business and from smaller, specialist areas.
36
Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Banking continued
Banking: Retail
Continuing operations1
Adjusted operating income
Adjusted operating expenses
Impairment losses on loans and advances
Adjusted operating profit
Net interest margin2
Expense/income ratio
Bad debt ratio2
Average loan book3
Change
%
3
8
2
(2)
2018
£ million
225.5
(119.2)
(25.2)
2017
£ million
218.2
(110.8)
(24.6)
81.1
82.8
8.4%
53%
0.9%
8.5%
51%
1.0%
2,676.3
2,575.6
4
Our strong margins and
service led customer
relationships position us
well to respond to any
change in market
conditions.
1 Results from continuing operations exclude the unsecured retail point of sale finance business, which has been
classified as a discontinued operation in the group’s income statement for the 2017 and 2018 financial years.
2 The calculation of the bad debt ratio and net interest margin excludes the unsecured retail point of sale finance
loan book from both the opening and closing loan book. This does not result in any change to the ratios
previously published for the 2017 financial year.
3 Re-presented to exclude the unsecured retail point of sale finance loan book in both the 2017 and 2018 financial
years and is used to calculate net interest margin, bad debt ratio and return on net loan book.
Retail
The Retail segment provides
intermediated finance, principally to
individuals, through motor dealers and
insurance brokers and incorporates our
Premium and Motor Finance businesses.
The Retail loan book was broadly flat
overall at £2.7 billion (31 July 2017: £2.7
billion), as good underlying loan book
growth in Premium Finance was offset by
a slight decline in the Motor Finance book
and the agreed sale of the unsecured
retail point of sale finance business.
Premium Finance delivered good
underlying growth of 5% driven by
volumes from recent broker wins. The
Premium Finance business continues to
be well positioned competitively,
benefiting from the ongoing multi-year
investment programme in its infrastructure
aimed at improving both broker and end
customer experience.
The Motor Finance loan book reduced 1%
to £1.7 billion (31 July 2017: £1.8 billion).
The UK book saw a small contraction in
the period, as we continue to prioritise
margin and credit quality in a highly
competitive market. This was partly offset
by continued modest growth in the
Republic of Ireland, which accounts for
26% (2017: 23%) of the Motor Finance
loan book, where we operate through a
local partner, First Auto Finance, who
provide the distribution and dealer
relationships. In both the UK and Ireland,
our core product remains hire-purchase
contracts for second-hand vehicles, with
Personal Contract Plans (“PCP”)
accounting for 13% of the Motor Finance
loan book at 31 July 2018.
On 14 September we announced the sale
of our unsecured retail point of sale
finance business, which provides finance
to consumers through retailers, and had a
loan book of £66.2 million (31 July 2017:
£36.7 million) at the balance sheet date.
After gradually and incrementally
developing this business and assessing
the market opportunity over the last
several years, we have concluded that it
does not provide a long-term fit with our
predominantly secured business model.
Overall, adjusted operating profit for the
Retail segment of £81.1 million (2017:
£82.8 million) was marginally down on the
prior year, and statutory operating profit
from continuing operations reduced to
£80.8 million (2017: £82.4 million). This
was due to ongoing investment in both
Premium and Motor Finance as well as
lower income in the Motor Finance
business.
Adjusted operating income was up 3%
year on year at £225.5 million (2017:
£218.2 million) with the net interest margin
broadly stable at 8.4% (2017: 8.5%).
Adjusted operating expenses increased
8% to £119.2 million (2017: £110.8 million),
as our multi-year investment in both
Premium Finance and, more recently, the
Motor Finance business continues. The
investment programme in our Motor
Finance business is still in its early stage
and is aimed at improving the service
proposition, streamlining operational
processes and increasing sales
effectiveness. As a result, the expense/
income ratio increased to 53%
(2017: 51%).
Credit performance remains in line with
our expectations at this stage of the cycle,
with the bad debt ratio at 0.9% (2017:
1.0%), reflecting continued commitment
to our strict lending criteria.
Commercial
The Commercial segment focuses on
specialist, secured lending principally to
the SME market and includes Asset and
Invoice Finance, including smaller
specialist businesses such as Novitas
Loans, a specialist provider of finance to
clients of the legal profession acquired in
2017, and Brewery Rentals, which
provides service and finance solutions for
brewery equipment and containers in the
UK and Germany.
The overall Commercial loan book
increased 9% to £2.8 billion (31 July 2017:
£2.6 billion), with growth across all
businesses, but particularly in the core
Invoice Finance business, Novitas Loans
and Brewery Rentals. The Asset Finance
loan book was also up 3% in the year,
notwithstanding active competition
from both new and existing lenders in
this market.
Adjusted operating profit of £76.1 million
(2017: £72.6 million) was up 5%, driven
by good income growth and continued
low bad debt. Statutory operating profit
increased 3% to £74.5 million
(2017: £72.1 million).
Close Brothers Group plc
| Annual Report 2018
37
Change
%
6
6
11
5
Retail
Adjusted operating profit
£81.1m
2017: £82.8m
Commercial
Adjusted operating profit
£76.1m
Banking: Commercial
Operating income
Adjusted operating expenses
Impairment losses on loans and advances
Adjusted operating profit
Net interest margin
Expense/income ratio
Bad debt ratio
2018
£ million
225.5
(132.2)
(17.2)
76.1
7.9%
59%
0.6%
2017
£ million
213.3
(125.2)
(15.5)
72.6
8.0%
59%
0.6%
Average loan book and operating leases
2,856.4
2,676.8
7
Banking: Property
Operating income
Operating expenses
Impairment losses on loans and advances
Operating profit
Net interest margin
Expense/income ratio
Bad debt ratio
Average loan book
2018
£ million
130.0
(31.1)
(4.3)
94.6
7.5%
24%
0.2%
2017
£ million
119.6
(28.7)
1.1
92.0
7.7%
24%
(0.1%)
Change
%
2017: £72.6m
9
8
3
Property
Operating profit
£94.6m
2017: £92.0m
1,728.4
1,543.3
12
Operating income of £225.5 million (2017:
£213.3 million) was 6% higher than the
prior year, reflecting growth in the loan
book. Despite ongoing pricing pressure in
the Asset Finance market, we have
maintained a strong net interest margin of
7.9% (2017: 8.0%), which remains ahead
of the industry.
Costs grew by 6% to £132.2 million (2017:
£125.2 million), driven by ongoing
investment in new initiatives. These
include our Technology Services
business, where we offer financing
solutions for IT infrastructure, the
expansion of our Asset Finance offering
into Germany, and post-acquisition
integration of Novitas Loans. Despite this
ongoing investment, the expense/income
ratio remained stable at 59% (2017: 59%).
The bad debt ratio remained in line with
the prior year at 0.6% (2017: 0.6%), with
good overall credit performance.
Property
The Property segment is focused on
specialist residential development finance
to established professional developers in
the UK. We do not lend to the buy-to-let
sector, or provide residential or
commercial mortgages.
Property delivered another year of strong
loan book growth at 12%, to £1.8 billion
(31 July 2017: £1.6 billion). We continue to
see strong structural demand in our core
market of property development finance
for new build family housing with an
average unit price of £500,000. London
and the South East represent c.70% of
the portfolio, however growth also
remains strong in regional locations
around major commuting hubs such as
Manchester, Birmingham and Bristol. Our
long track record, expertise and quality of
service ensure the business remains
resilient to competitive pressures and
continues to generate high levels of
repeat business.
The business delivered an operating profit
of £94.6 million (2017: £92.0 million), up
3% on the prior year. The net interest
margin reduced slightly to 7.5% (2017:
7.7%), predominantly reflecting the mix of
new business in the period. The bad debt
ratio was low at 0.2% (2017: -0.1%), with
the net recovery in the 2017 financial year
reflecting provision releases in that year.
Operating expenses of £31.1 million
(2017: £28.7 million) were up 8%, and
the expense/income ratio remained at
24% (2017: 24%), reflecting the lower
operational requirements of the
business with larger transaction
sizes at lower volumes.
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Close Brothers Group plc | Annual Report 2018 | Strategic Report
Securities
Winterflood has a long track
record of providing continuous
liquidity and trading profitably
in a wide range of market
conditions.
Photographed on location at Winterflood Securities Limited.
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Close Brothers Group plc | Annual Report 2018
39
39
Winterflood delivered another solid
performance, with continued retail
investor activity supported by
increased institutional volumes.
Key Performance Indicators
Key Financials
109.1
106.7
82.3
Operating income
Operating expenses
Operating profit
68
65
52
26
26
23
29
29
21
Bargains per day
Operating margin
Return on opening equity
Winterflood had another strong year,
maximising revenue opportunities in
mostly favourable market conditions
and delivering operating profit of
£28.1 million (2017: £28.1 million),
in line with the prior year.
Operating income increased 2% to £109.1
million (2017: £106.7 million), reflecting
strong trading income across all trading
sectors and particularly in AIM,
investment trusts and FTSE 350.
Geopolitical developments and rising
markets attracted higher levels of investor
trading activity both on the retail and
institutional sides, benefiting most trading
sectors. Winterflood is also diversifying its
income by increasing its presence in the
institutional market, which contributed to
income growth in the period.
Average daily bargains increased 3% to
67,520 (2017: 65,286), reflecting increased
trading activity. Winterflood had no loss
days in the year (2017: one) and at the
financial year end had 16 consecutive
months without a loss day,
notwithstanding some periods of higher
market volatility, demonstrating the skill
and expertise of our traders.
Income (£m)
2018
2017
2016
Bargains per day (’000)
2018
2017
2016
Operating margin (%)
2018
2017
2016
Return on opening equity (%)
2018
2017
2016
Operating profit
£28.1m
2017: £28.1m
Return on opening equity
29%
2017: 29%
2018
£ million
109.1
(81.0)
28.1
68k
26%
29%
2017
£ million
106.7
(78.6)
28.1
65k
26%
29%
Change
%
2
3
–
3
Operating expenses increased 3% to
£81.0 million (2017: £78.6 million),
reflecting slightly higher variable costs
and settlement fees, as a result of
increased trading activity. We also
continue to invest in Winterflood Business
Services, which provides flexible
outsourced dealing, custody and
settlement services.
Both the expense/income ratio and the
compensation ratio were broadly in line
with the prior year, at 74% (2017: 74%) and
47% (2017: 48%) respectively.
Winterflood has a long track record of
trading profitably in a range of conditions;
however, due to the nature of the
business, it always remains sensitive to
changes in the market environment.
40
Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Asset Management
Asset Management made significant
progress in the year, achieving strong net
inflows and significant growth in operating
profit, with continued good demand for
our integrated advice and investment
management services.
Strong Performance in the Year
The division delivered a 33% increase in
adjusted operating profit to £23.1 million
(2017: £17.4 million) and an operating
margin of 20% (2017: 17%). Statutory
operating profit was also up at
£17.6 million (2017: £12.1 million).
Managed assets increased 17% to £10.4
billion (31 July 2017: £8.9 billion), with
positive net flows of £1,083 million
(31 July 2017: £757 million), or 12% (2017:
9%) of opening managed assets.
Operating income increased 12% to
£115.5 million (2017: £102.9 million), driven
by growth in client assets from both
strong net inflows and rising markets.
The revenue margin increased to 98 bps
(2017: 96 bps) reflecting growth of our
integrated wealth management offering,
which combines advice and investment
management.
The increase in staff costs was partly
offset by ongoing savings from the
consolidation of custody, trading and
administration onto a single platform,
enabling investment in people to drive
growth in our advice and investment
management offering.
Positive Inflows Across All Channels
After seeing strong growth in the first half,
we continued to sustain good net inflows
alongside mixed market conditions in the
second, achieving 17% growth in
managed assets to £10.4 billion (31 July
2017: £8.9 billion). For the full year, net
inflows increased 43% to £1,083 million
(2017: £757 million), with strong flows both
directly from our own advisers and
investment managers, and through third
party IFAs. Positive market movements
contributed a further £395 million (2017:
£588 million) growth in managed assets.
Adjusted operating expenses increased
8% to £92.4 million (2017: £85.5 million),
and the expense/income ratio improved
to 80% (2017: 83%) reflecting the benefits
of operating leverage. The increase in
expenses was predominantly driven by
staff costs, reflecting greater numbers of
support staff and hiring of investment
managers. The compensation ratio
remained in line with the prior year at
55% (2017: 55%).
During the year we saw positive inflows
into our investment propositions from the
2017 acquisitions of EOS Wealth
Management and Adrian Smith &
Partners, both of which are now fully
incorporated into our integrated wealth
management offering and making strong
contributions. We also benefited from the
addition of new clients and managed
assets resulting from hiring additional high
net worth investment managers.
Advised assets under third party
management decreased by 18% following
transfers of assets into our management.
Overall total client assets grew 10% to
£12.2 billion (31 July 2017: £11.2 billion).
Our investment strategy focuses on
delivering long-term returns to clients
using a prudent investment
approach tailored to an individual
client’s risk profile. Over the year, all
our funds and segregated strategies
have continued to deliver strong positive
risk-adjusted returns. Relative to their
peer group, 11 of our 14 unitised funds
have outperformed their respective
Investment Association sectors, and
our segregated bespoke investment
strategies have continued to outperform
their ARC peer group average returns.
We continue to see good
long-term growth potential in our
Asset Management business.
Adjusted operating profit
£23.1m
2017: £17.4m
Net inflows on opening
managed assets
12%
2017: 9%
Close Brothers Group plc
| Annual Report 2018
41
During the year, our focus remained on
providing excellent service to our clients,
while optimising our adviser productivity,
allowing us to drive operating leverage,
revenue growth and net inflows.
In addition, we have made significant
progress implementing strategic
technological changes to improve our
operating efficiency, and support our
ability to offer a range of alternative
propositions. We will continue to invest
through selective hiring of advisers and
investment managers, as well as
opportunistic acquisitions, and we see
good growth potential for the business
longer term.
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Key Financials
Investment management
Advice and other services1
Other income
Operating income
Adjusted operating expenses
Adjusted operating profit2
Revenue margin (bps)
Operating margin
Return on opening equity
Change
%
18
7
(67)
12
8
33
2018
£ million
75.2
39.6
0.7
115.5
(92.4)
23.1
98
20%
34%
2017
£ million
63.7
37.1
2.1
102.9
(85.5)
17.4
96
17%
26%
1 Income from advice and self-directed services, excluding investment management income.
2 Excluding the OLIM Investment Managers (“OLIM”) business sold in 2017, the adjusted operating profit increased
by 49% to £23.1 million (2017: £15.5 million), with an underlying operating margin of 20% (2017: 15%).
Movement in Client Assets
Opening managed assets
Inflows
Outflows
Net inflows
Market movements
Disposals
Total managed assets
Advised only assets
Total client assets1
Net flows as % of opening managed assets
31 July
2018
£ million
8,900
1,961
(878)
1,083
395
–
10,378
1,841
12,219
12%
31 July
2017
£ million
8,047
1,884
(1,127)
757
588
(492)
8,900
2,257
11,157
9%
1 Total client assets include £4.2 billion (31 July 2017: £3.7 billion) of assets that are both advised and managed.
Key Performance Indicators
Net inflows as % of opening managed assets
2018
2017
2016
Revenue margin (bps)
2018
2017
2016
Operating margin (%)
2018
2017
2016
Return on opening equity (%)
2018
2017
2016
Photographed on location at Cosworth Ltd.
12
9
6
98
96
86
20
17
16
34
26
25
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Close Brothers Group plc
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Annual Report 2018
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Strategic Report
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Close Brothers Group plc
| Annual Report 2018
43
Our Culture
Service
We care about delivering excellent
service and thinking that’s both
entrepreneurial and disciplined.
Photographed on location at Cosworth Ltd.
44
Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Sustainability Report
Committed to making a
Positive impact
At Close Brothers
we take a long-term
approach to
managing our
business, and
always strive to act
responsibly, ethically
and with integrity.
This underpins our reputation as a
prudent and responsible business, and
supports our commitment to helping
clients, customers, employees and the
communities we operate in thrive over
the long term.
A Sustainable Approach
We regularly engage with our customers,
clients and employees to understand and
deliver what matters most to them, and
maintaining strong, trusted client
relationships and the engagement and
support of our people are key strategic
objectives. As part of this, we also strive
to make a positive impact on the
communities we operate in, encourage a
diverse and inclusive workplace, and
minimise our impact on the environment.
A commitment to corporate responsibility
is embedded in our corporate culture and
supported by a range of policies and
procedures. Our employees are involved
in a wide range of community and
environmental initiatives, and sustainability
matters appear regularly on the senior
management agenda.
This report sets out how we address our
wider corporate responsibility, focused on
four key areas: our employees,
customers, communities and the
environment, helping the people and
businesses of Britain thrive.
Four focus areas
For a sustainable approach
Creating and preserving value
Employees
p46
for more information
Our culture, values and
strong client focus
support engaged and
motivated staff
Remaining an attractive
employer who engages,
rewards and develops a diverse
and productive workforce
Customers
p48
for more information
Communities
p51
for more information
Environment
p52
for more information
Long-term lasting relationships and
continuous feedback enabling us
to provide reliable quality of service,
expertise and personal approach
Consistently supporting our
customers’ interests to help
them thrive over the long term
Understanding and valuing the
communities within which we
operate, helping them thrive by
making a lasting contribution
Creating long-term value and
a lasting positive impact in the
communities where we operate
Appreciating the importance
of our environment and taking
steps to reduce our impact and
protect our surroundings
Acting responsibly to ensure a
sustainable approach for our
environment and our business
Close Brothers Group plc
| Annual Report 2018
45
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Photographed on location at
Barfoots of Botley Ltd.
Performance measures
Initiatives
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89% 89% 100
employee
engagement score
score for treating
employees fairly
emerging leaders
developed
+501 +611 77%
Premium NPS score
in Asset Management
Bespoke NPS score
repeat business
in Property
£327,718 80
SME apprentices
in charitable
donations
• Annual measurement of employee
engagement
• Inclusion targets set for Women in
Finance Charter
• UpReach internship programme supporting
social mobility
• Voice of the Customer programme to listen
and act on client feedback
• Trustee leadership programme expansion
• Matched giving to charities through
employee payroll and volunteering schemes
• Apprentice programme in its fourth year
25%
reduction in GHG
emissions on prior year
1 Read more about net promoter scores on page 48.
28%
reduction in GHG
emissions per
employee
• Green Team of employee representatives
championing environmental sustainability
• Five-year environmental strategy to be
implemented in 2019
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Close Brothers Group plc
|
Annual Report 2018
|
Strategic Report
Sustainability Report continued
Supporting our Employees
Our people underpin everything we do to
deliver the highest levels of service and
position us well for the future.
We strive to create an environment where
our employees are supported and
motivated towards realising their full
potential, and continually monitor our
means to engage, reward and develop our
staff to ensure Close Brothers remains an
attractive employer.
Developing our People
During the year we continued to deliver
and implement a number of initiatives
promoting development across the group,
as well as building our pipeline of
programmes to continue to attract and
retain talent.
Feedback From our People
We believe that engaged employees are
more likely to remain enthusiastic about
their work and their organisation, and are
committed to ensuring they feel valued
and supported to perform better and stay
with us longer. We engage with our staff
through a regular externally run group-
wide Employee Opinion Survey.
This comprehensive Employee Opinion
Survey runs on a two-year cycle, which
gives our businesses the opportunity
to analyse the results in detail and
formulate meaningful and effective
action plans to take forward. Our aim
is to maintain those areas of strength
that our employees value the highest
alongside enhancing those areas we
could continue to improve.
In order to provide up to date insights on
employee engagement and action plan
progression, in March 2018 all employees
were sent a brief “pulse” employee
engagement survey. Employee
engagement is a measure of the extent to
which staff are enthusiastic about their
jobs, their level of commitment to the
company, and how motivated they are to
put effort into their work. The results
showed the group-wide engagement
scores remained high, with an overall
score of 89% consistent with the previous
survey. We had a strong overall response
rate of 82% which lends credibility to
these results.
All our employees have access to our
learning portal, which offers a wide range
of practical tools, workshops and
e-learning on a range of topics. The
average number of training hours across
the group has remained broadly
consistent with the prior year at 8.6 hours
per employee.
Our established programmes for
school leavers and graduates continue
to develop our new talent pipeline,
providing on-the-job learning and
supporting study towards professional
qualifications. Internal career mobility
continues to be a focus of our
leadership teams, with regular talent
forums built into our performance
management and succession planning
processes. Over the past year we have
also piloted new talent development
programmes throughout the group to
identify and support up and coming
talent through a series of structured
learning opportunities and exposure
to different teams and networks.
Our Sales Academy, launched in 2015,
continues to demonstrate our
commitment to developing entry level
sales talent with a new cohort starting in
September 2018 comprising a mix of
internal and external candidates.
The Asset Management division
continues to run its Advice Academy to
develop the skills and knowledge of
advice related staff. The Trainee Adviser
programme builds on this by supporting
individuals with a transition into a financial
adviser role.
Our Emerging Leaders programme is now
in its sixth cohort, focusing on individual
leadership development, management
and coaching skills to develop our pool of
future leaders. Over 100 individuals have
completed the programme so far, with the
majority progressing throughout the
organisation. This year we also launched
our Group Leadership programme to
build capability across the organisation in
line with our bespoke leadership
framework. This programme focuses on
developing skills in strategic leadership
and leading high-performance teams.
Remuneration and Benefits
We believe that our staff should be
rewarded fairly and transparently, and
we therefore ensure that remuneration
across the group is linked to clear
and transparent objectives. We are
confident that the enhanced benefits
package introduced in the prior
year remains fit for purpose and
satisfies employee expectations.
To encourage our staff to save for the
future and build long-term share
ownership, we offer a Save As You Earn
scheme, as well as a Buy As You Earn
share incentive plan allowing employees
to acquire shares on a monthly basis out
of pre-tax earnings, both of which remain
popular offerings.
The group continues to pay all staff at or
above the national living wage, which is in
excess of the national minimum wage.
Diversity and Equality
We are committed to creating an
environment that allows all our employees
to feel proud to work for us, regardless of
their gender, age, race, ethnicity,
disability, sexual orientation or
background. We are pleased that our
employees feel we are inclusive, with our
latest Employee Opinion Survey indicating
that 89% of our people believe that Close
Brothers treats employees fairly.
Employee engagement
Participation in long-term
ownership schemes
Talented females offered 30%
Club mentoring
89%
2017: 89%
48%
2017: 48%
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Close Brothers Group plc
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Gender Diversity
Number of board directors1
Number of directors of subsidiaries2
Number of senior employees, other than board directors3
Number of employees, other than board directors and
senior employees
Male
5
62
40
1,676
Female
3
8
12
1,413
1 Includes non-executive directors, excluded from group headcount calculations. Figures at 31 July 2018.
2 Includes subsidiary directors who are excluded from group headcount calculations.
3 Senior employees identified as Material Risk Takers who are not directors or subsidiary directors.
commitment to creating and promoting a
diverse workforce, with focus on
supporting all individuals irrespective of
their gender, race, age, disability, sexual
orientation or religion. We apply this
approach across all our people related
activities, including compensation review,
talent and succession planning,
leadership programmes, the development
of our benefits package, recruitment, and
training and development.
Inclusion is a regular agenda item at
executive committee meetings to ensure
we are delivering on our commitments.
We have also developed a dashboard of
key diversity metrics which are provided
to business leaders. We run workshops
aimed at raising awareness about
unconscious bias, and our recruitment
system allows us to monitor the diversity
of job applicants to ensure we are
attracting potential candidates from a
variety of backgrounds.
Our Equal Opportunity and Dignity at
Work policy is in place to ensure equal
and respectful treatment for all our
employees. This includes additional
support to disabled employees and
their needs, and reflects our strong
Our broad ambitions around inclusion
mean we have been focusing on
improving diversity at all levels through a
number of initiatives. We have recently
joined Stonewall, a leading LGBTQ+
rights charity, and the Employers Network
for Equality and Inclusion (“ENEI”) to help
shape our thinking and activities.
This year we were proud to announce we
had signed up to the Women in Finance
Charter pledge to improve gender
balance across financial services. As part
of our pledge, we aim to have 30%
female senior management individuals by
2020, which aligns with our continued
membership of the 30% Club, an
institution focused on promoting good
gender balance within companies at all
levels. Our workforce remains diverse,
with 46% female employees, and our
female board representation comfortably
exceeds the current average female
representation on FTSE 250 boards
of 24%. We also have a broad age
range of employees with 25% of our
employees being under 30 years
old and 15% over 50.
We are supportive of social mobility
and creating an organisation with
equal opportunities for all,
regardless of background. This year
we have begun working with the
charity UpReach to launch an
internship programme for
undergraduates from less-
advantaged backgrounds. We
embrace flexible working wherever
possible throughout all our
businesses, and aim to promote the
advantages of everyday flexibility to
enable all our employees to balance
their work and home lives
effectively. We offer enhanced
parental leave to all new parents,
and provide emergency backup
care for employees with caring
responsibilities.
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Strategic Report
Sustainability Report continued
Supporting our Customers
Our customers are typically small to
medium-sized enterprises and individuals
who value our reliable, high quality service
and personal approach. We are proud of
the long term, lasting relationships we have
with our customers and clients, and the
consistently high levels of repeat business
that they entrust us with.
Creating Customer Value
Putting customers’ interests at the heart
of our business is central to our success,
and is underpinned by our core values of
service, expertise and relationships. We
work with businesses of many sizes to
help them support growth, improve their
infrastructure or invest in new assets, and
help individuals with a variety of products
and services to manage their finances,
execute trades, look after their money
securely and plan for the future.
Throughout this year we undertook
extensive research into our customers,
markets and the technology trends
which are shaping the expectations
of customers now and into the future.
We have used these insights to inform
and evolve our proposition, and have
increased our focus on monitoring
and improving the experience of our
customers and partners across the group.
Our group-wide purpose statement
underlines our commitment to both our
customers and to the people who serve
them. Aligned to our group purpose,
within our Banking division we have
started to define a Bank wide customer
vision outlining how best we can deliver
on service, expertise and client
relationships. The priority themes we have
identified from this piece of work will
ensure we continue to deliver value for
our customers in the long term.
We have also made good progress
in delivering consistent, simple and
accessible digital services to our
customers across our businesses. Our
online customer journeys have benefited
from the development of digital design
tools and guidelines, testing the usability
of our digital services at the design phase,
and conducting accessibility training for
all of our businesses. We have continued
to invest in our people by training a further
50 employees in “Design Thinking”,
a user-centred design framework for
improving the customer journey.
Customer Feedback
We are committed to behaving ethically
and responsibly in all our dealings with
customers, and continuously listen to their
feedback to help improve their experience
and satisfaction. Customer forums and
surveys take place at both a divisional
and business unit level and enable us
to better understand and manage their
changing needs and expectations.
We continuously listen to our customers,
and we have engaged with them by
conducting surveys, face to face research
and focus groups with current, past and
potential customers across all of our
major businesses in the past year. This
has deepened our understanding of what
our customers think of us and what they
want from our products and services both
now and on an ongoing basis.
This year we began a “Voice of the
Customer and Partner” programme to
listen, analyse and act upon feedback
from our customers. We also invite our
customers to present at customer forums
so that our leadership teams can hear
directly from clients, and learn what they
like about conducting business with us
and what we could do better. The
information gathered from these
programmes forms a core part of our
governance of customer service, and is
aligned to the key customer principles
that we measure ourselves against on a
monthly basis. It also gives the Board of
Directors, Executive Committee and
business managers clear visibility that we
are continuing to act in our customers’
best interests.
Our strong focus on maintaining and
improving customer experience is
reflected in the consistently high scores
we achieve in customer and partner
surveys across our businesses. Net
Promoter Scores (“NPS”) are a measure
of a customer’s likelihood to recommend
us, and reflects their overall satisfaction
with us as a business. Unfavourable
ratings are deducted from favourable
ratings; hence a score above 0 is
good, and above 50 is excellent. We
achieve strong scores across our
customer offerings, and our high levels
of repeat business are evidence of
consistent customer satisfaction
Bespoke Asset Management
NPS
+61
Premium Finance NPS
Property repeat business
+50
77%
2017: 75%
Close Brothers Group plc
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Photographed on location at Crompton Way Motors.
across the group. Furthermore,
amongst our intermediaries our Motor
Finance business was rated a preferred
finance provider in 70% of cases.
Responsible Finance
Within the Banking division, we measure
ourselves against five key customer
principles:
• We are responsible lenders and
deposit takers.
• 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.
To support these customer principles we
have a wide range of policies in place
across all our divisions to ensure that our
staff and management are aware of their
responsibilities towards our customers.
We promote best practice and strict
compliance with relevant rules and
regulations, and maintain standards
through a range of compulsory training
for all employees.
Our conduct risk framework includes
monthly management information that
provides senior management with a
broad view of conduct related behaviours.
We are further enhancing this reporting
by creating a bespoke set of metrics for
each of our businesses that will give
increased visibility of the customer
experience. This management information
is analysed and assessed each month to
provide assurance that we treat
customers fairly and continue to operate
in line with our customer principles.
We are also committed to treating our
suppliers fairly, and this year were
pleased to achieve Corporate Certification
for Ethical Procurement from the
Chartered Institute of Procurement and
Supply (“CIPS”). We meet with our largest
suppliers on a regular basis to ensure that
both parties are attaining optimum value
from the relationship.
Our privacy policy ensures the protection
and correct treatment of client data in
accordance with the Data Protection
Act 1998. As part of our continuing
focus on protecting and handling
customer information, we delivered a
programme of cross-functional changes
in advance of the General Data Protection
Regulation (“GDPR”) taking effect in
May 2018. We have strengthened our
operating model focusing on both
cyber security and data protection,
and continue to invest to appropriately
protect customer information.
Monitoring and enhancing our systems
and controls to safeguard customers’
data and protect our business remains a
high priority, and we continue to invest in
expertise and technology to strengthen
our internal capabilities. We also remain a
member of the government’s Cyber
Security Information Sharing Partnership,
which provides early warning of potential
system failure or cyber-attack and allows
intelligence sharing across the industry.
We strive to ensure that our complaints
handling process is as fair as possible
and we continuously review and improve
internal processes to deliver prompt and
satisfactory outcomes for our customers.
We take all complaints seriously, and
each division monitors customer
complaints separately to ensure they are
dealt with quickly and efficiently, and that
actions are taken to address issues at
their root cause.
We have policies and training in place to
ensure our staff can identify vulnerable
customers and that they are treated fairly
in our interaction with them. This remains
an area of focus for our Customer Forums
and through regular thematic reviews of
our conduct.
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Sustainability Report continued
We take a long term, sustainable
approach to every aspect of our
business, treating our customers
and partners fairly and supporting
and developing our employees.
Michael N. Biggs
Chairman
Photographed on location at the AMRC Training Centre.
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Supporting our Communities
Supporting and engaging with our
communities goes hand-in-hand with our
group-wide purpose of helping the people
and businesses of Britain thrive over the
long term.
Our Emerging Chairs programme is an
evolution of the Trustee Leadership
programme and is aimed at existing
Trustees who wish to become Chairs. The
first Emerging Chairs programme took
place in November 2017 and the second
is planned for November 2018.
Charitable Activities
We continue to invest in a number of
community-based initiatives and support
the charitable causes that our employees
are passionate about. We have a
dedicated committee on charitable and
community activities chaired by our group
head of human resources and supported
by employees across the group. This
committee meets regularly to discuss and
propose new initiatives with input from
our control functions when required. We
also have a number of local committees
which run initiatives to raise funds for
local charities.
We ask our employees to choose their
preferred community and health charity
partners directly as part of the regular
employee survey. The NSPCC has been
selected as our community charity
partner and Cancer Research UK as our
health charity partner, the latter now for a
sixth year. Funds raised from group-wide
activities are split equally between these
two charities.
We continue to run an annual group-wide
charity week, consisting of a wide range
of locally organised events for staff as well
as group-wide initiatives. This year we
collectively raised over £126,000 during
the 2018 charity week, a 24% increase on
the amount raised last year, making it our
most successful ever.
Employee volunteers are key contributors
to the planning and running of these
events, and we actively encourage our
staff to fundraise and volunteer for the
charities they support. The Close
Brothers Matched Giving Scheme
matches 50% of funds raised or donates
£8 per hour of voluntary time given by
employees. We also match funds raised
by other local, organised fundraising
activities, encouraging employees to work
together to raise money for causes that
are close to their hearts.
In addition, we match contributions under
our Payroll Giving scheme, which allows
employee donations to be made directly
from pre-tax salary. Around 14% of
employees across the group are signed
up to Payroll Giving, allowing us to
maintain our Payroll Giving Quality Mark
Gold Award for the eighth consecutive
year. Importantly, 199 different charities
are now supported on an ongoing basis
through our staff’s generosity.
We aim to contribute long-term value
and a lasting positive impact in the
communities where we operate. We
maintain a range of programmes that
support the causes that matter most to
our employees, and promote charitable
work and community engagement across
all our businesses.
Supporting our Communities
Our long-running and unique initiatives
continue to support our communities and
help SMEs secure the skills they need for
the future. The Close Brothers SME
Apprentice Programme is now in its fourth
phase and continues to contribute to the
funding of new apprentices in the
manufacturing and transport sectors.
To date we have funded 60 of these
apprentices in the manufacturing sector in
and around the Sheffield and Birmingham
area, demonstrating our long-term
commitment to helping SMEs secure the
skills they need for future growth.
Close Brothers Asset Management
continues to run our Trustee Leadership
programme in partnership with social
enterprise Cause 4, and the Clothworkers
Company. This programme provides an
opportunity for professionals to take on a
board level role within a charity while also
providing the charities themselves with a
fresh and diverse pool of potential board
members. The programme is open to
Close Brothers’ employees as well as
external professionals. Since inception,
over 800 professionals have taken part in
our Trustee programmes in London,
Manchester and Bristol. We will launch
further programmes in The Midlands and
Scotland this autumn.
SME apprentices1
Trustee appointments
Charitable donations
80
55
1 Represents 60 funded to date and a further 20 committed for the 2019 financial year.
£327,718
2017: £257,264
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Sustainability Report continued
Supporting our Environment
GHG Scope 1 and 2
Emissions by Division (tCO2e)
We recognise the importance of the
environment in which we operate and
appreciate the importance it has to our
clients and external stakeholders. This year
we have made considerable progress in
reducing our electricity and fleet emissions,
demonstrating our ongoing efforts to lower
our impact on the environment.
Group
Banking
Securities
Asset
Management
2018
2017
658
811
2,861
4,035
636
817
849
977
Our Environmental Impact
As a financial services company we have
limited direct exposure to natural
resources and environmental impact.
However, we are aware of our
responsibility to protect natural resources
and act sustainably. We continue to
monitor ways to reduce our environmental
impact by lowering our energy
consumption, reducing emissions and
increasing recycling.
In addition, we remain a significant
provider of finance to the green energy
sector, supporting schemes for wind,
solar and hydro power developments.
As in prior years, we monitor our
energy consumption and greenhouse
gas emissions across the business
via a third party provider. We also
participate in the CDP (formerly the
“Carbon Disclosure Project”), which
involves disclosure of our greenhouse
gas emissions on a voluntary basis.
Most of the impact we have on our
environment is a result of staff travel,
our supply chain and our office network.
Our employees are encouraged to
lower their own environmental impact
on an individual basis by leasing
low emission cars and participating
in the cycle to work scheme.
Each of our businesses manages its
resources and recycling locally, and we
work closely with all of our business
Reduction in GHG emissions
locations to encourage the
implementation of additional ways to
reduce energy use. This year we have
changed our head office waste contractor
to a company that ensures zero waste
goes to landfill. Waste recycling is
encouraged in all our offices, and this
year our head office alone saved 359
trees by doing so.
The largest source of GHG emissions is
our Scope 1 fuel emissions from
company vehicles, yet this has come
down considerably on the prior year. This
reflects a large increase in the number of
hybrid alternative fuel vehicles in the
company fleet, and more strategic
placement of our travelling staff leading to
a 27% reduction in road travel since 2017.
Consideration of environmental risks and
ethical standards is explicitly required
as part of any credit underwriting
proposal under our bank Credit Policy.
We only lend against asset types
defined in our credit policies and
do not finance arms or onshore oil
development, or lend internationally
outside narrowly defined areas.
Greenhouse Gas (“GHG”) Emissions
In accordance 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 2018, our total GHG emissions were
5,004 tonnes of carbon dioxide equivalent
(“tCO2e”), equating to 1.55 tCO2e per
employee, down 25% overall and 28%
per employee since 2017. Our continued
efforts towards our environmental impact
are reflected in a reduction across both
Scope 1 and Scope 2 emissions in 2018.
Our Scope 2 electricity consumption
continues to reduce on previous years,
and illustrates our ongoing commitment
to improve energy efficiency in our offices.
We also benefited from improvements in
the national grid, which led to a reduction
of the UK-wide electricity emissions factor
by approximately 15% in the period.
Due to its relative size the Banking
division continues to account for the
majority of our GHG emissions.
A full breakdown of our 2018 GHG
emissions, together with corresponding
data for 2017, is shown in the table
opposite.
Calculation
We continue to gather increasing levels of
data alongside an independent third party
environmental analytics and reporting
company. This verifies the accuracy of our
data and enables us to monitor our
performance and develop strategic
insight and plans of action.
Reduction in GHG emissions
per employee
Reduction in Scope 2 electricity
25%
2017: 1%
28%
2017: 7%
30%
2017: 2%
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GHG Emissions Summary (tCO2e)
Scope
Scope 1
Scope 2
Total GHG emissions
Average number of employees
Total per employee
GHG emissions source
Fuel (Buildings)
Fuel (Owned vehicles)
Electricity
2018
191
2,525
2,288
5,004
3,234
1.55
2017
172
3,199
3,269
6,640
3,114
2.13
We are also in the process of developing
a comprehensive five-year environmental
strategy in partnership with our third party
environmental consultants to be
implemented early in 2019. This is
planned to include reviews of our peer
comparatives and key stakeholder
impact, and engagement with our staff to
better inform us of how our own people
feel we are performing.
Our total GHG emissions are reported as
tCO2e and are calculated in line with the
GHG Protocol framework. In addition to
reporting our total Scope 1 and 2
emissions, we have also disclosed the
emissions per employee as an intensity
metric to enable a comparable analysis in
future disclosures.
Green Initiatives
We continue to monitor and report our
GHG emissions on an ongoing basis,
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.
We recently established a “Green
Team” of employee representatives
across our businesses to champion
and raise the profile of environmental
sustainability. They undertake a
suite of activities to assess our
environmental impact, and promote
group-wide initiatives to improve our
performance in this area.
Photographed on location at
Barfoots of Botley Ltd.
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Strategic Report
Sustainability Report continued
Social Responsibility
Compliance with regulatory requirements
is essential not only from the relevant
regulator’s perspective but also to
maintain the trust of our customers.
We have a wide range of policies in place
across all of our divisions to ensure that
our staff and management comply with all
regulatory requirements and adhere to the
highest professional and ethical
standards in dealing with our customers,
suppliers and each other. We require all
staff to complete the relevant regulatory
training on an annual basis with further
training offered when required, and
achieved 100% completion of mandatory
training for eligible employees in the year.
Some of the group-wide policies and
regulations include:
Anti-money laundering regulations
We have implemented policies and
procedures in accordance with anti-
money laundering regulations and have
dedicated money laundering reporting
officers where required.
Anti-bribery and corruption policy
We operate a zero tolerance approach to
bribery and corruption, ensuring
compliance with all applicable anti-bribery
and corruption laws and regulations,
including the UK Bribery Act 2010.
Whistle-blowing policy
We encourage our employees to report
any activity that may constitute a violation
of laws, regulations or internal policy and
reporting channels are provided to staff
for this purpose within the framework of
a whistle-blowing policy.
Our comprehensive whistle-blowing
procedures comply with the rules that
came into effect in September 2016. We
have enhanced the existing policies by
the appointment of a whistle-blowers’
champion and a confidential telephone
whistle-blowing service, operated by a
third party provider.
Human Rights and Modern Slavery Act
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.
We are aware of our responsibilities and
obligations under the Modern Slavery Act
with the appropriate policies and training
in place to ensure compliance across the
organisation.
The Banking division has also committed
to the CIPS Ethical Code of Conduct,
which supports our commitment to
ensure modern slavery does not exist
within our supply chain.
Further details of our compliance with
the Modern Slavery Act can be found
on our website.
Employee health and safety policy
Our health and safety policy ensures 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.
The Health and Safety Committee
continues to meet on a quarterly basis
and we are proud of the continued
progress in successfully raising the profile
of health and safety across the business.
This year we recorded 43 incidents
across all of our sites, of which the
majority were related to medical
conditions, with only three reportable
incidents in the year.
We continue to use an online risk
assessment tool to manage site specific
risks as appropriate and our Display
Screen Equipment risk assessment
programme. This year we have also
added the assessment of new and
expectant mothers to this process.
The Strategic Report was approved by
the board and signed on its behalf by:
Preben Prebensen
Chief Executive
25 September 2018
Gender pay gap
We are confident that men and
women are paid equally for
performing equivalent roles across
our business, and are committed to
taking all steps possible to reduce
our gender pay gap.
The gender pay gap is defined as the
difference between the average
earnings male and female colleagues
receive, as a percentage of men’s
earnings. Our median group-wide
gender pay gap was 41.7% at
5 April 2017.
While the existence of this pay gap is
disappointing, it is also in line with
our financial services competitors
and comparators. The overwhelming
majority of our gender pay gap exists
because women hold fewer senior
positions within the group. If we
instead look at the differences in
average pay between males and
females in the same salary band the
gap drops to 1.6%. We are confident
that this remaining gap is due to
differences in roles and
responsibilities within each pay band,
and that all employees are paid
equally when they are performing
the same role.
We already exceed the government’s
target of 33% of board members
being women, and are broadly in line
with the Hampton-Alexander gender
targets for executives and their direct
reports. Over the next year, we plan
to take further action to tackle the
gender pay gap through a number of
initiatives and commitments. Our
Asset Finance Sales Academy has a
primary focus of improving our
female representation in sales, and all
entry level programmes now have an
explicit objective to seek a 50:50
gender balance split. We aim, over
the medium term, to improve our
female representation of senior
managers to 30%, to fall in line with
our board representation. We will
particularly focus on improving the
gender balance in our senior front
office roles, where female
representation tends to be lower.
We are committed to taking steps to
reduce our gender pay gap, and to
support our talented female staff
through their careers at Close
Brothers. Further details of our
gender pay gap can be found
on our website.
Close Brothers Group plc
| Annual Report 2018
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Compliance with regulatory
requirements is essential not
only from the relevant
regulator’s perspective but
also to maintain the trust of
our customers.
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Close Brothers Group plc
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Annual Report 2018
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Strategic Report
Close Brothers Group plc
Close Brothers Group plc
| Annual Report 2018
| Annual Report 2018
57
57
Our Culture
Relationships
We take the time to understand
and build strong long-term
relationships with our clients,
customers and all our
stakeholders.
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Close Brothers Group plc
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Annual Report 2018
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Governance
Board of Directors
Mike Biggs
Chairman
Preben Prebensen
Chief Executive
Elizabeth Lee
Group Head of Legal and
Regulatory Affairs
Jonathan Howell
Group Finance Director
Board appointment
Mike was appointed a director
in March 2017 and chairman of
the board from 1 May 2017.
Board appointment
Preben was appointed to
the board as chief executive
in April 2009 when he
joined Close Brothers.
Board appointment
Elizabeth was appointed
a director in August 2012
with responsibility for legal
and regulatory affairs.
Background and experience
Mike has over 40 years’
experience of the financial
services industry. Mike
was previously chairman of
Resolution Limited, the FTSE
100 UK life assurance business,
and has acted as both chief
executive officer and group
finance director of Resolution
plc. Prior to that he was group
finance director of Aviva plc.
Mike is also chairman of Direct
Line Insurance Group plc.
Background and 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. Preben is
also a non-executive director of
The British Land Company PLC.
Background and experience
Elizabeth joined Close
Brothers as general counsel
in September 2009. She
was previously with Lehman
Brothers and General Electric’s
financial services businesses
and prior to that she was a
partner at the law firm Richards
Butler (now Reed Smith).
Board appointment
Jonathan was appointed to
the board as group finance
director in February 2008 when
he joined Close Brothers.
Background and experience
Jonathan was previously group
finance director of London Stock
Exchange Group plc from 1999
to 2008. 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 and Risk Committee.
Committee membership
Mike is chairman of
the Nomination and
Governance Committee.
Close Brothers Group plc
| Annual Report 2018
59
Geoffrey Howe
Senior Independent
Director
Lesley Jones
Independent
Non-executive Director
Bridget Macaskill
Independent
Non-executive Director
Oliver Corbett
Independent
Non-executive Director
Board appointment
Geoffrey was appointed a
director in January 2011
and is the company’s senior
independent director.
Background and 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.
Board appointment
Lesley was appointed a
director in December 2013.
Board appointment
Bridget was appointed a
director in November 2013.
Board appointment
Oliver was appointed a
director in June 2014.
Background and experience
Lesley has extensive banking
experience, having previously
held several line management
positions within Citigroup and
was group chief credit officer
of Royal Bank of Scotland plc
from 2008 to 2014. Lesley is
also a non-executive director
of Northern Bank Limited
and N Brown Group plc.
Background and 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. Oliver was
also a non-executive director
of Rathbone Brothers plc.
Background and experience
Bridget is chairman of First
Eagle Holdings LLC and a
senior adviser to First Eagle
Investment Management LLC,
of which she was president
and chief executive officer
until March 2016. She is also
a non-executive director of
Jupiter Fund Management plc
and of Jones Lang LaSalle
Incorporated, and chairman
of Cambridge Associates
LLC. Bridget was previously a
trustee of the TIAA-CREF funds
and 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.
Committee membership
Geoffrey is a member of
the Audit, Remuneration,
Risk, and Nomination and
Governance Committees.
Committee membership
Lesley is chairman of the Risk
Committee and a member
of the Audit, Remuneration,
and Nomination and
Governance Committees.
Committee membership
Bridget is chairman of the
Remuneration Committee
and a member of the Audit,
Risk, and Nomination and
Governance Committees.
Committee membership
Oliver is chairman of the
Audit Committee and a
member of the Remuneration,
Risk, and Nomination and
Governance Committees.
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Close Brothers Group plc
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Annual Report 2018
|
Governance
Executive Committee
Preben Prebensen
Chief Executive
Elizabeth Lee
Group Head of Legal and
Regulatory Affairs
Jonathan Howell
Group Finance Director
Martin Andrew
Asset Management
Chief Executive
Rebekah Etherington
Group Head of Human
Resources
Adrian Sainsbury
Banking division
Managing Director
Robert Sack
Group Chief Risk Officer
Mike Morgan
Banking division Chief
Financial Officer
Philip Yarrow
Winterflood Chief Executive
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Directors’ Report
The directors of the company present their report for the year
ended 31 July 2018.
The Strategic Report set out on pages 4 to 54 of this Annual
Report, and the Corporate Governance Report, committee
reports and the Directors’ Remuneration Report set out on
pages 80 to 101 of this Annual Report include information that
would otherwise need to be included in this Directors’ Report.
Relevant items are referred to below and incorporated by
reference into this report. Readers are also referred to the
cautionary statement on page 159 of this Annual Report.
Results and Dividends
The consolidated results for the year are shown on page 108 of
the Financial Statements. The directors recommend a final
dividend for the year of 42p (2017: 40p) on each ordinary share
which, together with the interim dividend of 21p (2017: 20p) paid
in April 2018, makes an ordinary distribution for the year of 63p
(2017: 60p) per share. The final dividend, if approved by
shareholders at the 2018 Annual General Meeting (“AGM”), will
be paid on 20 November 2018 to shareholders on the register at
12 October 2018.
Directors
The names of the directors of the company at the date of this
report, together with biographical details, are given on pages 58
and 59 of this Annual Report. All the directors listed on those
pages were directors of the company throughout the year.
In accordance with the UK Corporate Governance Code, each
of the current directors will retire at the 2018 AGM and, with the
exception of Jonathan Howell, offer themselves for
reappointment at that meeting.
On 25 January 2018, the company announced that Jonathan
Howell had informed the board of his decision to leave the
company to pursue the next stage of his career. Jonathan will
remain in his role as group finance director, an executive member
of the board and a member of the Group Executive Committee
until the forthcoming AGM.
On 27 June 2018, the company announced that, following a
robust search process overseen by the Nomination and
Governance Committee, the board had decided to appoint Mike
Morgan as group finance director and an executive member of
the board. Mike’s appointment to the board will be proposed for
approval by shareholders at the AGM. Mike has been chief
financial officer of the Group’s Banking division and a director of
Close Brothers Limited, the company’s Banking subsidiary, since
November 2010. He is also a member of both the Group and
Banking Executive Committees. Further information on the
process that resulted in Mike’s appointment can be found in the
report of the Nomination and Governance Committee on page
78 of this Annual Report.
Further details on the directors’ remuneration and service
contracts or appointment letters (as applicable) can be found in
the Directors’ Remuneration Report on pages 84 and 85 of this
Annual Report.
Close Brothers Group plc
| Annual Report 2018
61
Directors’ interests
The directors’ interests in the share capital and listed debt
instruments of the company at 31 July and 16 September 2018
are set out on pages 99 and 101 of the Directors’ Remuneration
Report.
Powers and appointment of directors
The company’s articles of association set out the powers of the
directors, and rules governing the appointment and removal of
directors. The articles of association can be viewed at
www.closebrothers.com/investor-relations/investor-information/
corporate-governance. Further details on the powers, and
appointment and removal of directors, are set out in the
Corporate Governance Report on pages 69 and 70 of this
Annual Report.
Directors’ indemnities and insurance
In accordance with its articles of association, the company has
granted a deed of indemnity to each of its directors on terms
consistent with the applicable statutory provisions. The deeds
indemnify the directors in respect of liabilities (and associated
costs and expenses) incurred in connection with the
performance of their duties as a director of the company or any
associated company. 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. The company also maintains
directors’ and officers’ liability insurance for its directors
and officers.
Company Secretary
The company secretary of Close Brothers Group plc is Alex
Dunn. He can be contacted at the company’s registered office.
Share Capital
The company’s share capital comprises one class of ordinary
share with a nominal value of 25p per share. At 31 July 2018,
152,060,290 ordinary shares were in issue, of which 614,911
were held by the company in treasury.
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.
At the company’s 2017 AGM, the directors were authorised to:
• allot shares in the company or grant rights to subscribe for, or
convert, any security into shares up to an aggregate nominal
amount of £12,646,853;
• allot shares up to an aggregate nominal amount of
£25,293,707, for the purposes of a rights issue;
• allot shares having a nominal amount not exceeding in
aggregate £1,897,028 for cash without offering the shares first
to existing shareholders in proportion to their holdings;
• allot shares having a nominal amount not exceeding
£3,794,056 for the purpose of financing a transaction
determined by the directors to be an acquisition or other
capital investment as defined by the Statement of Principles
on Disapplying Pre-Emption Rights published by the Pre-
Emption Group; and
• make market purchases of up to 15,176,224 of the company’s
ordinary shares, equivalent to 10% of the company’s issued
share capital at the time.
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Close Brothers Group plc
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Annual Report 2018
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Governance
Directors’ Report continued
Since the date of the company’s 2017 AGM, with the exception
of the authority to make market purchases, the directors have
not used these authorities. Details of market purchases of the
company’s ordinary shares during the year can be found below
in the section headed “Purchase of Own Shares”.
The existing authorities given to the company at the last AGM to
allot and purchase shares will expire at the conclusion of the
forthcoming AGM. At the AGM, shareholders will be asked to
renew these authorities. Details of the relevant resolutions to be
proposed will be included in the Notice of AGM.
New issues of share capital
No ordinary shares were allotted and issued during the year.
Specifically, no ordinary shares were allotted and issued during
the year 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 26 on page 141 of the financial statements.
Cancellation of the company’s share premium account
At the company’s 2017 AGM, shareholders approved a special
resolution to cancel the company’s share premium account in
order to increase the company’s distributable reserves. As
announced by the company on 13 December 2017, following
confirmation from the High Court, the amount of
£307,762,365.31, being the entire amount standing to the credit
of the company’s share premium account, was cancelled and
the resulting sum credited to the distributable profits of the
company.
Rights attaching to shares
The company’s articles of association set out the rights and
obligations attaching to the company’s ordinary shares. All of the
ordinary shares rank equally in all respects.
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.
The articles of association and applicable legislation provide that
the company can decide to restrict the rights attaching to
ordinary shares in certain circumstances (such as the right to
attend or vote at a shareholders’ meeting), including where a
person has failed to comply with a notice issued by the company
under section 793 of the Companies Act 2006.
Deadline for voting rights
Full details of the deadlines for exercising voting rights in respect
of the resolutions to be considered at the AGM, to be held on
15 November 2018, will be set out in the Notice of AGM.
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
articles of association set out certain circumstances in which the
directors of the company can refuse to register a transfer of
ordinary shares.
The company is not aware of any arrangements between its
shareholders that may result in restrictions on the transfer of
shares and/or voting rights.
Directors and employees of the group are required to comply
with applicable legislation relating to dealing in the company’s
shares as well as the company’s share dealing rules. These rules
restrict employees’ and directors’ ability to deal in ordinary
shares at certain times, and require the employee or director to
obtain permission prior to dealing. Some of the group’s
employee share plans also contain restrictions on the transfer of
shares held within those plans.
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”).
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.
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 will be 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 made market purchases of
523,616 Treasury Shares with an aggregate nominal value of
£130,904.00, representing 0.3% of its issued share capital, for
an aggregate consideration of £7.4 million. It transferred 211,819
shares out of treasury, to satisfy share option awards, for a total
consideration of £2.3 million.
At 31 July 2018, the company held 614,911 Treasury Shares with
a nominal value of £0.2 million. The maximum number of
Treasury Shares held at any time during the year was 680,342
with a nominal value of £0.2 million.
Close Brothers Group plc
| Annual Report 2018
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Employee Share Trust
Ocorian Trustees (Jersey) 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 26 on page 141 of
the financial statements. The trustee has waived its right to
dividends on all shares held within the trust.
During the year, the employee share trust made market
purchases of 581,286 ordinary shares.
Substantial Shareholdings
Details of substantial shareholdings in the company are set out
in the Corporate Governance Report on page 73 of this
Annual Report.
Articles of Association
The company’s articles of association were last amended in
November 2009. They may only be amended by a special
resolution of the company’s shareholders. The articles of
association can be viewed at www.closebrothers.com.
Corporate Governance Statement
The company is required by the Disclosure Guidance and
Transparency Rules to prepare a corporate governance
statement including certain specified information. Information
fulfilling the requirements of the corporate governance statement
can be found in this Directors’ Report and the Corporate
Governance Report, committee reports and Directors’
Remuneration Report on pages 66 to 101 of this Annual Report.
This information is incorporated by reference into this
Directors’ Report.
Strategic Report
The company’s Strategic Report can be found on pages 4 to 54
of this Annual Report.
Business activities
The group’s business activities, together with a description of
future developments (including the factors likely to affect future
development and performance) and its summarised financial
position, are set out in the Strategic Report.
Employment practices and greenhouse gas emissions
Information on the company’s employment practices (including
with respect to disabled employees and employee involvement)
and greenhouse gas emissions is set out in the Sustainability
Report on pages 44 to 54 of the Strategic Report.
Significant Agreements Affected by a Change of Control
A number of agreements to which the company is a party may
take effect, alter or terminate upon a change of control of the
company. These include certain insurance policies, bank facility
agreements and employee share plans.
The group had committed facilities totalling £1.4 billion at 31 July
2018 which contain clauses requiring lender consent for any
change of control. Should consent not be given, a change of
control would trigger mandatory repayment of those 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.
Financial Instruments
Details of the group’s financial instruments can be found in notes
11 to 14, 18 to 20 and 28 to the financial statements. The notes
begin on page 115.
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 71
and 72, and the risks associated with the group’s financial
instruments are analysed in note 28 on pages 144 to 155 of the
financial statements.
Post-Balance Sheet Events
There were no material post-balance sheet events.
Political Donations
No political donations were made during the year (2017: £nil).
Charitable Donations
Further information on the group’s charitable activities, and on
the charitable donations made in the year, can be found on page
51 as part of the Strategic Report.
Disclosure of Information Under Listing Rule 9.8.4R
As required by Listing Rule 9.8.4CR, the table below sets out the
location of information required to be disclosed under Listing
Rule 9.8.4R:
Subject
Page
Details of shareholder
dividend waivers
See the section headed “Employee
Share Trust” on page 63
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Close Brothers Group plc
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Governance
Directors’ Report continued
Research and Development Activities
During the normal course of business, the group continues to
invest in new technology and systems and to develop new
products and services to improve operating efficiency and
strengthen its customer proposition.
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.
Resolutions at the 2018 AGM
The company’s AGM will be held on 15 November 2018.
Resolutions to be proposed at the AGM include the
reappointment of directors, the annual advisory vote to approve
the Directors’ Remuneration Report, the renewal of the directors’
authority to allot shares, the disapplication of pre-emption rights
and authority for the company to purchase its own shares.
The full text of each of the resolutions to be proposed at the
2018 AGM will be set out in the Notice of AGM sent to the
company’s shareholders. A letter from the chairman and
explanatory notes will accompany the Notice of AGM.
Auditor
PricewaterhouseCoopers LLP (“PwC”) has expressed its
willingness to continue in office as the company’s external
auditor. Resolutions to reappoint PwC and to give the directors
the authority to determine the auditors’ remuneration will be
proposed at the forthcoming AGM. The full text of the relevant
resolutions will be set out in the Notice of AGM sent to the
company’s shareholders.
Disclosure of Information to the 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.
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.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate
Governance Code, the board confirms that it has a reasonable
expectation that the group will continue to operate and meet its
liabilities, as they fall due, for the three-year period up to 31 July
2021. A period of three years has been chosen because it is the
period covered by: (i) the group’s strategic planning cycle; and (ii)
the Internal Capital Adequacy Assessment Process (“ICAAP”),
which forecasts key capital requirements and other group-wide
internal stress testing.
The directors’ assessment has been made with reference to:
• the group’s current position and prospects – please see the
Financial Overview on pages 26 to 31;
• the group’s business model and strategy – please see
Business Model, and Strategy and Key Performance Indicators
on pages 14 to 19; and
• the board’s risk appetite, and the robust assessment of the
group’s principal risks and how these are managed, including
the results of the ICAAP – please see Risk and Control
Framework on page 71.
The group’s strategy and three-year plan are evaluated and
approved by the directors on an annual basis. The plan
considers the group’s future projections of profitability, cash
flows, capital requirements and resources, and other key
financial and regulatory ratios over the period.
The group’s principal risks and ICAAP are also evaluated by
the directors on an annual basis, including the results of two
separate ICAAP stress scenarios.
Close Brothers Group plc
| Annual Report 2018
65
Directors’ Responsibility Statement
The directors, whose names and functions are listed in the
Directors’ Report, are responsible for preparing the Annual
Report and the financial statements in accordance with
applicable law and regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the group financial statements in accordance with
International Financial Reporting Standards (“IFRSs”) as adopted
by the European Union and the parent company financial
statements in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 102 “The Financial Reporting
Standard applicable in the UK and Republic of Ireland”, and
applicable law). Under company law the directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the group
and parent company and of the profit or loss of the group and
parent company for that period.
In preparing the group and 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 IFRSs as adopted by the European
Union have been followed for the group financial statements,
and whether United Kingdom Accounting Standards,
comprising FRS 102 “The Financial Reporting Standard
applicable in the UK and Republic of Ireland”, and applicable
law have been followed for the parent company financial
statements, subject to any material departures disclosed and
explained in the group and parent company financial
statements; and
• prepare the group and parent company financial statements
on the going concern basis unless it is inappropriate to
presume that the group and the parent company will
continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the group and
parent company’s transactions and disclose with reasonable
accuracy at any time the financial position of the group and
parent company and enable them to ensure that the financial
statements and Directors’ Remuneration Report comply with
the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the group and parent
company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
company’s website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Each of the directors confirms that, to the best of their
knowledge:
• the group and parent company financial statements, prepared
in accordance with the relevant financial reporting frameworks,
give a true and fair view of the assets, liabilities, financial
position and profit or loss of the group and parent company
respectively;
• the Strategic Report, together with the Directors’ Report and
the Corporate Governance Report, include a fair review of the
development and performance of the business and the
position of the group and parent company, together with a
description of the principal risks and uncertainties that they
face; and
• the Annual Report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the
information necessary for shareholders to assess the group
and parent company’s position, performance, business model
and strategy.
By order of the board
Alex Dunn
Company Secretary
25 September 2018
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Governance
| Annual Report 2018
66
Corporate Governance Report
Chairman’s
Introduction
I am pleased to introduce the
Corporate Governance Report
for the year ended 31 July 2018.
It includes an overview of the
group’s governance structure,
its risk and control framework,
and a description of the key
activities of the board and its
committees during the year as
part of its oversight of the
group’s strategy, business
model and performance.
The board strongly believes that robust corporate governance
makes a significant contribution to the long-term success of the
group and the achievement of its strategy. We are committed to
ensuring that the principles of good corporate governance are
reflected throughout the group’s governance framework. I am
pleased to report that, as in prior years, the company has
complied with the principles and provisions of the UK Corporate
Governance Code during the year. Further details of the
company’s approach to corporate governance and how it
complies with the Code can be found later in this report.
2018 has been a busy year for corporate governance reform in
the UK. The board has monitored developments closely,
including the publication of a new Corporate Governance Code.
The strength of the group’s existing corporate governance
framework means it is well placed for the implementation of the
new Code, which will first apply to the company in the financial
year ending 31 July 2020. The board and its committees have
already spent time assessing the implications for the group and
over the coming months we will continue to consider the actions
required in a small number of areas to deliver compliance with
the new Code.
During the year the board has used formal meetings and other
opportunities to discuss the group’s performance and delivery of
its strategy with group and divisional executives. As part of its
decision-making and scrutiny, the board has considered the
interests of the company’s stakeholders, as well as risks arising
from the wider regulatory, economic and political environment.
The board recognises its role in establishing and monitoring the
group’s purpose and values. To that end, the board spent time in
the year overseeing the development of the group’s purpose
statement and key cultural attributes, which are set out at the
beginning of this Annual Report.
The board has been unchanged this year. However, in January
we announced that after 10 years as group finance director,
Jonathan Howell will be leaving the company following the
forthcoming Annual General Meeting to pursue the next stage of
his career. The Nomination and Governance Committee oversaw
an extensive search process, involving internal and external
candidates, to identify Jonathan’s successor. In June, we were
pleased to announce that Mike Morgan, chief financial officer of
our Banking division, will succeed Jonathan as group finance
director. Mike’s appointment as a director will be proposed for
approval at the AGM. On behalf of the board, I would like to
thank Jonathan for his significant contribution to the group over
so many years.
This year, in line with the Corporate Governance Code, the board
appointed an external evaluator to review its effectiveness and
performance. The review concluded that the board is strong and
effective. The board welcomes the findings and we will work to
consider opportunities for incremental improvements during the
year ahead. Further details of the evaluation can be found on
pages 70 and 71.
The board’s four committees continue to play an important role
in the governance of the group, and in helping the board operate
effectively and efficiently. Reports from each of the committees,
describing their activities during the year, are set out later in
this report.
Executive remuneration remains an important topic, and I was
pleased that the group’s new remuneration policy received the
strong support of shareholders at last year’s AGM. The
Directors’ Remuneration Report, which includes further detail on
the application of the new policy during the year, can be found
later in this section of the Annual Report.
Engagement and dialogue with shareholders continue to be very
important to the board. Personally, I have been pleased to meet
with a number of our shareholders during the year. The
company’s AGM, which will take place on 15 November 2018, is
a valuable opportunity for me and my fellow directors to meet
with shareholders, and for shareholders to raise questions about
the performance of the group. I very much look forward to
discussing the group’s progress and the work of the board with
shareholders at that meeting.
Michael N. Biggs
Chairman
25 September 2018
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UK Corporate Governance Code
The UK Corporate Governance Code, as published by the
Financial Reporting Council (“FRC”) in April 2016 (the “Code”),
has been applied by the company throughout the financial year.
A copy of the Code can be found on the FRC’s website:
www.frc.org.uk.
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.
It is the board’s view that throughout the year the company has
complied with the principles and provisions set out in the Code.
Further detail as to how the company has complied with the Code
is set out in the remainder of this Corporate Governance Report.
In July 2018, the FRC published a revised version of the Code
(the “Revised Code”), which applies to accounting periods
beginning on or after 1 January 2019. The Revised Code is
therefore not applicable to the company in the year under review,
but the company will report under it with respect to the financial
year ending 31 July 2020. Further information on the Nomination
and Governance Committee’s consideration of the Revised
Code can be found in the Committee’s report on page 79. A
copy of the Revised 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, and to ensure
that the company is appropriately managed and delivers
long-term shareholder value. It sets the group’s strategic
objectives, monitors management’s performance against those
objectives and provides direction for the group as a whole. The
board also supervises the group’s operations, with the aim of
ensuring that it maintains a framework of prudent and effective
controls which enables risks to be properly assessed and
appropriately managed.
Board size and composition
The board has eight members: the chairman, three executive
directors and four independent non-executive directors. The
board’s members come from a range of backgrounds and it is
structured to ensure 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 comprises three female and five male members. This
means that more than a third of the directors are women.
The board actively considers its diversity as part of discussions
around succession planning and talent management throughout
the year. It is committed to making board appointments on the
basis of merit against objective and defined criteria, following a
consideration of the balance of skills, experience, knowledge
and diversity required. The Nomination and Governance
Committee ensures that the external search firms that it uses to
assist with board appointments engage with candidates from a
broad and diverse range of backgrounds and experience in
drawing up long-lists for consideration.
The board will look for opportunities to further improve the
diversity of the board, where it is consistent with the skills,
experience and expertise required at a particular point in time.
The board remains committed to improving diversity at all levels
of the group’s operations. As such, it supports, and is updated
on, diversity initiatives in place below board level across the
group. Further information on these initiatives can be found on
pages 46 and 47 of the Strategic Report.
Matters reserved to the board
A number of key decisions are reserved for, and may only be
made by, the board. These specific matters and decisions are
set out in a formal schedule, which enables the board and
executive management to operate within a clear governance
framework. The schedule of matters reserved to the board is
reviewed annually and is published on the company’s website.
The matters and decisions specifically reserved for the board
include:
• responsibility for the overall direction of the group and
oversight of the group’s management;
• approval of the group’s strategy and monitoring its delivery;
• oversight of risk management, regulatory compliance and
internal control;
• ensuring adequate financial resources, including approving the
group’s Recovery and Resolution Plans, and the Internal
Capital Adequacy Assessment Process (“ICAAP”);
• changes to the group’s dividend policy and significant
changes in accounting policies;
• approving acquisitions, disposals, other transactions and
expenditure over certain thresholds;
• changes to the capital structure of the group;
• approval of communications to shareholders;
• changes to the structure, size and composition of the board,
following recommendations from the Nomination and
Governance Committee;
• approval of corporate governance matters, including the
Details of the individual directors and their biographies are set
out on pages 58 and 59.
evaluation of the performance of the board and its
committees;
Board diversity
The board acknowledges the benefits that diversity can bring to
the board and to all levels of the group’s operations. It
recognises the importance of having a board with a range of
skills, knowledge and experience. It also embraces the benefits
to be derived from having directors who come from a diversity of
backgrounds, bringing different perspectives and the challenge
needed to ensure effective decision-making.
• leading the development of the group’s culture framework; and
• approval and oversight of the group’s policy framework.
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Governance
Corporate Governance Report continued
Board and committee meeting attendance 2017/2018
During the year the board held seven regular scheduled meetings. In addition, all members of the board attended an off-site strategy
session with senior management over two days in May.
The annual schedule of board meetings is decided a substantial time in advance in order to ensure, so far as possible, the availability
of each of the directors. In the event that directors are unable to attend meetings, they receive papers in the normal manner and have
the opportunity to relay their comments and questions 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.
The attendance of directors at scheduled 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, which is not reflected in the
table. Specifically, all members of the board were present at all meetings of the Audit and Risk Committees in the year.
Board
Audit Committee
Remuneration
Committee
Risk Committee
Nomination and
Governance Committee
Attended
Total
Attended
Total
Attended
Total
Attended
Total
Attended
Total
Executive directors
Preben Prebensen
Jonathan Howell
Elizabeth Lee
Non-executive directors
Mike Biggs
Oliver Corbett
Geoffrey Howe
Lesley Jones
Bridget Macaskill
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
6
6
6
6
6
6
6
6
5
5
5
5
5
5
5
5
5
5
The board held two additional ad hoc meetings in the year to consider matters relating to the ICAAP and the creation of the
company’s Euro Medium Term Note Programme. The Nomination and Governance Committee held one additional ad hoc meeting
during the year to consider, and recommend to the board, the appointment of Mike Morgan as the new group finance director. These
additional meetings are not reflected in the table above.
At the end of each of the seven board meetings in the year, the chairman and the other non-executive directors met without any of the
executive directors. In addition, the non-executive directors met throughout the year on an informal basis to discuss matters relevant
to the group.
Governance Framework
Board governance structure
The board committee structure is shown in the diagram below. The board has delegated responsibility for certain matters to its
committees, as set out in written terms of reference which are reviewed annually. These terms of reference outline each committee’s
role and responsibilities and the extent of the authority delegated by the board. They are available on the company’s 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.
Reports for each of the board’s committees are set out later in this report and they include further detail on each committee’s role and
responsibilities, and the activities undertaken during the year.
The Board
Audit
Committee
Remuneration
Committee
Risk
Committee
Nomination and
Governance Committee
Meetings of the board
At each scheduled meeting the board receives reports from the chief executive and group finance director on the performance and
results of the group. In addition, the Banking division managing director, the Banking division chief financial officer, the Asset
Management chief executive and the Winterflood chief executive attend each meeting to 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 and
regulatory matters. In addition, the board receives regular updates from the group human resources, corporate development, risk,
compliance and internal audit functions.
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. In addition to scheduled or routine items, the board also considers key issues that impact the group, as
they arise.
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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 business performance
and regulatory interactions.
Each board meeting includes time for discussion between the
chairman and non-executive directors without the executive
directors.
Key board activities during the year
During the year, the board has spent time particularly on:
• considering the strategic aims and performance of businesses
across the Banking division and the Asset Management
division and Winterflood;
• customer matters, including the group’s customer experience
programme;
• IT and cyber strategy, and associated transformation projects;
• the development of the group’s culture framework and
purpose statement;
• capital planning and the implications of regulatory changes
during the year;
• consideration and approval of the company’s issue of notes
under its newly created Euro Medium Term Note Programme;
• reviewing the competitive landscape;
• engagement with regulators and regulatory developments
during the year, including the General Data Protection
Regulation (“GDPR”), Brexit and MiFID II;
• the review and approval of the group’s Recovery and
Resolution Plans;
• considering and approving the ICAAP and the Internal
Liquidity Adequacy Assessment Process;
• the annual review of group risk appetite statements; and
• the triennial external board and committee effectiveness
evaluation.
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 Mike Biggs. His other significant commitments
are set out in his biography on page 58. The board has
considered Mike’s chairmanship of Direct Line Insurance Group
plc and remains satisfied that those commitments do not restrict
him from devoting such time as is necessary to discharging his
duties effectively as the company’s chairman.
As chairman, Mike 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. Mike also
has responsibility for leading the development of the group’s
culture by the board and for ensuring that the board sets the
tone from the top.
The chief executive is Preben Prebensen, who is primarily
responsible for the day-to-day management of the group’s
business. His other responsibilities include coordinating all
activities to implement the group’s strategic objectives,
managing the group’s risk exposures in line with board policies
and risk appetite, implementing the decisions of the board and
facilitating effective communication with shareholders and
regulatory bodies. He also has responsibility for overseeing the
adoption of the group’s culture and values as part of the
day-to-day management of the group.
Preben chairs the Executive Committee, the forum that exercises
management oversight of the group, including through the
monitoring and implementation of strategy and budgetary
objectives, as determined by the board. The members of the
Executive Committee are shown on page 60.
The chairman and chief executive have various prescribed
responsibilities under the Senior Managers regime overseen by
the PRA.
Independent non-executive directors
There have been no changes in the period to the company’s
independent non-executive directors, who are Geoffrey Howe,
Oliver Corbett, Lesley Jones and Bridget Macaskill. The
independent non-executive directors are responsible for
contributing sound judgement and objectivity to the board’s
deliberations and the decision-making process. They also
provide constructive challenge and scrutiny of the performance
of management and delivery of the company’s strategy.
Senior independent director
The senior independent director is Geoffrey Howe. The senior
independent director acts as a sounding board for the chairman
and executive directors and leads the chairman’s annual
performance review. In addition to the existing channels for
shareholder communications, shareholders may discuss any
issues or concerns they have with the senior independent director.
Non-executive directors’ independence
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, among other things:
• whether they are independent in character and 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, its
shareholders and other stakeholders 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.
In addition, the board is satisfied that each non-executive
director is able to dedicate the necessary amount of time to the
company’s affairs.
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 2017 AGM. Further detail regarding these
authorisations is set out on pages 61 and 62.
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Governance
Corporate Governance Report continued
Appointment and removal 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.
In accordance with the Code, all directors retire and submit
themselves for reappointment at each AGM. The board will only
recommend to shareholders that executive and non-executive
directors be proposed for reappointment at an AGM after
evaluating the performance of the individual directors.
Letters of appointment or service contracts (as applicable) for
individual directors are available for inspection by shareholders at
each AGM and during normal business hours at the company’s
registered office.
The articles of association provide that in addition to any power
to remove directors conferred by the Companies Act 2006, the
company’s shareholders can pass a special resolution to remove
a director from office.
Reappointment of directors at the 2018 AGM
Following performance evaluations undertaken during the year,
the board has confirmed that each director continues to be
effective and demonstrate commitment to their role. On the
recommendation of the Nomination and Governance Committee,
the board will therefore be recommending that all serving
directors standing for re-election at the 2018 AGM be
reappointed by shareholders. As previously announced,
Jonathan Howell will not be submitting himself for re-election at
the AGM.
Induction and professional development
On appointment, all new directors receive a comprehensive and
personalised induction programme to familiarise them with the
group and to meet their specific requirements. The company
also provides bespoke inductions for directors when they are
appointed as a committee chairman or member. 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.
Company secretary
The company secretary is responsible for ensuring that 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. The company secretary provides advice and
support to the board, through the chairman, on all governance
matters and on the discharge of their duties. Directors are able
to take independent external professional advice to assist with
the performance of their duties at the company’s expense.
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.
Directors are responsible for notifying the chairman and the
company secretary of any actual or potential conflicts as soon as
they become aware of them. A procedure has been established,
whereby actual and potential conflicts of interest are regularly
reviewed and appropriate authorisation sought. This procedure
includes mechanisms for the identification of conflicts prior to the
appointment of any new director or if a new conflict arises during
the year. 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 company secretary maintains a register of conflicts
authorised by the board. The board believes this procedure
operated effectively throughout the year.
Board and Committee Effectiveness
Annual board and committee evaluation
During the year, in accordance with the Code, the board
appointed an external evaluator to carry out an independent
review of its effectiveness and that of its committees. The
Nomination and Governance Committee considered a shortlist
of potential external evaluators drawn up by the company
secretary and appointed Margaret Exley CBE of SCT
Consultants Ltd to undertake the evaluation. Neither Ms Exley
nor SCT Consultants Ltd have any other connections with
the company.
The scope and timing of the evaluation were discussed by the
Nomination and Governance Committee, and the chairman and
company secretary then discussed and agreed the process to
be followed with Ms Exley.
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 regular reviews. During the
year, training and development activities took a number of forms,
including informal meetings with senior management within the
businesses and control functions, in-depth business reviews,
lunches with emerging leaders and with members of the group’s
graduate and Aspire programmes, attendance at external
seminars and briefings from management and external advisers
covering topics such as corporate governance updates,
regulatory developments, changes in remuneration regulation
and practice, accounting changes (including IFRS 9) and risk
modelling. In addition to training organised by the group
specifically for the board, directors attend a range of other
training and development sessions as part of other roles
they hold.
Each of the directors and the company secretary completed a
confidential questionnaire and then held one-to-one interviews
with Ms Exley. In advance of these sessions, Ms Exley was
provided with a wide range of documents in response to a
request list and observed a meeting of the board.
The evaluation focused on a range of different areas relevant to
board effectiveness and corporate governance, including:
• the role and composition of the board;
• the work of the board on strategy;
• performance oversight of the business;
• management of the work of the board;
• talent and succession planning;
• stakeholder engagement;
• committee effectiveness;
• risk management; and
• board behaviours.
Training and development records are maintained by the
company secretary and reviewed annually by the chairman and
each individual director.
Ms Exley presented her report to the board for discussion at its
meeting in July 2018. The directors also spent time considering
the evaluation at an informal board session in September 2018.
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The evaluation concluded that the board is strong and effective.
It found the board to be clear on its role and diligent in its
execution of that role. Ms Exley noted that the board’s
composition provides a range of skills and experience which
effectively meet the needs of the business. Her report also
referred to the strength of the board’s engagement with
stakeholders. The evaluation found the board’s committees to be
well chaired, with effective decision-making processes.
The group maintains a range of internal controls relating to
financial management, reporting and control processes, which
are designed to ensure the accuracy and reliability of its financial
information and reporting. The main features of these controls
include consistently applied accounting policies, clearly defined
lines of responsibility and processes for the review and oversight
of disclosures within the Annual Report. These internal controls
are overseen by the Audit Committee.
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 organisation’s
risk committees, at both a group and business level. These
continue to work efficiently and effectively.
The group’s risk and control framework is designed to support
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, mitigated, so that the group is not subject
to material unexpected loss.
The group closely monitors its risk profile to ensure that it
continues to align with its strategic objectives as documented
on page 18.
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 board considers that the group’s current risk profile remains
consistent with its strategic objectives.
Throughout the year the Risk Committee undertakes a robust
assessment of the principal risks facing the group, and reviews
reports from the risk function on the processes that support the
management and mitigation of those risks. As part of this
ongoing review process, a specific review of the principal risks
and uncertainties facing the group is also carried out by the
board. A summary of the group’s principal risks and
uncertainties is provided on pages 20 to 23.
In addition, the Risk Committee and the Audit Committee,
between them, assess and review 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 covers all material controls,
including financial, operational and compliance controls. The
board reviews the effectiveness of both committees on an
annual basis and considers that it has in place systems and
controls appropriate for the group’s profile and strategy.
The board welcomes the positive findings of the evaluation but
will focus during the next financial year on a number of areas
with the aim of further improving its effectiveness. The board
also considers that improvements have been made in the areas
identified for improvement in the internal evaluations undertaken
in the previous two years. Recommendations for further
incremental improvements arising from this year’s evaluation
include: considering ways in which the board could gain
additional exposure to front line operations; and finding time for
further opportunities for board members to spend informal,
unstructured time together.
Directors’ performance
During the financial year, the chairman holds regular meetings
with individual directors at which, among other things, their
individual performance is discussed. These discussions form
part of the basis for recommending the reappointment of
directors at the company’s AGM. These discussions include
consideration of the director’s performance and contribution to
the board and its committees, their time commitment and the
board’s composition.
Chairman’s performance
As in previous years, Geoffrey Howe, the senior independent
director, has led an annual performance assessment process in
respect of the chairman. This involves review meetings during
the year with the other non-executive directors, without the
chairman being present, and consultation with the chief
executive. The senior independent director subsequently
provides feedback to the chairman.
Directors’ fitness and propriety
In line with its regulatory obligations, the group undertakes
annual reviews of the fitness and propriety of all those in Senior
Manager Functions, including all of the company’s directors and
a number of other senior executives. This process comprises
assessments of individuals’ honesty, integrity and reputation;
financial soundness; competence and capability; and continuing
professional development. This year’s reviews have confirmed
the fitness and propriety of all of the company’s directors and
other senior executives who perform Senior Manager Functions.
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
organisational structure with distinct, 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. Early warning trigger levels
are set to drive the required corrective action before overall
tolerance levels are reached. The risk management and internal
control framework, overseen by a number of committees,
including the Risk Committee and the Audit Committee, is the
mechanism that ensures the board receives comprehensive risk
and control information in a timely manner.
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Governance
Corporate Governance Report continued
The risk management framework is based on the concept of “three lines of defence”, as set out in the table below.
The key principles underlying risk management in the group are that:
• business management owns all the risks assumed throughout the group and is responsible for their management on a day-to-day
basis to ensure that risk and return are balanced;
• the board and business management together 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.
Risk Management Framework
First line of defence
Second line of defence
The Businesses
Group Risk and Compliance Committee
(Reports to the Risk Committee)
Risk and Compliance
Risk Committee
(Reports to the board)
Third line of defence
Internal Audit
Audit Committee
(Reports to the board)
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.
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:
• identifying and assessing risks;
• managing and controlling risks;
• measuring risk (key risk indicators/early
warning indicators);
• mitigating risks;
• reporting risks; and
• committee structure and reporting.
Risk functions (including compliance)
provide support and independent
challenge on:
• the design and operation of the risk
framework;
• risk assessment;
• risk appetite and strategy;
• performance management;
• risk reporting;
• adequacy of mitigation plans;
• group risk profile; and
• committee governance and challenge.
Key Features
• Promotes a strong risk culture and focus
on sustainable risk-adjusted returns;
• Implements the risk framework;
• Promotes a culture of adhering to limits
Key Features
• Overarching “risk oversight unit” takes
an integrated view of risk (qualitative
and quantitative);
• Supports through developing and
and managing risk exposures;
advising on risk strategies;
• Promotes a culture of customer focus
and appropriate behaviours;
• Ongoing monitoring of positions and
management and control of risks;
• Facilitates constructive check and
challenge – “critical friend”/“trusted
adviser”; and
• Oversight of business conduct.
• Portfolio optimisation; and
• Self-assessment.
Internal audit provides independent
assurance on:
• first and second line of defence;
• appropriateness/effectiveness of internal
controls; and
• effectiveness of policy implementation.
Key Features
• Draws on deep knowledge of the group
and its businesses;
• Independent assurance on the activities
of the firm, including the risk
management framework;
• Assesses the appropriateness and
effectiveness of internal controls; and
• Incorporates review of culture and
conduct.
Close Brothers Group plc
| Annual Report 2018
73
Substantial Shareholdings
The table below sets out details of the interests in voting rights notified to the company under the provisions of the FCA’s Disclosure
Guidance and Transparency Rules. Information provided by the company pursuant to the Disclosure Guidance and Transparency
Rules is publicly available via the regulatory information services and on the company’s website.
Standard Life Aberdeen plc group1
M&G Investment Management
Royal London Asset Management
16 September 2018
31 July 2018
Voting
rights
%
16.99
6.58
5.03
Voting
rights
%
17.57
6.58
5.03
1 On 6 August 2018, the Standard Life Aberdeen group notified the company that its interest in voting rights had decreased from 17.57% to 17.24%. On 23 August 2018, the
Standard Life Aberdeen group notified the company that its interest in voting rights had decreased from 17.24% to 17.12%. On 31 August 2018, the Standard Life Aberdeen
group notified the company that its interest in voting rights had decreased from 17.12% to 16.99%.
Substantial shareholders do not have different voting rights from
those of other shareholders.
Stakeholders
The board recognises that, for the company to be successful
over the long term, it is important to build and maintain
successful relationships with a wide range of stakeholders.
When taking decisions, the board considers the interests of, and
impact on, key stakeholders, including its relationships with its
customers, employees and regulators. Further detail on the
company’s stakeholders and examples of how the company
engages with them is included in the Strategic Report on pages
44 to 54.
Engagement with Shareholders
Investor relations
The board believes it is important to maintain open and
constructive relationships with shareholders and for them to
have opportunities to share their views with the board. The group
has a comprehensive investor relations (“IR”) programme to
ensure that current and potential shareholders, as well as
financial analysts, are kept informed of the group’s performance
and have appropriate access to management to understand the
company’s business and strategy.
The group’s IR team, reporting to the group finance director, has
primary responsibility for managing the group’s relationship with
shareholders, and they run a structured programme of meetings,
calls and presentations around the financial reporting calendar,
as well as throughout the year. The IR team regularly seeks
investor feedback, directly and via the group’s corporate brokers,
which is communicated to the board and management. The
board is regularly updated on the IR programme through an IR
report, which is produced for each board meeting and
summarises share price performance, share register
composition and feedback from any investor meetings.
The chief executive and group finance director engage with the
group’s major institutional shareholders on a regular basis. In
addition, the chairman arranges to meet with major institutional
shareholders to discuss matters such as strategy, corporate
governance and succession planning. Separately, the senior
independent director is available to meet with shareholders,
should they wish to discuss any concerns they may have.
As discussed further in the Directors’ Remuneration Report,
the chairman of the Remuneration Committee takes part in
consultations with major institutional shareholders on
remuneration issues from time to time.
Periodically, the group runs seminars covering different parts of
its business to provide additional detail to investors and analysts.
Relevant presentations, together with all results announcements,
annual reports, regulatory news announcements and other
relevant documents, are available on the IR section of the
company’s website (www.closebrothers.com/investor-relations).
The group also engages with leading institutional shareholder
bodies and proxy advisers throughout the year.
Annual General Meeting
The directors regard the company’s AGM as an important
opportunity for all shareholders to engage directly with the
board. All shareholders are able to raise questions with the
board at the AGM, either in person or by submitting written
questions in advance. The chairmen of each of the board
committees attend the AGM and all other directors are expected
to attend the meeting. All directors were in attendance at the
2017 AGM.
At the AGM, the chairman and the chief executive present a
review of the group’s business. All voting at general meetings of
the company is conducted by way of a poll. All shareholders
have the opportunity to cast their votes in respect of proposed
resolutions by proxy, either electronically or by post. Following
the AGM, the voting results for each resolution are published and
made available on the company’s website.
By order of the board
Alex Dunn
Company Secretary
25 September 2018
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Governance
Risk Committee Report
The Risk Committee’s principal
roles and responsibilities are to
support the board in its
oversight of risk management
across the group.
The identification, management and mitigation of risk is
fundamental to the success of 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 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 continuing evolution of the macroeconomic environment and
political landscape alongside a demanding regulatory agenda
aimed at bolstering the strength and conduct of the banking
industry have again kept the Risk Committee fully occupied
throughout the year.
I am pleased to report that enhancements to our risk
management framework, and a consistent and prudent risk
appetite, have each helped to reinforce the group’s strong credit
performance again this year. We continue to build out our risk
capabilities and are satisfied that we have both retained and
recruited the skills and talent that we need to meet the
challenges and opportunities that lie ahead.
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 approach
allows us to ensure that emerging risks are identified and
debated and that management’s plans for risk mitigation are
well understood and appropriately resourced.
Committee roles and responsibilities
The Committee’s key roles and responsibilities are to:
• oversee the maintenance and development of a supportive
culture 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 management 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).
Membership and meetings
The Committee comprises Geoffrey Howe, the senior
independent director, and Oliver Corbett and Bridget Macaskill
who chair the Audit and Remuneration Committees respectively,
and me as chairman. Six scheduled meetings were held during
the year.
Full details of members’ attendance at these meetings during the
year are set out on page 68.
In addition to the members of the Committee, standing
invitations are extended to the chairman of the board, the
executive directors, the group chief risk officer, the group head of
compliance and the group head of internal audit. All attend our
Committee meetings as a matter of course and have supported
and informed the Committee’s discussions.
Other executives, subject matter experts, risk team members
and external advisers are invited to attend the Committee from
time to time as required, to present and advise on reports
commissioned.
I meet frequently with the group 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, business performance and the competitive environment.
Committee effectiveness
As described in more detail on page 70, an external evaluation
of the effectiveness of the board and its committees was
undertaken during the year in line with the requirements of the
UK Corporate Governance Code.
The Committee considers that during the year it continued to
have access to sufficient resources to enable it to carry out its
duties and has continued to perform effectively.
Activity in the 2018 financial year
The risk function has continued to evolve in 2018. The three lines
of defence model is now fully embedded, while the governance
structure facilitates effective oversight of risk, both at a group
and business level. The risk design has been further
strengthened through the organisation of additional specialist
skills and resource, in particular with regard to operational
resilience oversight. These actions have continued to improve
the flow of management information to the Committee,
increasing the effectiveness of its challenge and oversight and
enhancing visibility on risk and compliance issues identified at all
levels across the group.
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The risk appetite framework has been supplemented by the use
of additional quantitative analysis, supporting the group’s risk
management capabilities, particularly in response to market
events. This has allowed us to adopt and refine risk appetite
measures at a more granular level within portfolio management,
individual credit-decisioning and risk reporting. The specific
portfolio review approach has continued, with particular attention
given to the Property, Premium and Motor portfolios, which have
all benefited from deep dives by the Risk Committee.
Management of emerging risks has again continued to improve,
facilitating organisational readiness for external volatility.
Emerging risk assessment remains a standing agenda item for
the Committee’s discussion (and indeed, all risk committees
within the group) while stress testing capabilities have continued
to evolve on a more quantitative basis to support “what if”
analysis for one-off events. The potential impacts of Brexit
continue to receive focus albeit, given the group’s footprint,
these are likely to be secondary in nature. Nevertheless, until we
have a clearer idea of the final negotiated treaty, they will merit
regular review. We continue to develop appropriate contingency
plans, and these have been subject to regular challenge by the
Committee. We remain satisfied that the group is well positioned
to address any foreseeable Brexit outcome.
The group’s use of finance and risk models continues to evolve
at pace with the development of our IFRS 9 models advancing
our overall model inventory. In addition, we have seen the
evolution and use of the model risk framework and governance
structure. The board and the Committee continue to assess
various options for advancing our future modelling approach with
the aim of enhancing our risk management capabilities.
The Committee has also overseen the introduction of a new
asset and liability management system which supports more
quantitative modelling capabilities and sophisticated stress
testing techniques.
Operational risk continues to develop in its complexity and we
have responded by investing further in systems and process
enhancements to support the early identification of negative
trends. Our operational resilience has been the subject of much
debate at the Committee as we continually review our estate, our
IT capabilities and our contingency and disaster recovery plans.
Incident simulations have been utilised to good effect and have
proved valuable to the Committee in continuing to challenge our
resilience preparedness.
Our focus on cyber crime has accelerated during the year, as an
increasing number of industry attacks reinforced the importance
of strong cyber defences to protect our systems and customer
data. The group’s GDPR programme is complete, ensuring
regulatory alignment and generating enhancements to customer
documentation, third party contracts, internal processes,
systems changes and the supporting operating model. Our
cyber detection and monitoring capabilities have continued to
improve, while our cyber security strategy remains under
constant review by the board and this Committee to ensure that
we are keeping pace with, and responding to, the latest
industry developments.
Ensuring that we are fully compliant with the numerous and
ever-changing regulatory requirements for financial services firms
remains challenging. We continue to engage actively with
regulators and industry bodies to ensure that our compliance
framework remains appropriate and relevant for all of our
businesses. The Compliance team works closely with first and
second line colleagues, providing regulatory advice in support of
divisional business strategies, as well as shaping policies,
delivering training and conducting assurance reviews.
Remuneration
The linkage between culture, risk and compensation is an
important one and the Risk Committee and the group chief risk
officer have provided input to the Remuneration Committee
again this year to ensure that risk behaviours and the
management of operational risk incidents over the course of the
financial year were appropriately reflected in decisions taken
about performance and reward.
Looking ahead to 2018
Key priorities for the coming year include:
• Effective management of emerging risks, specifically key
impacts of the UK’s exit from the EU, as well as any other
material developing concerns.
• Continued review and assessment of the group’s modelling
capabilities, including the development of a wider models
strategy as appropriate.
• Further evolution of quantitative stress testing.
• Refinement and advancement of the group’s operational
resilience framework.
• Embedding of affordability assessment processes across the
lending businesses.
• Extension of the Senior Managers and Certification Regime
(“SMCR”) to Winterflood and Asset Management.
Lesley Jones
Chairman of the Risk Committee
25 September 2018
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Annual Report 2018
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Governance
Audit Committee Report
This report sets out the principal
responsibilities of the Audit
Committee, its membership
and meetings as well as the key
activities under review during
the year.
Audit Committee
Chairman’s overview
The principal roles and responsibilities of the Committee
continue to be to:
• assess the integrity of the group’s external financial reporting;
• review the effectiveness of the group’s internal controls; and
• monitor and review the activities and performance of both
internal and external audit.
During the year under review the Committee has again had a full
agenda. The Committee has placed particular focus on the
transition to the new external auditor following the tender
undertaken in the 2017 financial year as well as oversight of
management’s project to ensure readiness for the
implementation of IFRS 9. Further details of the Committee’s
work in respect of these and other key issues are set out in the
sections below.
Membership and meetings
The Committee met five times during the year with meetings
aimed to coincide with the group’s financial reporting schedule.
Details of members’ attendance are set out on page 68. The
Committee comprises Geoffrey Howe, the senior independent
director, and Lesley Jones and Bridget Macaskill who chair the
Risk and Remuneration Committees respectively, and me as
Chairman. The biographies of each of the members are outlined
on pages 58 and 59. The composition of the Committee satisfies
the relevant requirements of the UK Corporate Governance
Code. The board considers that I have the appropriate recent
and relevant experience.
In addition to the Committee members, standing invitations are
extended to the chairman of the board and the executive
directors. In addition, the group head of internal audit, the group
head of compliance, the group chief risk officer and the group
financial controller attend meetings by invitation. I meet with this
group as well as the group finance director ahead of each
meeting to agree the agenda and to receive a full briefing on all
relevant issues. The external auditor attends each meeting and I
had regular contact with the lead audit partner during the year.
The Committee met with both internal and external audit without
management present at each meeting of the Committee held
during the year.
Committee effectiveness
As described in more detail on page 70, an external evaluation
of the effectiveness of the board and its committees was
undertaken during the year in line with the requirements of the
UK Corporate Governance Code.
The Committee considers that during the year it continued to
have access to sufficient resources to enable it to carry out its
duties and has continued to perform effectively.
Activity in the 2018 Financial Year
Key accounting judgements
The Committee has spent considerable time during the year
focusing on the key areas of accounting judgement taken by
management in preparing the financial statements. The key
judgements were unchanged from the prior year reflecting the
group’s adherence to its business model and consistency of
approach to financial reporting.
Credit provisioning
The Committee views credit provisioning as the key accounting
judgement area for the group. As in previous years, it received
presentations from management explaining key judgement
areas, consistency of approach and the group’s business mix.
After challenging management and the new external auditor, the
Committee concluded that the provisioning approach and key
judgements were reasonable.
Revenue recognition
The Committee reviewed management’s approach to revenue
recognition, noting the consistency of approach with prior years.
The Committee also assessed the expected impact of IFRS 15
on the group. The Committee concluded that both the revenue
recognition approach for each of the group’s key businesses and
the application of IFRS 15 were appropriate.
IFRS 9
The Committee has spent considerable time this year receiving
updates at each of its five meetings from management on the
final preparations prior to the adoption of IFRS 9 on 1 August
2018. This included specific training sessions explaining the key
areas of judgement as well as consideration of the initial
disclosures on adoption of the new standard. The Committee has
paid particular attention to the governance process around the
credit and macro economic models and the new auditors’ view of
management’s progress. The Committee will continue to monitor
this key area of accounting judgement in the coming year.
Other financial reporting
Going concern and viability statement
The Committee reviewed a paper from management in support
of the going concern basis and the longer-term viability of the
group. The Committee noted the stability of the group’s business
model, its successful track record, the group’s three-year
business plan and the results of internal stress testing and
concluded this provided sufficient evidence to support the
board’s viability statement set out on page 64.
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Fair, balanced and understandable
On behalf of the board, the Committee reviewed the financial
statements as a whole in order to assess whether they were fair,
balanced and understandable. The Committee discussed and
challenged the balance and fairness of the overall report with the
executive directors and also considered the views of the external
auditor. The Committee was satisfied that the Annual Report could
be regarded as fair, balanced and understandable and proposed
that the board approve the Annual Report in that respect.
Policy oversight
Whistle-blowing
The Committee oversees the group’s whistle-blowing policy, and
I act as the group’s whistle-blowing policy champion. The group
continues to place a high priority on employees’ understanding
of the process to enable them to speak out with confidence
when appropriate.
Other policies
The Committee has also reviewed and approved the group’s
Recovery and Resolution Plans, tax policy and statement,
approach to hedging for share awards and the policy for the
provision of non-audit services by the external auditor.
Internal Audit
The Committee reviewed and approved the internal audit plan
during the year as well as pre-approving any changes to that
plan. At each of its meetings during the year, the group head of
internal audit presented a summary of key audits, highlighting
key themes as well as updating the Committee on progress on
agreed actions from previous audits. During the year 33 audits
were completed, including three reviews requested by the
group’s regulator.
The Committee reviews the effectiveness of the internal audit
function annually. The review for the year under review was
conducted internally and was supported by a biennial feedback
survey of business stakeholders across the group. The
Committee’s policy is that an external effectiveness review will be
carried out at least every five years. The next such review will
take place not later than the year ended 31 July 2020.
The Committee continued to keep both the level and
independence of the internal audit resource under review during
the year. Following the prior year appointment of Ernst & Young
LLP as the new co-source provider from 1 August 2017, the
Committee also received feedback on the performance of
that firm.
External Audit
As outlined in my report last year, the Committee underwent an
audit tender in 2017 and PricewaterhouseCoopers LLP (“PwC”)
were subsequently appointed at the 2017 AGM with Mark
Hannam as the group’s lead audit partner. The Committee has
spent significant time overseeing the transition to PwC this year.
In particular the Committee reviewed the audit plan and has had
the opportunity to discuss the new auditors’ initial assessment of
the group and its control environment.
The Committee will assess the independence, qualification and
effectiveness of PwC after the completion of their first audit.
The evaluation will be focused on:
• the quality of audit expertise, judgement and dialogue with the
Committee and senior management;
• the independence and objectivity demonstrated by the audit
team; and
• the quality of service including consistency of approach and
responsiveness.
The process will be facilitated by a survey of the group’s finance
teams and a review of audit and non-audit fees. The Committee
underwent a similar process for the previous auditor Deloitte
LLP, and concluded that that firm was independent and their
audit was effective in respect of the prior year.
The company confirms that it complied with the provisions of the
Competition and Markets Authority’s Order regarding statutory
audit services for the financial year under review.
The Committee oversees the group’s policy on the provision of
non-audit services by the external auditor. The group’s policy is
that permission to engage the external auditor will always be
refused when a threat to independence and/or objectivity is
perceived. However, the Committee will give permission where it
sees benefits for the group where:
• work is closely related to the audit;
• a detailed understanding of the group is required; and
• the external auditor is able to provide a higher quality and/or
better value service.
During the year non-audit fees amounted to £0.5 million and
represented 29% of the audit fee. Non-audit fees related to:
Assurance work on:
Systems and controls
Funding
£ million
0.4
0.1
The corresponding amounts for the prior year were £0.8 million
and 62% when Deloitte LLP was the group’s external auditor.
The Committee was satisfied that these fees, individually and in
aggregate, were consistent with the non-audit services policy
and did not believe they posed a threat to the external auditors’
independence.
Oliver Corbett
Chairman of the Audit Committee
25 September 2018
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Governance
Nomination and Governance Committee Report
Nomination and Governance Committee
Chairman’s overview
This report sets out an overview of the Committee’s roles and
responsibilities, and its key activities during the year.
In the year, the Committee oversaw the process to appoint a
new group finance director, culminating in the decision of the
board to appoint Mike Morgan. Further information on the
process is set out below.
Once again, the Committee has played an active role in
overseeing talent management and succession planning for the
group, including through making sure that appropriate activities
and initiatives are undertaken to develop the group’s talent
pipeline. This will continue to be a key area for the Committee in
the year ahead.
Throughout its discussions, the Committee has had regard to
the benefits of promoting diversity at all levels of the group’s
operations. To that end, the Committee ensures that the
recruitment searches it oversees consider candidates from a
diversity of backgrounds and experiences.
As in previous years, the Committee has also spent time
considering the composition of the board, non-executive director
succession and the range of skills and experience represented
among its members and, as described further below, has started
a search to identify an additional non-executive director to be
appointed to the board.
Committee roles and responsibilities
The Committee’s key roles and responsibilities are:
• regularly reviewing the structure, size and composition of the
board, and making recommendations to the board with regard
to any changes;
• considering the leadership needs of the group and considering
succession planning for directors and senior executives;
• considering the appointment or retirement of directors;
• reviewing the continued independence of the non-executive
directors;
• assessing the board’s balance of skills, knowledge and
experience;
• evaluating 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 the non-executive directors.
The Committee’s role and responsibilities are set out in written
terms of reference and are available at www.closebrothers.com.
Key activities in the 2018 financial year
During the year the Committee’s activities included:
• considering board composition and succession, including
oversight of the process to appoint a new group finance
director;
• reviewing talent and executive management succession
planning;
Membership and meetings
The Committee’s membership was unchanged during the year
and 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. The composition of the Committee satisfies the
relevant requirements of the UK Corporate Governance Code.
In addition, the chief executive attends meetings by invitation.
The group head of human resources attended a number of
meetings during the year, including when presenting reviews of
talent and executive management succession planning, and
updating the Committee on the progress of the external search
to appoint a new group finance director.
Five scheduled meetings of the Committee were held during the
year and details of members’ attendance are set out on page 68.
In addition, one ad hoc meeting was held to consider the
nomination of Mike Morgan as the new group finance director
and an executive member of the board.
Group finance director succession
During 2018, the Committee oversaw the extensive process that
culminated in the decision by the board to appoint Mike Morgan
as group finance director and an executive member of the board,
following Jonathan Howell’s decision to leave the group at the
conclusion of the forthcoming AGM in order to pursue the next
stage of his career.
The Committee approved a detailed specification for the role of
group finance director, with input from the group chief executive
and the group head of human resources, and engaged external
search consultancy firm, Odgers Bernstein, to find appropriate
candidates. The firm is not connected to the company in
any way.
The search process included consideration of both external and
internal candidates and, at all stages, the Committee took steps to
ensure that external and internal candidates were treated equally.
Odgers Bernstein produced a long-list of candidates from a
diversity of backgrounds and representing a breadth of talent
and experience. A shortlist of external and internal candidates
was agreed and candidates were interviewed by non-executive
and executive directors and senior management. Following these
interviews, and assessments undertaken by Odgers Bernstein,
the Committee recommended the appointment of Mike Morgan.
The board then considered and approved the recommendation.
The PRA and FCA have each given their approval to Mike’s
appointment. Mike’s appointment as a director will be proposed
for approval by shareholders at the AGM in November.
The decision to appoint Mike Morgan was taken in June,
ensuring that there was a period of nearly five months for
Jonathan Howell and Mike to work together to ensure a smooth
transition in the period until Jonathan steps down at the
conclusion of the AGM in November.
• planning for the triennial external board evaluation undertaken
during the year;
• monitoring proposed changes to the UK’s corporate
governance regime and the implications for the company and
the board; and
• assessing the non-executive directors’ skill sets, knowledge
and experience to ensure that an appropriate balance of skills,
knowledge and experience has been maintained.
Non-executive directors’ skill sets
During the year, the Committee considered and reaffirmed the
skill sets and experience of the company’s four independent
non-executive directors, including their extensive experience
within financial services. Geoffrey Howe is the senior
independent director and has extensive experience within the
industry, including as a chairman. Oliver Corbett has strong
financial skills and a track record of audit committee experience,
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Reappointment of directors
Prior to the company’s AGM each year, the Committee considers,
and makes recommendations to the board concerning, the
reappointment of directors, having regard to their performance
and ability to continue to contribute to the board. Following this
year’s review in advance of the 2018 AGM, the Committee has
recommended to the board that all serving directors be
reappointed at the AGM, with the exception of Jonathan Howell
who will not be seeking reappointment at the meeting.
Geoffrey Howe has served as a non-executive director of the
company since January 2011. As it is now more than six years
since his appointment as a director, and as required by the UK
Corporate Governance Code, the Committee has undertaken a
particularly rigorous review of Geoffrey’s performance and
independence. It has concluded that he remains independent
and continues to make a significant contribution to all activities of
the board and its committees. The Committee and the board
have also noted the valuable contribution that Geoffrey makes as
the company’s senior independent director and in his support for
the chairman, who completed his first full year in post during
2018. The Committee and the board value the continuity,
knowledge and experience that Geoffrey’s continued
appointment as a director would bring.
Corporate governance reform
The Committee has monitored the various reforms to corporate
governance in the UK that have been announced during the
year. These include the publication of the new Corporate
Governance Code, which will first apply to the company in the
financial year ending 31 July 2020. The Committee has received
updates from the company secretary on the new Code and the
implications for the company. It will continue to discuss the
implications and resulting actions required over the coming
months to ensure that the company complies with the
new Code.
Committee effectiveness
As described in more detail on page 70, an external evaluation of
the effectiveness of the board and its committees was
undertaken during the year in line with the requirements of the
UK Corporate Governance Code. The Committee was involved
in the selection of the evaluator and in determining the scope
and timing of the review.
The Committee considers that during the year it continued to
have access to sufficient resources to enable it to carry out its
duties and has continued to perform effectively.
Michael N. Biggs
Chairman of the Nomination and Governance Committee
25 September 2018
including as a finance director. Lesley Jones has familiarity with
FCA/PRA and EU risk regulations, and wide experience as a
committee chairman and non-executive director within the
financial services sector. Bridget Macaskill has significant
remuneration committee credentials and familiarity with FCA/
PRA and EU remuneration regulations. Further information on
the background and experience of each of the non-executive
directors can be found in their biographies on pages 58 and 59.
Succession planning – board and management
The Committee spent considerable time during the year
reviewing talent and considering the group’s succession
planning at board and senior management level. This included
a formal review by the Committee of senior management
succession planning, looking at the capability and potential of
incumbents in key roles, and the succession pipeline, emergency
cover arrangements and external market for those roles.
Succession planning for non-executive roles has also been an
important focus of the Committee.
As part of its discussion of the skills and experience of the
non-executive directors and associated succession planning,
during the year the Committee decided to begin a search to
appoint an additional non-executive director. This appointment is
intended to further strengthen the range of skills and experience
represented on the board. Whilst the Committee is seeking to
select a candidate with the capability and experience to
contribute to the full range of board activities, it has identified a
desire to seek a candidate with particular experience of
customer behaviour and technological change. The search is
being undertaken in conjunction with external search firm,
Heidrick & Struggles, who have been instructed to consider
candidates from a diversity of backgrounds and experiences.
The firm is not connected to the company in any way. The
search is ongoing and the company will make a further
announcement on the outcome of the process as required in
due course and will include further commentary in next year’s
Annual Report.
Diversity
Diversity continues to be a key focus of the Committee. The
Committee embraces the benefits of diversity and it has been a
topic of discussion throughout the year, including in the context
of the board-level appointments considered by the Committee
and as part of the Committee’s review of talent and executive
management succession planning.
The Committee considers that the board remains diverse,
drawing on the knowledge, skills and experience of directors
from a range of backgrounds, but will seek to take opportunities
to further improve the diversity of the board, where it is
consistent with the skills, experience and expertise required at a
particular point in time. Currently, three of the company’s eight
directors are women, meaning that the representation of women
on the board exceeds the minimum percentage set out in the
recommendations of the Hampton-Alexander Review published
in November 2016. However, the Committee recognises that due
to the relatively small size of the board, the appointment or
departure of a single director can have a significant impact on its
ability to achieve recommendations in relation to the composition
and diversity of the board as a whole at a particular point in time.
More detail on the group’s approach to diversity can be found in
the Sustainability Report on pages 46 and 47 and the Corporate
Governance Report on page 67.
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Governance
Directors’ Remuneration Report
This report sets out our
approach to remuneration
for the group’s employees
and directors for the 2018
financial year.
Annual Statement from the Remuneration
Committee Chair
On behalf of the board and the Remuneration Committee, I am
pleased to present the Directors’ Remuneration Report for the
2018 financial year.
2018 was the first year under our new remuneration policy which
was approved at the 2017 AGM, with over 97% of the
shareholders’ votes cast in favour. I am grateful for the strong
engagement and support we received from our shareholders for
the new policy, which further aligns our remuneration structures
with our distinctive business model and strategy.
How the group performed
Close Brothers has a well-established model which supports its
long track record of consistently good performance. The model
is based on maintaining a disciplined underwriting approach
which is sustained through the economic cycle, enabling us to
support our clients and deliver strong returns for shareholders in
a wide range of market conditions. Our business model is
focused on sustainable lending, with a strong net interest margin
and conservative underwriting, supported by a clearly defined
risk appetite and a prudent approach to managing our business
and financial resources.
Key performance indicator
Return on opening equity
Adjusted operating profit (£ million)
Adjusted earnings per share growth over three years1
Total shareholder return per annum over three years2
Distributions to shareholders (£ million)3
Continuing to apply this disciplined approach, the group
achieved another good performance in the 2018 financial year,
with an overall increase of 4% in adjusted operating profit to
£278.6 million (2017: £268.7 million). Adjusted EPS increased 5%
to 140.2p (2017: 133.6p).
Return on opening equity remained strong at 17.0% (2017: 18.1%)
and well ahead of the group’s cost of capital.
The table below sets out an overview of our one-year and
three-year key performance indicators which provide context
for the Remuneration Committee decisions taken this year.
All three of our divisions performed well in the 2018 financial
year. We importantly maintained our strong net interest margin at
8.0% (2017: 8.1%) and our prudent underwriting, in the Banking
division. Notwithstanding our disciplined approach, we also
achieved good underlying loan book growth at 6.6% (2017: 7.0%)
and adjusted operating profit increased 2% to £251.8 million
(2017: £247.4 million). Winterflood achieved another strong result
with operating profit in line with the prior year at £28.1 million
(2017: £28.1 million). Asset Management delivered a significant
increase in profits, up 33% to £23.1 million (2017: £17.4 million)
with strong net inflows at 12% of opening managed assets,
which increased to £10.4 billion at 31 July 2018 (31 July 2017:
£8.9 billion).
We also maintained our prudent and diverse funding position,
with total funding covering 132% (31 July 2017: 127%) of the loan
book at 31 July 2018. Our capital position remains strong and
well ahead of regulatory requirements with a CET1 capital ratio of
12.7% (31 July 2017: 12.6%).
2018
17.0%
278.6
16.3%
3.3%
94.0
2017
18.1%
268.7
28.3%
10.1%
89.3
1 For the three-year periods ended 31 July 2018 and 31 July 2017.
2 For the three-year periods ended 31 July 2018 and 31 July 2017 based on the average three-month share price prior to that date.
3 Interim dividend paid and final dividend proposed for the financial year.
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Executive director remuneration outcomes
As a result of the sustained good performance, the last year saw
the financial element of the EDs’ bonus, which is linked to RoE,
pay out at 80% of maximum. The EDs also achieved strong
performance against their group-wide balanced scorecard,
introduced this year, with payouts ranging from 90% to 95%. The
Remuneration Committee determines the overall outcome of the
balanced scorecard and adjusts the final individual ratings to
take into account the individual contributions to successful
outcomes of the scorecard objectives. A summary of
achievements against the financial targets is set out on page 80,
and against the balanced scorecard on pages 90 to 92. Overall
bonus payouts were 85% to 86% of maximum.
Notwithstanding continued strong returns in the last year, the
vesting outcome for the long-term incentive plans awarded in
2015, which are linked to growth in earnings and total
shareholder returns, as well as performance against risk
management objectives, is lower than prior years, declining to
19%. This reflects lower growth in earnings at the current stage
of the business cycle, and more modest share price
performance. In a slower growth environment, the Long Term
Incentive Plan (“LTIP”) targets are particularly stretching and not
always achievable without compromising our prudent and
consistent underwriting standards. Consequently, the single total
remuneration figures for the EDs are down from the previous
year. The vesting outcomes are set out on pages 93 to 95.
Group-wide employee remuneration
The responsibility for determining the reward practices on a
group-wide basis lies with the Remuneration Committee. Our
wider employee remuneration structure aims to:
• attract, motivate and retain high calibre employees across
the company;
• reward good performance;
• promote the achievement of the company’s annual plans and
its longer-term strategic objectives;
• align the interests of employees with those of all key
stakeholders, in particular our customers, clients and
shareholders, as well as other key stakeholders including
regulators; and
• support good risk management procedures and a positive
client conduct culture.
There have been no significant changes to the pay or benefits
structures of the wider employee population during the course of
the year. The group continues to pay all staff at or above the
national living wage, which is in excess of the national minimum
wage. The average salary increase awarded across the group
was 2%, with an emphasis on supporting pay progression for
junior employees. Average total compensation for employees
across the group increased by 1%.
Gender pay disclosure
This year the Remuneration Committee has overseen the
publication of our first gender pay gap report, which is published
on our website at https://www.closebrothers.com/sites/default/
files/CBG_Gender_Pay_Gap_Report.pdf. We are confident that
men and women are paid equally for performing equivalent roles
across our business and are committed to taking steps to
reduce our gender pay gap.
Our gender pay gap is generally driven by a greater proportion of
males in senior and front office roles where market rates are higher.
We are strongly committed to increasing the proportion of women
in senior roles, and already exceed the government’s target for
33% of board members to be women, and are broadly in line with
Hampton-Alexander gender targets for executives and their direct
reports. However, we know there is far more to be done to improve
our female talent pipeline at all levels of our business and have
made a number of commitments to drive forward change.
Changes to the board of directors during the year
Senior management succession planning is a key focus of the
directors and the group’s remuneration policy sets out the
approach for EDs’ compensation should they leave the business.
As announced earlier in the year, Jonathan Howell has decided
to leave the company at the end of the Annual General Meeting
in November 2018. Jonathan will be eligible to be considered for
a time pro-rated 2019 bonus for the period of the 2019 financial
year he had been group finance director. Jonathan will not
receive a 2018 LTIP award, recognising that he will not be in the
business for the majority of the long-term performance period.
Full details of his remuneration arrangements following cessation
of employment will be disclosed on our website when finalised
and in next year’s Directors’ Remuneration Report.
In June we confirmed that Mike Morgan, currently chief financial
officer of the Banking division, will succeed Jonathan. Mike’s
annual salary as group finance director will be set at £400,000.
He will also receive cash in lieu of pension at 10% of salary in line
with the general employee level. Mike’s maximum annual bonus
and LTIP opportunity will both be set initially at 175% of salary,
well within the 300% and 350% maximums respectively
permitted within our approved policy.
Key external developments
The Committee is mindful of the forthcoming changes to the
Corporate Governance Code, which will become effective for
Close Brothers from August 2019.
The responsibilities and roles undertaken by the Committee
already encompass much of the revised Code; however, during the
course of the following year the Committee will undertake a review
of what additional steps need to be taken, with particular focus on
how we effectively maintain and, where appropriate, extend
engagement with all colleagues and across all other stakeholders.
Finally, I would like to thank my fellow members of the
Remuneration Committee for their commitment and engagement
in the last year. I hope that you will find this report on the
directors’ remuneration useful, understandable and clear.
Bridget Macaskill
Chairman of the Remuneration Committee
25 September 2018
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Governance
Directors’ Remuneration Report continued
Executive Directors’ Remuneration Policy
The Executive Directors’ Remuneration Policy was approved by shareholders at the 2017 AGM. It is intended that the policy will apply
for three years up to the 2020 AGM, unless amendments are required, in which case further shareholder approval will be sought.
The policy can be read in full on pages 74 to 81 of the 2017 Annual Report which is available on our website at
www.closebrothers.com. A summary of the main elements of the remuneration policy is set out in the table below.
Information on how the remuneration policy will be applied in 2019 is included in the Annual Report on Remuneration section, on
pages 95 and 96.
Remuneration policy – executive directors
Element
Operation
Base salary
Attracts and retains high calibre employees.
Reflects the employee’s role and experience.
• Paid monthly in cash.
• Increases will generally not exceed those for the broader
employee population unless there is a change in role or
responsibility.
Benefits
Enables the EDs to perform their roles effectively by contributing
to their wellbeing and security.
• Include private medical cover, health screening, life assurance
cover, income protection cover and allowance in lieu of
company car.
Pension
Provides an appropriate and competitive level of personal and
dependant retirement benefits.
Annual bonus
Motivates executives to support the group’s goals, strategies
and values over both the medium and long term and aligns
their interests with those of key stakeholders.
Long Term Incentive Plan
Motivates executives to achieve the group’s longer-term
strategic objectives and aligns their interests with those of
key stakeholders.
• Other benefits provided to individuals in certain circumstances,
such as relocation.
• Existing EDs may receive cash in lieu of a pension up to 22.5%
of base salary.
• New EDs promoted to the board will receive pension
contributions in line with the general employee population.
• Maximum opportunity:
– Group chief executive and group finance director: 300% of
base salary (60% deferred into shares).
– Group head of legal and regulatory affairs: 120% of base
salary (40% deferred into shares).
• Deferred shares vest in equal tranches over three years.
• 40% to 60% based on financial performance with remainder
based on performance against a balanced scorecard.
– Group chief executive and group finance director: 60%.
– Group head of legal and regulatory affairs: 40%.
• Subject to malus and clawback provisions.
• Maximum award level at grant:
– Group chief executive and group finance director: 350% of
base salary.
– Group head of legal and regulatory affairs: 275% of base
salary.
Aids the attraction and retention of key staff.
• Awards vest after three years with subsequent two-year
Shareholding requirement
Aligns the interests of executives with those of shareholders.
holding period.
• Awards vest 70% based on financial performance and 30%
based on non-financial performance.
• Subject to malus and clawback provisions.
• Shareholding requirements are:
– Group chief executive and group finance director: minimum
200% of base salary.
– Group head of legal and regulatory affairs: minimum 100% of
base salary.
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Element
Other
Legacy arrangements
Malus
The deferred element of the annual bonus is subject to malus
prior to vesting.
The LTIP is subject to malus for the three-year period to the
point of vesting.
Clawback
The cash element of the annual bonus is subject to clawback
for three years from award.
The deferred element of the annual bonus is subject to clawback
for three years from date of grant
Operation
• The group will pay legal, training and other reasonable and
appropriate fees, including any relevant tax liabilities, incurred
by the EDs as a result of performing their duties.
• The EDs are also permitted to participate in the group-wide
Save As You Earn scheme and Share Incentive Plan.
• Historical LTIP and SMP awards granted under the previous
executive remuneration policy (approved at the 2014 AGM) will
continue to operate in line with that policy.
• 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.
• The circumstances where it may apply:
– The ED’s employment is terminated for misconduct or the
ED is issued with a formal disciplinary warning for
misconduct under the firm’s disciplinary policy.
– 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.
• The level of the award is not sustainable when assessing the
overall financial viability of the firm.
• The circumstances where it may apply:
– Discovery of a material misstatement resulting in an
adjustment in the audited consolidated accounts of the
group, or the audited accounts of any material subsidiary.
– The assessment of any performance target or condition in
respect of an award was based on material error, or
materially inaccurate or misleading information.
The LTIP is subject to clawback for four years from date of grant.
– 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.
– Action or conduct of a participant which, in the reasonable
opinion of the board, amounts to fraud or gross misconduct.
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Governance
Directors’ Remuneration Report continued
Service contracts and policy for payment on loss of office – executive directors
Standard provision
Notice period
Policy
Details
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.
• EDs may be required to work during the notice period,
may be placed on garden leave 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 EDs
who work for part of the year or are “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.
Treatment of unvested
deferred awards under the
annual bonus plan and any
previous Invested SMP
Shares
Treatment of the LTIP and
any previous Matched SMP
Shares
The Committee has the discretion under
the relevant plan rules to determine
whether “good leaver” status should be
applied on termination.
• 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
The current approach provides that
discretion may be afforded in cases such
as death, disability, retirement, redundancy
or mutual separation.
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.
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 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 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.
Outside appointments
EDs may accept external appointments.
• Board approval must be sought before accepting the
appointment.
• The fees may be retained by the director.
Chairman and non-
executive directors
• Engaged under letters of appointment for terms not exceeding three years.
• Renewable by mutual agreement and can be terminated on one month’s notice.
• All non-executive directors are subject to annual re-election.
• No compensation is payable if required to stand down.
Other
• 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 group’s registered office.
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Dates of service contracts – executive directors
Name
Preben Prebensen
Jonathan Howell
Elizabeth Lee
Date of service contract
9 February 2009
8 October 2007
1 August 2012
Remuneration policy for the chairman and independent non-executive directors
Element and how it supports the group’s
short-term and long-term strategic objectives Operation and maximum payable
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.
Fees are paid in cash and are reviewed periodically.
Fees for the chairman and non-executive directors are set by the board. The chairman and
non-executive directors do not participate in decisions to set their own remuneration.
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 and associated tax liabilities incurred in connection with the performance of 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.
Appointment letters – non-executive directors
Name
Oliver Corbett
Geoffrey Howe
Lesley Jones
Bridget Macaskill
Mike Biggs
Date of appointment
3 June 2014
4 January 2011
23 December 2013
21 November 2013
14 March 2017
Current letter of appointment start date
17 November 2016
17 November 2016
17 November 2016
17 November 2016
14 March 2017
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Governance
Directors’ Remuneration Report continued
Annual Report on Remuneration
Remuneration Committee
Committee roles and responsibilities
The Committee’s key objectives are to:
• determine the overarching principles and
parameters of the remuneration policy on
a group-wide basis;
The Committee’s main responsibilities are to:
• review and determine the total remuneration packages of EDs and other senior
executives, including group Material Risk Takers and senior control function staff,
in consultation with the chairman and chief executive and within the terms of the
agreed policy;
• establish and maintain a competitive
• approve the design and targets of any performance-related pay schemes
remuneration package to attract, motivate
and retain high calibre EDs and senior
management across the group;
operated by the group;
• align senior executives’ remuneration with
• review the design of all-employee share incentive plans;
the interests of shareholders; and
• promote the achievement of the group’s
annual plans and strategic objectives by
providing a remuneration package that
contains appropriately motivating targets
that are consistent with the group’s risk
appetite.
• 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;
• 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 chair, together with each of the other independent non-executive directors.
A record of attendance at the five meetings held during the year is set out on page 68.
The chairman of the board, group chief executive, group head of human resources and the head of reward and HR operations also
attend meetings by invitation.
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Membership activity in the 2018 financial year
There were five meetings of the Committee held during the year. There is a standing calendar of items which is supplemented by
other significant issues that arise during the year. The key matters discussed during the year were as follows:
Meeting
September 2017
The Committee’s main activities
• Approval of Directors’ Remuneration Report for 2017, including the 2018 Remuneration Policy
• Final review and approval of EDs’ annual bonus targets and objectives for 2018
• Review and approval of targets and objectives for first LTIP awards under the 2018 Remuneration Policy
• Review and approval of the remuneration section of the Pillar 3 disclosure for 2017
• Review and approval of the Remuneration Policy Statement for 2017
• Review of performance testing results for vesting 2014 LTIP and SMP awards
• Approval of risk management objectives for 2017 awards
• Annual review and approval of the Remuneration Committee terms of reference
January 2018
• Annual Remuneration Governance review
• Final approval of 2017 Material Risk Takers
• Remuneration Committee adviser selection
• Gender Pay Gap review
April 2018
June 2018
July 2018
• Forecast year-end all-employee group-wide salary and bonus analysis
• Review of Material Risk Takers for the 2018 financial year
• Annual review of remuneration principles
• Thematic review of effectiveness of sales incentive schemes
• Review of initial submission of 2018 all-employee group-wide compensation proposals
• Review of proposed 2018 compensation for Material Risk Takers
• Review and approve risk-adjustment outcomes (pool and individual) for 2018
• Annual review whether to apply malus and clawback to any remuneration
• Initial review of the risk management objectives for the 2015 LTIP vesting
• Review and approval of final year-end 2018 all-employee group-wide compensation proposals
• Review and approval of EDs’ 2018 compensation proposals
• Review and approval of proposed 2018 LTIP awards
• Assessment of the vesting of the risk management objectives for the 2015 LTIP vesting
• Review of sales incentive schemes and approval of schemes for 2019
• Review of LTIP performance targets for 2018 awards
• Initial review of EDs’ annual bonus targets and objectives for 2019
• Final confirmation of 2018 Material Risk Takers, including quantitative criteria
• Overview and proposed approach to Directors’ Remuneration Report
Advice
During the year under review and up to the date of this report, the Committee consulted and received input from the chairman of the
board, the group chief executive, the group head of HR, the head of reward and HR operations, the group chief risk officer and the
company secretary. Where the Committee seeks advice from employees, this never relates to their own remuneration.
Following the confirmation that the Committee’s former advisers, PwC, were to be appointed the external auditor of the group, a
number of remuneration consultants were approached in November 2017 to tender for the position of external adviser to the
Committee. Following the review, Deloitte LLP (a member of the Remuneration Consultants Group) were appointed in February 2018.
Fees paid to Deloitte during the year were £40,150. During the year Deloitte also provided advice on the IRB programme. The
Committee is satisfied that the provision of these other services does not affect the objectivity and independence of the remuneration
advice provided by Deloitte.
At an early stage of the audit tender process, the PwC remuneration advisory role was identified as a potential conflict. A provisional
plan was agreed at that stage by the chairs of the Audit and Remuneration Committees to manage the potential conflict should PwC
be successful in the tender. Following the recommendation to appoint PwC as auditor in May 2017, the board approved a much
reduced transitional remuneration advisory role for PwC to take effect from 1 August 2017, ensuring no conflict would arise. During
the period between August and December 2017 PwC provided some interim management advice on a number of minor matters
consistent with the board-approved transition role.
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Close Brothers Group plc
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Annual Report 2018
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Governance
Directors’ Remuneration Report continued
The Committee received information on comparative pay data from MM&K. Slaughter and May provided legal advice on the
company’s equity scheme rules. Fees paid to Slaughter and May were £19,200.
Statement of voting on the remuneration policy at the 2017 AGM
Directors’ Remuneration Policy
Statement of voting on the Directors’ Remuneration Report at the 2017 AGM
Annual Report on Remuneration
Implementation of the policy in 2018
Single total figure of remuneration for EDs 2018 (Audited)
For
97.1%
For
99.2%
Against
2.9%
Against
0.8%
Number of
abstentions
11,022
Number of
abstentions
2,647,845
Name
Preben Prebensen
Jonathan Howell
Elizabeth Lee
Salary
Benefits
Annual bonus1
Performance
awards2,3
Pension
Total
2018
2017
2018
2017
£’000
£’000
£’000
£’000
550
415
338
540
408
331
20
14
14
24
13
16
2018
£’000
1,419
1,058
348
2017
£’000
1,474
1,097
292
2018
2017
2018
2017
2018
2017
£’000
£’000
£’000
£’000
£’000
£’000
433
326
168
1,177
889
465
123
93
75
122
92
74
2,545
1,906
943
3,337
2,499
1,178
1 60% of Preben Prebensen’s and Jonathan Howell’s annual bonus is deferred into shares and 40% of Elizabeth Lee’s annual bonus is deferred into shares.
2 The figures for the performance awards for 2017 have been re-calculated using the actual share price on the dates of vesting for the LTIP and Matched SMP Shares of £14.65.
The three-month average to 31 July 2017 was used for the 2017 report given that the awards were vesting after publication of the report.
3 The figures for the performance award for 2018 have been calculated using the three-month average to 31 July 2018.
The charts below compare the EDs’ single total remuneration figures for 2017 and 2018.
Preben Prebensen
FY18
FY17
27%
21%
56%
17%
44%
35%
0
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
Fixed remuneration
Annual bonus
Performance awards
Jonathan Howell
FY18
FY17
27%
21%
56%
17%
44%
35%
0
500
1,000
1,500
2,000
2,500
3,000
Fixed remuneration
Annual bonus
Performance awards
Elizabeth Lee
FY18
FY17
45%
36%
37%
18%
25%
39%
0
200
400
600
800
1,000
1,200
1,400
Fixed remuneration
Annual bonus
Performance awards
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Link between reward and performance
The group’s financial results have been good this year, and over the past three years. Adjusted operating profit has increased 4% in
the year to £278.6 million, and it has grown 7% per annum compounded over the last three financial years on a reported basis. RoE
remains strong at 17.0% and dividend growth was 5% this year, with dividend cover remaining at 2.2 times.
The strong RoE has been reflected in the EDs’ bonuses, with the element of the bonus determined on RoE being 80.0% of the
potential maximum. The EDs also achieved strong performance against their group-wide balanced scorecard with payouts ranging
from 90% to 95%.
For the 2015 Long Term Incentive Plan vesting this year, 80% of the vesting is based on the financial goals and 20% is based on risk,
compliance and control objectives. For the financial goals the adjusted EPS growth of 16.3% over the last three years was below the
threshold performance target of 18.8% and consequently has not vested within the EPS element of the LTIP. The compounded TSR of
3.3% per annum has not met the threshold target of 10.0% per annum under the LTIP and has also not vested. These vesting levels
reflect lower growth in earnings at the current stage of the cycle as well as modest share price performance in the last three years. The
continued prudent approach to capital management combined with a good performance in risk, compliance and controls mean that
the risk management objectives element vested at 92.9%. As a result, the LTIP will vest at 18.6% overall this year (see page 93 for
further details).
The LTIP vesting levels have significantly reduced the single total remuneration figures, despite the ongoing good performance of the
company, reflecting the stretching targets set by the Committee which may not be met at the current stage of the business cycle.
Additional disclosures on the single total remuneration figure for EDs table (Audited)
Salary
The per annum salaries paid during the year are as shown in the single total remuneration figure table on page 88. There were modest
increases, 2.0% or lower, between 2017 and 2018. 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. No salary increases have been
awarded to the current EDs for the 2019 financial year, whilst the average increase for the general employee population is 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 allowances 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.
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
Maximum bonus potential for the 2018 financial year was 300% of salary for Preben Prebensen and Jonathan Howell, and 120% of
salary for Elizabeth Lee. The bonuses for EDs were determined with reference to RoE targets and a group-wide balanced scorecard.
Details of the achievements and targets are outlined below.
Summary of annual bonus achievements
Name
Preben Prebensen
Jonathan Howell
Elizabeth Lee
Financial target (RoE)
Group-wide balanced scorecard
Potential
maximum
(100% of
potential
maximum)
(£’000s)
990
747
162
Weighting
60%
60%
40%
Actual
per cent of
maximum
80.0%
80.0%
80.0%
Actual
amount
awarded
(£’000s) Weighting
40%
40%
60%
792
597
129
Potential
maximum
(£’000s)
660
498
243
Actual
per cent
awarded
95.0%
92.5%
90.0%
Actual
amount
awarded
(£’000s)
627
461
219
Total
bonus
awarded
(£’000s)
1,419
1,058
348
The RoE for the 2018 financial year was 17.0% against a maximum target of 20%, warranting an award of 80.0% of the potential
maximum bonus for this element.
RoE targets
Threshold
33.3% of maximum potential
12%
Target
66.7% of maximum potential
15%
Maximum
100% of maximum potential
20%
Actual RoE achieved
17.0%
Percentage
of RoE element paid
80.0%
For Preben Prebensen and Jonathan Howell, 60% of any annual bonus, and 40% for Elizabeth Lee, is deferred into group shares
vesting in equal tranches over three years in line with the 2017 Remuneration Policy.
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Annual Report 2018
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Governance
Directors’ Remuneration Report continued
Group-wide ED objectives for the 2018 financial year
Effective from the 2018 financial year, the Committee has replaced the personal objectives element of the annual bonus with a shared
balanced scorecard, in line with the revised remuneration policy. This includes measures relating to strategy; people and customers;
and risk, compliance and conduct, and is common to all EDs.
Annual performance objectives are determined by the Remuneration Committee at the start of each financial year, and are designed
to support the group’s wider strategic objective of protecting, improving and extending its successful model.
The table on pages 90 to 92 sets out examples of the key balanced scorecard objectives which were in place in 2018, performance
against these objectives and an overview of the factors that the Committee has taken into account when assessing the performance
of the executives. The Committee determines the overall outcome of the balanced scorecard and adjusts the final individual rating to
take into account the individual contributions to successful outcomes of the scorecard objectives. Resultant awards ranged between
90% and 95% of maximum for this element of the bonus.
For reasons of commercial sensitivity, not all performance criteria and factors taken into consideration by the Committee have been
disclosed.
Performance against group-wide ED balanced scorecard
Our overriding strategic business objectives of protect, improve and extend are reflected in, and aligned to, the strategic element of
the balanced scorecard.
Element
Objective
Performance and extent to which target has been met
Strategic –
protect
Adherence to the lending
model
• Net interest margin 8.0%
• Bad debt ratio 0.6% (10-year range
0.6-2.6%)
• Firm adherence to the lending
model with continued margin and
underwriting discipline
• Return on net loan book 3.5%
• Analyst coverage and shareholder
(10-year range 2.3-3.7%)
• Conservative loan to value (“LTV”)
ratios e.g. typical LTV 50-60% in
Property and 80-85% in Motor
Finance
feedback continue to recognise the
key attributes of the group’s
business model
• All core metrics remain consistent
with lending model
• Average loan book maturity 14
• All credit risk metrics including
months (2017: 14 months)
• Moderate underlying loan book
growth of 6.6% (10-year range
6-23%)
Maintain investment while
controlling costs
• Banking E/I ratio 49% (2017: 48%)
• Group E/I ratio 60% (2017: 60%)
security cover, tenor, pricing, credit
quality and concentration risk
remain within risk appetite
• Moderated loan book growth
reflecting margin and underwriting
discipline consistent with our
business model
• Cost discipline maintained, with
stable E/I ratios in the Banking
division and group overall,
notwithstanding both slower top
line growth and ongoing
investment spend
Maintain prudent levels of
capital funding and
liquidity
• CET1 ratio 12.7% (fully loaded
• Maintained prudent position with
regulatory minimum requirement
9.0%)
• Total capital ratio 15.0% (fully
loaded regulatory minimum
requirement 13.4%)
• Leverage ratio 10.6% (minimum
requirement 3.0%)
• Total funding 132% of loan book
(31 July 2017: 127%)
• Average maturity of funding
allocated to loan book 23 months
(31 July 2017: 21 months)
• £1,435 million of liquid assets
(31 July 2017: £1,029 million)
• Average 12-month liquidity
coverage ratio at 1,038%
(regulatory minimum 100%)
strong capital ratios, diverse
funding sources and conservative
maturity profile
• Maintained CET1 ratio comfortably
ahead of minimum fully loaded
requirement and very strong
leverage ratio
• Maintained prudent level of funding
in relation to the loan book, with
average maturity of allocated
funding significantly longer than
loan book
• Further strengthened funding
position with issuance of senior
bond and additional motor
securitisation
• Prudent liquidity position and very
strong liquidity coverage ratio,
substantially in excess of regulatory
requirements
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Element
Objective
Performance and extent to which target has been met
Strategic –
improve
Strategic business reviews
of each business for
strategic threats and
opportunities
• Completed review of medium and long-term threats and opportunities
both at executive/board and business level, including thematic review
facilitated by an external consultant
• Deep dive into business-specific opportunities, including changing
Progress against key
investments
Strategic –
extend
Continue to develop
opportunities in existing
and adjacent markets
People and
customers
Maintain strong employee
engagement
Sustain strong
performance against key
customer metrics
customer requirements and use of technology; process automation; and
technology optimisation
• Increased sharing of best practice examples across the businesses,
focused on use of technology, customer-centric solutions and process
optimisation
• IRB programme fully resourced and progressing to plan; constructive
engagement with PRA; on track to submit application in 2019
• Key business initiatives on track, including multi-year investment
programmes in Premium and Motor Finance
• New Treasury deposit platform on track for delivery in FY2019
• IFRS 9 transition achieved on time and on budget at 1 August 2018
• Good growth momentum in several core lending areas including
expansion of our Property business in regional UK markets; growth in
Invoice Finance and Brewery Rentals
• Strong growth momentum in Asset Management with 12% net inflow rate
and successful hire of additional high net worth portfolio managers
• Continued growth in Winterflood’s institutional business
• Successful integration of Novitas acquisition, achieving strong loan book
growth and expansion of product offering
• Germany and Technology Services remain in early stage
• 89% employee engagement
• Annual engagement pulse survey
(2017: 89%)
confirms maintained strong
engagement scores
• Developed a group purpose
statement, linked to strategy and
culture, shared with employees
with positive feedback
• We monitor a wide range of
• Significant progress in assessing
customer metrics including net
promoter scores (e.g. +50 in
Premium Finance and +61 in
bespoke Asset Management) as
well as repeat business (e.g. 77%
in Property)
how our current proposition meets
changing requirements from
customers and partners, including
through formal research and focus
groups, attendance at key industry
events and regular customer
forums
• Completed customer journey
mapping and delivered customer
journey improvements across a
number of Banking businesses
• Formally introduced accessibility
training across the business to
ensure digital channels are built to
work for everyone
• Initiated Voice of the Customer and
Partner programme to enable us to
listen, analyse, act upon and
monitor feedback
Succession plans for key
senior management team
• Identified successor for group finance director, through a robust external
and internal process
• Strengthened internal succession for several key roles through
external hires
• Further developing internal succession options through internal and
external coaching, talent reviews and external benchmarking
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Governance
Directors’ Remuneration Report continued
Element
Objective
Performance and extent to which target has been met
Risk conduct
and
compliance
Preserve strong
compliance across the
group with its legal and
regulatory obligations and
own risk appetite
• Continued enhancement of processes and procedures relating to
conduct risk
• New cyber security strategy approved, setting out core principles to
inform ongoing investment decisions
• Successful completion of GDPR programme supported by enhanced risk
assurance activities, supplemented by additional reporting and MI to
monitor ongoing compliance
• Ongoing review of existing procedures to ensure compliance with evolving
regulatory requirements
• Continued enhancement of operational risk framework with development
of a risk and control register to identify, mitigate and quantify operational
risks across businesses and functions
• 100% completion of mandatory training for eligible staff
• Crisis management simulations conducted at group, business and
functional level, including divisional management teams
• Disaster recovery tests conducted on a regular cycle, with evolution and
enhancement of testing approach
Performance objective has been achieved
Satisfactory outcome, further progress to be made
Performance objective has not been met
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Long-term performance awards
The performance awards in the single total figure of remuneration include the 2015 LTIP grant and the 2015 Matched SMP Shares.
Both of these will vest on 3 October 2018, and the overall vesting is outlined in the table below.
Details of the overall vesting for the LTIP and SMP
Performance measure
Adjusted EPS growth (40% weighting)
TSR (40% weighting)
Threshold target
RPI +3% p.a.1
+10% p.a.
Maximum target
RPI +10% p.a.
+20% p.a.
Risk management objectives (20% weighting)
Overall vesting
1 Minimum vesting target equates to 5.9% p.a.
n/a
n/a
Actual achieved
5.2% p.a.
3.3% p.a.
As per the
table on
page 95
Overall vesting
0.0%
0.0%
18.6%
18.6%
The share price for the LTIP and Matched SMP Shares increased by 2% 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 2018 was 1,518.2p (from 1 May
2018 to 31 July 2018, which was the performance measurement period). The 2015 LTIP and SMP awards were originally granted at
1,493.4p. While the increase in share price remains positive over the performance period, the single total figures of remuneration for
the EDs are down from the previous year, primarily due to the lower overall vesting of the long-term performance awards.
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.
Details of the assessment of the risk management objectives for the LTIP and SMP
The Committee considers it to be of critical importance that remuneration arrangements continue to incentivise discipline in the
management of the firm’s capital and balance sheet and in the delivery of the business model.
The Committee undertakes a robust assessment of performance against the risk management objectives to ensure that payments to
EDs are fair and appropriate with consideration for individual and corporate performance. In doing so, the Committee assesses
performance against a number of key measures in making its determination.
Performance was assessed after each of the three years of the LTIP performance period, with each year’s review carrying a weighting
of one-third towards the overall vesting for the award, ensuring a fair assessment of progress over the three-year period.
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Governance
Directors’ Remuneration Report continued
Year one and year two assessments were set out in the 2016 and 2017 Directors’ Remuneration Reports respectively. The year three
performance assessment is detailed below.
Year three performance assessment
Element
Measure
Extent to which the Committee determined the target has been met
Capital and balance
sheet management
Capital requirements
• CET1 capital ratio remained strong at 12.7% and provides a significant
buffer above both the current CET1 and Tier 1 regulatory minima of
7.9% and 9.8% respectively.
Dividend
• Full-year dividend increased 5%, maintaining strong dividend cover at
2.2 times.
Funding
Liquidity
• Total funding of £9.6 billion of which £5.0 billion is term funding. Average
maturity of funding allocated to loan book is 23 months, well in excess
of the loan book at 14 months.
• Continued to comfortably meet the liquidity coverage ratio.
• Requirements with an average annual ratio of 1,038% vs minimum
requirement of 100%.
Risk, compliance
and controls
Regulatory relationship
• Maintained good regulatory relationship with the PRA and
continued to work closely with the FCA on their focus areas.
Strategic Risk Objectives • Risk appetite framework evolved, with continued development planned.
Risk model governance framework in place.
Regulation initiatives
• Both GDPR and MiFID II were implemented satisfactorily.
• Continued focus on customer outcomes, including culture, vulnerable
customers and affordability.
Operational risk/resilience • Operational resilience approach evolving in line with regulatory
standard. Further investment in the IT estate and process
enhancements support contingency and disaster recovery plan.
Incident simulations employed to good effect. Cyber security strategy
continually evolving.
External environment
• Brexit: Satisfactory progress has been made with contingency plans
in place.
Key roles
• Talent and succession plans reviewed and in place.
Audit
• There have been no audit reports with “significant” issues and no
reports have given material cause for concern. There is a culture of
strong engagement with group internal audit.
Performance objective has been achieved
Satisfactory outcome, further progress to be made
Performance objective has not been met
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The table below summarises the Committee’s assessment of performance against the risk management objectives after each of the
three years of the LTIP performance period.
Element
Year one assessment
Year two assessment
Year three assessment
Overall vesting
Capital and balance sheet management
Risk, compliance and controls
Overall vesting
100%
85%
100%
87.5%
100%
85%
100%
85.8%
92.9%
The Committee plans to strengthen the focus and alignment of the key measures within the risk, compliance and controls section
and more detail on how the objectives will be structured going forward is provided in the “Implementation of the policy in 2019”
section below.
Implementation of the policy in 2019
Base salary
Group chief executive – Preben Prebensen
Group finance director – Jonathan Howell1
Group finance director – Mike Morgan2
Group head of legal and regulatory affairs – Elizabeth Lee
1 For the period 1 August 2018 to the 2018 Annual General Meeting.
2 Salary effective from the 2018 Annual General Meeting.
Salary effective from
1 August 2018
Percentage increase
£550,000
£415,000
£400,000
£337,500
0.0%
0.0%
–
0.0%
Base salaries 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 EDs’ salaries not to be increased, in line with the salary guidance
for all senior employees. The average salary increase across the wider employee population was 3%.
The EDs will receive benefits in line with those outlined in the remuneration policy table on page 82. There will be no increases to the
allowances for benefits other than any potential increase in the cost of providing them.
The current EDs will continue to receive a cash allowance in lieu of a pension equivalent to 22.5% of base salary. Mike Morgan, whose
appointment as the new group finance director will take effect on the date of the 2018 Annual General Meeting, will receive 10% of
base salary cash allowance in lieu of a pension less employer’s national insurance contributions, in line with the level of benefit offered
to the general employee population.
2019 annual bonus (i.e. bonus awarded in respect of the 2019 performance year)
Nature of measures
Financial
Choice of measures
RoE
Non-financial
Balanced scorecard:
• Strategic objectives
• People and customers
• Risk, conduct and
compliance
Weightings
Vesting ranges
Group chief
executive and group
finance director
60%
Group head of legal
and regulatory affairs
40%
40%
60%
Targets
12 to 20%
Discretionary
assessment1
All
Threshold – 33%2
Maximum – 100%
Minimum – 0%
Maximum – 100%
1 Due to commercial sensitivity, the details of the performance targets and achievement against those will be outlined in the 2019 Annual Report on Remuneration.
2 Performance below threshold on the RoE measure would result in zero vesting of the financial measure.
For the current EDs, annual bonuses will be subject to the same caps as applied in respect of the 2018 performance year.
Mike Morgan will have a maximum bonus potential of 175% of salary following his appointment to the board. His annual bonus relating
to the proportion of the year before his appointment as group finance director will be determined in line with other group Executive
Committee members, and his annual bonus for the proportion of the year as an ED will be determined as per the above table.
RoE continues to be our long-standing metric for the financial element. The Committee considers it to be the primary measure of
business performance, as it provides the strongest evidence of adherence to the business model.
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Close Brothers Group plc
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Annual Report 2018
|
Governance
Directors’ Remuneration Report continued
2018 LTIP (i.e. LTIP awarded in respect of the 2018 to 2020 cycle)
The 2018 LTIP awards due to be granted in October 2018 are shown in the table below.
2018 LTIP award1
Percentage change in LTIP award from 2017
2018 LTIP award as a percentage of 2018 salary
1 Mike Morgan will be granted a 2018 LTIP of £608,000.
The 2018 LTIP targets are detailed in the table below.
Chief executive
Preben Prebensen
£1,890,000
0%
344%
Group finance director
Jonathan Howell
–
–
–
Group head of legal and
regulatory affairs
Elizabeth Lee
£700,000
0%
207%
Nature of measures
Financial
Choice of measures
Adjusted EPS growth
Targets
10 to 30% over 3 years
RoE
12 to 20%1
Non-financial
Risk management objectives Discretionary assessment
against specific goals
1 Average over three-year performance period.
Weightings
35%
35%
30%
Vesting ranges
Threshold – 25%
Maximum – 100%
Minimum – 25%
Maximum – 100%
Threshold – 25%
Maximum – 100%
The Committee believes these targets are appropriately stretching and effectively align the EDs’ interests with those of shareholders.
Due to commercial sensitivity, the full details of the performance targets will be outlined in the Directors’ Remuneration Reports
throughout the performance period.
In order to provide greater alignment of EDs’ compensation to the key long-term risk measures, the Committee intends to focus the
number of risk, conduct and compliance objectives within the risk management objectives. Objectives to be included for the 2018
LTIP are:
Measure
Further progress our plans towards an Internal Ratings Based (“IRB”) approach
Embed the culture framework of the organisation
Maintain and improve our relationships with regulators, and monitor their evolving agendas
Continue to enhance our resilience to operational risks
Relative importance of spend on pay
The following table shows the total remuneration paid compared to the total distributions to shareholders.
Remuneration paid
Distributions to shareholders1
1 Interim dividend paid and final dividend proposed for the financial year.
2018
£ million
300.1
94.0
2017
£ million
283.3
89.3
Change in remuneration of the chief executive
The following table shows how the remuneration of the chief executive changed compared to the general employee population for the
2018 financial year. The Committee deemed it appropriate for Preben Prebensen to receive a salary increase lower than the general
employee population. The change in bonus for Preben Prebensen primarily reflects the achievement against the RoE outlined on page
89. The average bonus for the general employee population primarily increased in line with AOP as shown on page 1.
Preben Prebensen
All employee population
Average change
in salary for 2018
(from 1 August 2017)1
1%
2%
Average change
in benefits for 2018
(from 1 August 2017)2
1%
2%
Average change
in annual bonus
for 20183
(3.7%)
3%
1 Calculated as the average percentage increase in salary for those eligible for an increase at 1 August 2017.
2 Calculated as the average percentage increase in benefits for those eligible for a salary increase at 1 August 2017.
3 The percentage increase in the average bonus calculated as the total bonus spend divided by the average headcount for financial years 2017 and 2018.
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Close Brothers Group plc
| Annual Report 2018
97
Chief executive: historical information
Preben Prebensen
Single figure of total remuneration
(’000)2
Annual bonus against maximum
opportunity
LTIP, SMP and Matching Share
Award vesting
2010
2011
2012
2013
2014
2015
2016
20171
2018
£1,890
£2,187
£2,496
£5,748
£7,411
£5,962
£3,995
£3,337
£2,545
90%
33%
95%
33%
90%
100%
100%
25%
79%
95%
98%
97%
95%
68%
91%
51%
86%
19%
1 The figures for the performance awards for 2017 have been re-calculated using the actual share price on the dates of vesting for the LTIP and Matched SMP Shares of £14.65.
In the 2017 report, the three-month average to 31 July 2017 was used, given that the awards were vesting after publication of the report.
2 The figures for 2011 to 2014 include the Matching Share Awards that were granted in 2009 at the time of Preben Prebensen’s appointment as chief executive.
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 nine years.
Adjusted EPS and TSR growth
350
300
250
200
150
100
50
0
97%
95%
79%
68%
51%
19%
33%
33%
25%
2007
award
vested
20101
2008
award
vested
20111
2009
award
vested
20121
2010
award
vested
20132
TSR
2011
award
vested
20142
AEPS
2012
award
vested
20153
2013
award
vested
20163
2014
award
vested
20173
2015
award
vested
20183
LTIP vesting
LTIP vesting %
100
80
60
40
20
0
1 Vesting was subject to two-thirds adjusted EPS and one-third TSR for awards granted in 2007 and 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 to 2015 awards.
Note: This graph shows the vesting percentage of the LTIP compared with the adjusted EPS rebased to 100 at 31 July 2009, and the TSR based on £100 invested in Close
Brothers Group plc on 31 July 2009.
LTIP vesting for the last five years
Year awarded
20111
20122
20132
20142
20152
Year vested
2014
2015
2016
2017
2018
Adjusted EPS
100%
100%
100%
56%
0%
Vesting percentage
TSR
100%
100%
25%
26%
0%
Goals
85%
87%
89%
92%
93%
Total
95%
97%
68%
51%
19%
1 Vesting was subject to one-third adjusted EPS, one-third absolute TSR and one-third strategic goals for all awards granted for 2011.
2 Vesting was subject to 40% adjusted EPS, 40% absolute TSR and 20% risk management objectives for the 2012 to 2015 awards.
98
Close Brothers Group plc
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Annual Report 2018
|
Governance
Directors’ Remuneration Report continued
Performance graph
The graph below shows a comparison of TSR for the company’s shares for the nine years ended 31 July 2018 against the TSR for the
companies comprising the FTSE 250 Index.
350
300
250
200
150
100
50
0
July 2009
July 2010
July 2011
July 2012
July 2013
July 2014
July 2015
July 2016
July 2017
July 2018
Source: Thomson Reuters Datastream
Close Brothers
FTSE 250 Index
Note:
This graph shows the value, by 31 July 2018, 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. 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 2018 was 1,588p
and the range during the year was 1,316p to 1,613p.
Scheme interests awarded during the year (Audited)
The face value and key details of the share awards granted in the 2018 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 £14.59, the average mid-market closing price for the five days prior to
grant (3 October 2017).
Name
Award type1
Preben Prebensen
Jonathan Howell
Elizabeth Lee
DSA2
LTIP3,4
DSA2
LTIP3,4
DSA2
LTIP3,4
Vesting period
1-3 years
3 years
1-3 years
3 years
1-3 years
3 years
Performance
conditions
No
Yes
No
Yes
No
Yes
Face value
‘000
£934
£1,890
£689
£1,362
–
£700
Percentage
vesting at
threshold
n/a
25%
n/a
25%
n/a
25%
Number of
shares
64,031
129,541
47,204
93,352
–
47,979
Vesting/
performance
period end date
03-Oct-20
03-Oct-20
03-Oct-20
03-Oct-20
03-Oct-20
03-Oct-20
1 The awards are all delivered as nil cost options.
2 The DSA vests in equal tranches over three years.
3 Performance conditions are the same as the 2018 LTIP targets, detailed on page 96.
4 LTIP granted in 2017 have an additional two-year holding period.
Close Brothers Group plc
| Annual Report 2018
99
External appointments
Preben Prebensen received £63,750 in fees (2017: £0) from The British Land Company plc and Jonathan Howell received £77,000 in
fees (2017: £77,000) from The Sage Group plc during the Close Brothers Group 2018 financial year.
Payments to past directors (Audited)
Stephen Hodges retired in November 2016 and continued to receive salary and benefits during his notice period (including £182,282
in the period August to November 2017). As disclosed on page 92 of the 2017 Annual Report, his outstanding DSA, LTIP and SMP
awards receive good leaver treatment in line with the current remuneration policy.
Payments for loss of office (Audited)
There were no payments made to directors for loss of office during the year.
EDs’ shareholding and share interests (Audited)
The interests of the directors in the ordinary shares of the group at 31 July 2018 are set out below:
Name
Preben Prebensen
Jonathan Howell6
Elizabeth Lee
Shareholding
requirement
at 31 July
20181
69,270
52,267
21,254
Number
of shares
owned
outright2
2018
502,961
90,577
37,442
Outstanding share awards
not subject to performance
conditions3
Outstanding share awards
subject to performance
conditions4
Outstanding options5
2018
2017
2018
2017
153,190
111,729
27,901
160,522
115,685
41,893
423,898
310,739
159,581
436,096
324,426
167,570
2018
1,458
–
1,542
2017
2,237
–
2,321
1 Based on the closing mid-market share price of 1,588p on 31 July 2018.
2 This includes shares owned outright by closely associated persons.
3 This includes DSA and SMP Invested Shares, which are nil cost options.
4 This includes LTIP awards and Matched SMP Shares, which are nil cost options.
5 These are comprised of SAYE options.
6 At 31 July 2018, Jonathan Howell held 500,000 of the company’s subordinated loan notes due 2027.
No EDs held shares that were vested but unexercised at 31 July 2018. There were no changes in notifiable interests between
1 August 2018 and 16 September 2018, other than the purchase of shares by Preben Prebensen within the SIP which increased his
shareholding to 502,980 shares.
EDs’ shareholding
The chart below compares the EDs’ shareholding versus shareholding policy, as a percentage of salary.
Preben
Prebensen
Jonathan
Howell
Elizabeth
Lee
200%
1,452%
200%
347%
100%
176%
0
300
600
900
1,200
1,500
Policy
Actual
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Close Brothers Group plc
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Annual Report 2018
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Governance
Directors’ Remuneration Report continued
Details of EDs’ share exercises during the year (Audited)
Name
Award type
Preben Prebensen
Jonathan Howell
Elizabeth Lee
2014 DSA
2015 DSA
2016 DSA
2014 LTIP
2014 SMP – Invested
2014 SMP – Matched
2014 DSA
2015 DSA
2016 DSA
2014 LTIP
2014 SMP – Invested
2014 SMP – Matched
2014 LTIP
2014 SMP – Invested
2014 SMP – Matched
Held at
1 August
2017
5,983
5,178
24,312
69,960
35,890
71,779
3,499
3,013
17,363
52,470
27,285
54,569
27,984
13,992
27,984
Called1
5,983
5,178
24,312
35,659
35,890
36,586
3,499
3,013
17,363
26,744
27,285
27,814
14,264
13,992
14,264
Market price
on award
p
1,429.4
1,493.4
1,378.6
1,429.4
1,429.4
1,429.4
1,429.4
1,493.4
1,378.6
1,429.4
1,429.4
1,429.4
1,429.4
1,429.4
1,429.4
Market price
on calling
p
1,469.2
1,469.2
1,467.9
1,469.2
1,469.2
1,469.2
1,469.2
1,469.2
1,467.9
1,469.2
1,469.2
1,469.2
1,467.9
1,467.9
1,467.9
Lapsed
–
–
–
34,301
–
35,193
–
–
–
25,726
–
26,755
13,720
–
13,720
Total value
on calling1
£
87,900
76,073
356,866
523,889
527,283
537,508
51,406
44,266
254,864
392,913
400,861
408,633
209,375
205,383
209,375
Dividends
paid on
vested shares
£
10,324
6,029
14,101
61,532
61,930
63,131
6,038
3,508
10,071
46,148
47,082
47,995
24,613
24,144
24,613
1 These are the actual number of shares and values realised on calling. Any variances in totals are due to rounding.
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 give EDs the right 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. They may be called for at any time up to
12 months from the date of vesting. The DSA, LTIP and SMP awards may be forfeited in certain circumstances if the ED leaves
employment before the vesting date. 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 Invested SMP Shares, and spread over the vesting period for the LTIP and Matched SMP 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 82. The Matched SMP Shares are subject to the same performance criteria.
Details of EDs’ option exercises during the year (Audited)
Name
Preben Prebensen
Jonathan Howell
Elizabeth Lee
Award type
2014 SAYE
–
2014 SAYE
Held at
1 August
2017
779
–
779
Exercised
779
–
779
Lapsed
–
–
–
Exercise price
p
1,155.0
–
1,155.0
Market price
on exercise
p
1,400.0
–
1,484.0
Gain on
calling
£
1,909
–
2,563
Close Brothers Group plc
| Annual Report 2018
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Single total figure of remuneration for non-executive directors (Audited)
Name
Mike Biggs3,4
Oliver Corbett
Geoffrey Howe
Lesley Jones
Bridget Macaskill
Basic fee1
£’000
300
67
67
67
67
Committee
chairman
£’000
–
30
–
30
30
Committee
member
£’000
–
10
15
10
10
2018
Senior
Independent
director
£’000
–
–
20
–
–
Benefits2
£’000
6
–
–
1
10
Total
£’000
306
107
102
108
117
Basic fee1
£’000
86
65
65
65
65
Committee
chairman
£’000
–
25
–
25
25
2017
Senior
Independent
director
£’000
–
–
15
–
–
Committee
member
£’000
–
10
15
10
10
Benefits2
£’000
3
–
–
2
13
Total
£’000
89
100
95
102
113
1 Non-executive director fees were increased with effect from 1 August 2017.
2 Benefits include travel-related expenses in respect of attendance at board meetings which are taxable. Amounts disclosed have been grossed up using the appropriate tax
rate as the company pays the NEDs’ tax.
3 Mike Biggs was appointed a director on 14 March 2017 and chairman from 1 May 2017. The fee paid to him in 2017 was pro-rated accordingly.
4 Mike’s 2017 benefits have been restated due to timing of expense payments.
Notes to the single total figure of remuneration for non-executive directors
The fees payable to non-executive directors for the 2018 and 2019 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
Oliver Corbett
Geoffrey Howe
Lesley Jones
Bridget Macaskill
Mike Biggs
There were no changes in notifiable interests between 1 August 2018 and 16 September 2018.
This report was approved by the board of directors on 25 September 2018 and signed on its behalf by:
Bridget Macaskill
Chairman of the Remuneration Committee
2019
£300,000
£67,000
2018
£300,000
£67,000
£20,000
£30,000
£30,000
£30,000
£5,000
£20,000
£30,000
£30,000
£30,000
£5,000
Shares held
beneficially at
31 July
2018
–
5,000
–
2,500
500
Shares held
beneficially at
31 July
2017
–
5,000
–
2,500
–
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Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Independent Auditors’ Report to the Members of
Close Brothers Group plc
Report on the Audit of the Financial Statements
Opinion
In our opinion:
• Close Brothers Group plc’s group (“the group”) financial
statements and parent company financial statements (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
2018 and of the group’s profit and cash flows 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 (United Kingdom Accounting
Standards, comprising FRS 102 “The Financial Reporting
Standard applicable in the UK and Republic of Ireland”, and
applicable law); 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
IAS Regulation.
We have audited the financial statements, included within the
Annual Report, which comprise: the consolidated income
statement and consolidated statement of comprehensive income
for the year ended 31 July 2018; the consolidated and company
balance sheets as at 31 July 2018; the consolidated and
company statements of changes in equity; the consolidated cash
flow statement for the year then ended; and the notes to the
financial statements, which include a description of the significant
accounting policies.
Our opinion is consistent with our reporting to the Audit
Committee.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable law.
Our responsibilities under ISAs (UK) are further described in
the Auditors’ responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the
ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard,
as applicable to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these
requirements.
To the best of our knowledge and belief, we declare that
non-audit services prohibited by the FRC’s Ethical Standard
were not provided to the group or the parent company.
Other than those disclosed in the Audit Committee Report, we
have provided no non-audit services to the group or the parent
company in the period from 1 August 2017 to 31 July 2018.
Our audit approach
Overview of our audit
• Overall Group materiality: £13.5 million, based on 5% of profit
before tax.
• Overall parent company materiality: £6.5 million based on 1%
of total assets.
• The scope of our audit and the nature, timing and extent of
audit procedures performed were determined by our risk
assessment, the financial significance of components and
other qualitative factors (including history of misstatement
through fraud or error).
• We performed audit procedures over components considered
financially significant in the context of the group (full scope
audit) or in the context of individual primary statement account
balances (audit of specific account balances). We performed
other procedures including testing entity level controls,
information technology general controls and analytical review
procedures to mitigate the risk of material misstatement in the
residual components.
The key audit matters were:
• impairment of loans and advances to customers;
• risk of material misstatement in revenue due to error in
applying the effective interest rate (“EIR”) method; and
• the adoption of IFRS 9.
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the directors made
subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain.
We gained an understanding of the legal and regulatory
framework applicable to the group and the industry in which it
operates, and considered the risk of acts by the group which
were contrary to applicable laws and regulations, including fraud.
We designed audit procedures at group and significant
component level to respond to the risk, recognising that the risk
of not detecting a material misstatement due to fraud is higher
than the risk of not detecting one resulting from error, as fraud
may involve deliberate concealment by, for example, forgery or
intentional misrepresentations, or through collusion. We focused
on laws and regulations that could give rise to a material
misstatement in the group and parent company financial
statements, including, but not limited to, the Companies Act
2006, UK tax legislation and Listing Rules of the Financial
Conduct Authority (“FCA”). Our tests included, but were not
limited to, review of correspondence with and reports to the
regulators, review of correspondence with legal advisors,
enquiries of management, and review of internal audit reports in
so far as they related to the financial statements. There are
inherent limitations in the audit procedures described above and
the further removed non-compliance with laws and regulations is
from the events and transactions reflected in the financial
statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities,
including fraud. As in all of our audits we also addressed the risk
of management override of internal controls, including testing
journals and evaluating whether there was evidence of bias by
the directors that represented a risk of material misstatement
due to fraud.
First year audit considerations
Prior to the commencement of the current financial year and our
formal appointment in November 2017, PricewaterhouseCoopers
LLP (“PwC”) had to become independent of the group. This
involved PwC ceasing non-permissible commercial and personal
financial and business relationships for the firm, partners and
staff. During this time, we met with management across the
group to understand the business and to gather information
which we needed to plan our first audit effectively. We met with
the former auditors and attended the Board Audit Committee
meetings throughout the 2017 audit cycle to understand the key
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audit matters as and when they arose. We also reviewed the
audit working papers of the former auditors to gain sufficient
comfort over the 2018 opening balance sheet and comparative
financial information. Our review also focused on how they had
responded to the key management judgements used in
preparing the financial statements and work performed over key
business processes across the group.
Key audit matters
Key audit matters are those matters that, in the auditors’
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the
most significant assessed risks of material misstatement
(whether or not due to fraud) identified by the auditors, including
those which had the greatest effect on: the overall audit strategy;
the allocation of resources in the audit; and directing the efforts
of the engagement team. These matters, and any comments we
make on the results of our procedures thereon, were addressed
in the context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide a
separate opinion on these matters. This is not a complete list of
all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Impairment of loans and advances to customers (group)
The loan impairment provisions of £39.1 million represented
approximately 0.54% of loans and advances to customers. The
income statement charge for the year was £46.7 million.
Management exercises significant judgement in order to
determine the timing of recognition and quantum of provisions
in respect of loss events which have occurred at the balance
sheet date. The principal judgements are:
• selection of the measurement technique which is most
appropriate to each type of loan;
• the use of historical experience to inform future outcomes
and the modification of such experience to reflect conditions
at the balance sheet date through the use of overlays;
• the estimation of timing and quantum of realising collateral
in respect of impaired loans together with other future
cash flows; and
• the quantum of provisions in respect of losses incurred but
not identified at the balance sheet date.
Management applies an individual assessment to individually
significant loans which includes estimation of expected future
cash flows including the ultimate realisation of available
collateral. Loans which are smaller in size and comprise
homogeneous portfolios are evaluated on a collective basis
using models which incorporate assumptions including
probability of default and loss given default.
Relevant references:
• note 2, critical accounting estimates and judgements on page
119; and
• the key accounting judgements section of the Audit
Committee Report on page 76.
We performed walkthroughs to understand management’s
processes and tested key controls around the determination of
impairment provision, including:
• the identification of impairment events;
• the measurement of provisions for individually significant
loans;
• the assessment to ensure that the collective impairment
models are appropriately calibrated; and
• the assessment of the outputs of the group’s impairment
models.
We found that these key controls were designed, implemented
and operated effectively, and therefore determined that we
could place reliance on them for the purposes of our audit.
In addition we performed the following substantive procedures:
Collective impairments
We understood and critically assessed the appropriateness of
model assumptions used. This included challenging whether
the portfolios were appropriately segmented and whether
historical experience was representative of current
circumstances. We also used our credit modelling experts in
assessing elements of the modelling methodologies.
We performed testing over the completeness and accuracy of
data from underlying loan systems. We also assessed whether
customer forbearance plans had been appropriately reflected in
the impairment models.
Based on the evidence obtained, we found that the
methodologies, modelled assumptions and data used within
the models to modelled outputs to be appropriate.
Specific impairments
We critically assessed the criteria for determining whether an
impairment event had occurred and therefore whether there
was a requirement to calculate an individual impairment
provision. We tested a sample of performing loans, including
loans with characteristics that might imply an impairment
indicator existed, to assess whether these loans had any
impairment indicators that management had not identified.
For a sample of impaired loans, we understood the latest
developments in relation to each case and the key judgements
relevant to determining the provision. We re-performed
management’s impairment calculation, tested key inputs
including the expected future cash flows, discount rates and the
valuation of collateral held.
Based on the evidence obtained, we found the provisions for
individually assessed loans to be materially appropriate.
104
Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Independent Auditors’ Report to the Members of
Close Brothers Group plc continued
Key audit matter
How our audit addressed the key audit matter
Risk of material misstatement in revenue due to error in
applying the effective interest rate (“EIR”) method (group)
The group’s net interest income was £486.1 million. Interest
income on loans and advances made by the group is
recognised using the effective interest rate method and any
fees, commissions or transaction costs that form an integral
part of the financial instrument, are included in the effective
interest rate. Judgement is required to determine whether
applicable fees and costs should be included in the effective
interest rate, or whether immediate revenue recognition should
be applied. The spreading of fees and costs uses both manual
and automated processes.
The judgement and manual nature applied across different
businesses throughout the bank results in a higher risk of
material misstatement due to error or fraud.
Relevant references:
• note 2, critical accounting estimates and judgements on
page 119;
• the key accounting judgements section of the Audit
Committee Report on page 76; and
• note 1, significant accounting policies that includes the
group’s revenue recognition policy on pages 116 and 117.
Adoption of IFRS 9 (group)
On 1 August 2018, the group transitioned to IFRS 9: Financial
Instruments (“IFRS 9”) which replaced IAS 39. The estimated
transition impact is disclosed in note 1 to the Financial
Statements in accordance with IAS 8. Disclosures in 2018 are
intended to provide users with an understanding of the
estimated impact of the new standard, and as a result are
more limited than the disclosure to be included in the 2019
financial statements.
The new standard measures impairment using an expected
credit loss (“ECL”) approach and applies a different approach to
measurement and classification of financial instruments.
The application of the new standard requires management to
exercise judgement in a number of key areas:
• model design and configuration;
• the approach to incorporating future economic conditions;
and
• the determination of significant changes in credit risk.
We have deemed the disclosure of the impact of IFRS 9 an area
of focus because of the significant changes introduced by the
standard.
Relevant references:
• note 2, critical accounting estimates and judgements on
page 119; and
• the key accounting judgements section of the Audit
Committee Report on page 76.
We have understood management’s process and tested key
controls around revenue recognition, including:
• walkthroughs for the main lending products to understand
the processes and key controls for the identification,
recognition and calculation of fees, commissions and costs
under the effective interest rate method; and
• the reconciliations between the models used to calculate
the effective interest rate adjustments for the fees and the
general ledger.
We found that these key controls were designed, implemented
and operated effectively, and therefore determined that we
could place reliance on these key controls for the purposes of
our audit.
In addition we have performed the following substantive
procedures:
• we tested the effective interest rate models by assessing their
design, critically challenging relevant assumptions, and
testing the accuracy of model computations by re-performing
a sample of effective interest rate calculations; and
• we agreed a sample of loan agreements and cash receipts to
the inputs used within the effective interest rate models, and
assessed whether the appropriate fees and costs had been
reflected in the effective interest rate.
Based on the evidence obtained, we found that the assumptions,
models and data used were materially appropriate.
We understood management’s process and tested key controls
supporting management’s estimate of the transition adjustment
focusing on:
• model development, validation and approval to ensure
compliance with IFRS 9 requirements;
• review and approval of key assumptions, judgements and
forward-looking information prior to use in the models;
• the integrity of data used as inputs to the models including
the transfer of data between source systems and the
impairment models; and
• review and approval of the output of IFRS 9 models.
We noted the key controls were designed and operated
effectively and therefore determined that we could place
reliance on these key controls for the purposes of our audit.
We understood and critically assessed the ECL models developed
by the group. This included using our credit modelling specialists
in our assessment of judgements and assumptions supporting
the ECL requirements of the standard. We re-performed certain
model calculations to confirm the risk parameter inputs. We tested
the code used for a sample of ECL models.
We assessed the reasonableness of forward-looking
information incorporated into the impairment calculations
considering the multiple economic scenarios chosen and the
weighting applied to each.
We tested the underlying disclosures related to the transition
impact and reconciled the disclosed impact to underlying
accounting records.
Based on the evidence obtained, we found that the
methodologies, modelled assumptions, data used within the
models and resulting outputs and disclosures are
materially appropriate.
Close Brothers Group plc
| Annual Report 2018
105
We considered the presence of any significant audit risks and
other qualitative factors (including history of misstatements
through fraud or error). Any component which was not already
included as a full scope audit component but was identified as
being individually financially significant in respect of one of more
account balances was subject to specific audit procedures over
those account balances. Inconsequential components (defined as
components which did not represent a reasonable possibility of a
risk of material misstatement either individually or in aggregate)
were eliminated from further consideration for specific audit
procedures although they were subject to group-level analytical
review procedures. All remaining components which were neither
inconsequential nor individually financially significant were within
our audit scope, with the risk of material misstatement mitigated
through audit procedures including testing of entity level controls,
information technology general controls and group and
component level analytical review procedures.
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Certain account balances were audited centrally by the group
engagement team.
Components within the scope of our audit contributed 98.0% of
group total assets and 91.8% of profit after tax.
02
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to
determine the scope of our audit and the nature, timing and
extent of our audit procedures on the individual financial
statement line items and disclosures and in evaluating the effect
of misstatements, both individually and in aggregate on the
financial statements as a whole.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
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We determined that there were no other key audit matters
applicable to the parent company to communicate in our report.
Scope of our audit
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
group and the parent company, the accounting processes and
controls, and the industry in which they operate.
The group is structured into three primary divisions being
Banking, Winterflood Securities and Asset Management. The
Bank is subsequently divided into Retail, Commercial and
Property segments. The consolidated financial statements are a
consolidation of these components.
In establishing the overall approach to the group audit, we
determined the type of work that is required to be performed
over the components by us, as the group engagement team,
or auditors within PwC UK operating under our instruction
(“component auditors”). All work relating to the UK audit
opinion is performed by PwC UK.
Where the work was performed by component auditors, we
determined the level of involvement we needed to have in their
audit work to be able to conclude whether sufficient appropriate
audit evidence had been obtained as a basis for our opinion on
the consolidated financial statements as a whole. This included
regular communication with the component auditors throughout
the audit, the issuance of instructions, a review of the results of
their work on the key audit matters and formal clearance meetings.
Any components which were considered individually financially
significant in the context of the group’s consolidated financial
statements (defined as components which represent more than
or equal to 10% of the total profit before tax of the consolidated
group) were considered full scope components. We considered
the individual financial significance of other components in
relation to primary statement account balances.
Overall materiality
£13.5 million.
How we determined it
5% of profit before tax.
£6.5 million.
1% of total assets.
Group financial statements
Parent company financial statements
Rationale for benchmark applied
Based on the benchmarks used in the
Annual Report, profit before tax is the
primary measure used by the shareholders
in assessing the performance of the group,
and is a generally accepted auditing
benchmark.
We have selected total assets as an
appropriate benchmark for parent company
materiality. Profit-based benchmarks are
not considered appropriate for parent
company materiality as the Group is not
required to disclose a parent company
income statement.
For each component in the scope of our group audit, we
allocated a materiality that is less than our overall group
materiality. The range of materiality allocated across components
was between £2.8 million and £12.2 million. Local statutory
materiality levels applied were less than group materiality.
We agreed with the Audit Committee that we would report to
them misstatements identified during our audit above £500,000
(group audit) and £500,000 (parent company audit) as well as
misstatements below those amounts that, in our view, warranted
reporting for qualitative reasons.
106
Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Independent Auditors’ Report to the Members of
Close Brothers Group plc continued
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw
attention to in respect of the directors’ statement in the financial statements
about whether the directors considered it appropriate to adopt the going
concern basis of accounting in preparing the financial statements and the
directors’ identification of any material uncertainties to the group’s and the
parent company’s ability to continue as a going concern over a period of at
least twelve months from the date of approval of the financial statements.
We are required to report if the directors’ statement relating to going concern
in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our
knowledge obtained in the audit.
We have nothing material to add or to draw
attention to. However, because not all future
events or conditions can be predicted, this
statement is not a guarantee as to the group’s
and parent company’s ability to continue as a
going concern.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our
auditors’ report thereon. The directors are responsible for the
other information. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not
express an audit opinion or, except to the extent otherwise
explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we
identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to
conclude whether there is a material misstatement of the financial
statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is
a material misstatement of this other information, we are required
to report that fact. We have nothing to report based on these
responsibilities.
With respect to the Strategic Report and Directors’ Report, we
also considered whether the disclosures required by the UK
Companies Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006,
ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (“FCA”) require us also to report certain opinions and
matters as described below (required by ISAs (UK) unless
otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of
the audit, the information given in the Strategic Report and
Directors’ Report for the year ended 31 July 2018 is consistent
with the financial statements and has been prepared in
accordance with applicable legal requirements.
In light of the knowledge and understanding of the group and
parent company and their environment obtained in the course of
the audit, we did not identify any material misstatements in the
Strategic Report and Directors’ Report.
The directors’ assessment of the prospects of the group and
of the principal risks that would threaten the solvency or
liquidity of the group
We have nothing material to add or draw attention to regarding:
• the directors’ confirmation on page 65 of the Annual Report
that they have carried out a robust assessment of the principal
risks facing the group, including those that would threaten its
business model, future performance, solvency or liquidity;
• the disclosures in the Annual Report that describe those risks
and explain how they are being managed or mitigated; or
• the directors’ explanation on page 64 of the Annual Report as
to how they have assessed the prospects of the group, over
what period they have done so and why they consider that
period to be appropriate, and their statement as to whether
they have a reasonable expectation that the group will be able
to continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications
or assumptions.
We have nothing to report having performed a review of the
directors’ statement that they have carried out a robust
assessment of the principal risks facing the group and statement
in relation to the longer-term viability of the group. Our review was
substantially less in scope than an audit and only consisted of
making inquiries and considering the directors’ process
supporting their statements; checking that the statements are in
alignment with the relevant provisions of the UK Corporate
Governance Code (the “Code”); and considering whether the
statements are consistent with the knowledge and understanding
of the group and parent company and their environment obtained
in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to
report when:
• the statement given by the directors, on page 65, that they
consider the Annual Report taken as a whole to be fair,
balanced and understandable, and provides the information
necessary for the members to assess the group’s and parent
company’s position and performance, business model and
strategy is materially inconsistent with our knowledge of the
group and parent company obtained in the course of
performing our audit;
• the section of the Annual Report on page 76 describing the
work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee; and
• the directors’ statement relating to the parent company’s
compliance with the Code does not properly disclose a
departure from a relevant provision of the Code specified,
under the Listing Rules, for review by the auditors.
Close Brothers Group plc
| Annual Report 2018
107
Other Required Reporting
Companies Act 2006 exception reporting
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
• certain disclosures of directors’ remuneration specified by law
are not made; or
• the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee and
board of directors on 17 May 2017, we were formally appointed
by shareholders on 16 November 2017 to audit the financial
statements for the year ended 31 July 2018 and subsequent
financial periods. This is therefore our first year of uninterrupted
engagement.
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Mark Hannam (Senior Statutory Auditor)
For and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
25 September 2018
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Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors’ Responsibilities
Statement set out on page 65, the directors are responsible for
the preparation of the financial statements in accordance with the
applicable framework and for being satisfied that they give a true
and fair view. The directors are also responsible for such internal
control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the group’s and the parent company’s
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern
basis of accounting unless the directors either intend to liquidate
the group or the parent company or to cease operations, or have
no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditors’ report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always
detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken
on the basis of these financial statements.
A further description of our responsibilities for the audit of the
financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and
only for the parent company’s members as a body in accordance
with Chapter 3 of Part 16 of the Companies Act 2006 and for no
other purpose. We do not, in giving these opinions, accept or
assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
108
Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Consolidated Income Statement
for the year ended 31 July 2018
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
Depreciation of operating lease assets and other direct costs
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
Loss from discontinued operations, net of tax
Profit after tax
Loss 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 notes 4 and 7.
Note
4
4
2018
£ million
601.0
(114.9)
20171
£ million
574.3
(116.8)
486.1
457.5
213.3
(13.7)
100.1
65.1
(45.1)
206.4
(16.7)
94.2
57.3
(37.3)
319.7
303.9
805.8
761.4
(480.5)
(46.7)
(527.2)
278.6
(7.4)
271.2
(67.0)
204.2
(2.2)
202.0
(0.3)
(453.7)
(39.0)
(492.7)
268.7
(6.2)
262.5
(68.8)
193.7
(2.8)
190.9
(0.3)
202.3
191.2
136.2p
135.3p
130.2p
129.3p
134.7p
133.8p
128.3p
127.5p
21.0p
42.0p
20.0p
40.0p
4
4
4
16
4
15
6
7
8
8
8
8
9
9
Close Brothers Group plc
| Annual Report 2018
109
Consolidated Statement of Comprehensive Income
for the year ended 31 July 2018
Profit after tax
Other comprehensive income/(expense) that may be reclassified to income statement from
continuing operations
Currency translation gains
Gains on cash flow hedging
Gains/(losses) on financial instruments classified as available for sale:
Sovereign and central bank debt
Contingent consideration
Tax relating to items that may be reclassified
Other comprehensive income/(expense) that will not be reclassified to income statement from
continuing operations
Defined benefit pension scheme gains
Tax relating to items that will not be reclassified
Other comprehensive income, net of tax from continuing operations
Total comprehensive income
Attributable to
Non-controlling interests
Shareholders
2018
£ million
202.0
2017
£ million
190.9
0.3
4.4
0.6
(0.3)
(1.3)
3.7
1.7
(0.4)
1.3
5.0
0.4
4.7
0.7
0.3
(2.3)
3.8
2.7
(0.5)
2.2
6.0
207.0
196.9
(0.3)
207.3
(0.3)
197.2
207.0
196.9
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Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Consolidated Balance Sheet
at 31 July 2018
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
Assets classified as held for sale
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
Liabilities classified as held for sale
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
2018
£ million
2017
£ million
10
11
12
13
14
15
16
6
17
7
18
19
19
19
19
14
17
20
7
21
21
1,140.4
512.2
140.2
7,297.5
320.6
32.1
66.4
16.6
201.3
226.1
43.0
187.1
67.5
805.1
546.7
99.8
6,884.7
240.1
32.7
48.6
27.0
191.7
202.7
47.4
158.7
–
10,251.0
9,285.2
543.1
55.2
5,497.2
509.8
1,773.4
22.4
15.7
17.4
249.6
217.9
0.6
552.6
72.0
5,113.1
330.9
1,489.6
4.3
11.5
21.4
233.1
220.7
–
8,902.3
8,049.2
38.0
–
1,327.7
(16.2)
38.0
307.8
906.6
(15.9)
1,349.5
1,236.5
(0.8)
(0.5)
1,348.7
1,236.0
10,251.0
9,285.2
Approved and authorised for issue by the Board of Directors on 25 September 2018 and signed on its behalf by:
Michael N. Biggs
Chairman
P. Prebensen
Chief Executive
Registered number: 520241
Close Brothers Group plc
| Annual Report 2018
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Consolidated Statement of Changes in Equity
for the year ended 31 July 2018
At 1 August 2016
Profit/(loss) for the year
Other comprehensive
income/(expense)
Total comprehensive
income/(expense)
for the year
Exercise of options
Dividends paid
Shares purchased
Shares issued
Shares released
Other movements
Share premium
cancellation
Income tax
Called up
share capital
£ million
37.7
Share
premium
account
£ million
284.0
–
–
–
–
–
–
0.3
–
–
–
–
–
–
–
0.1
–
–
23.7
–
–
–
–
Retained
earnings
£ million
797.5
191.2
2.2
193.4
–
(85.6)
–
–
–
0.2
–
1.1
At 31 July 2017
38.0
307.8
906.6
Profit/(loss) for the year
Other comprehensive
income
Total comprehensive
income/(expense)
for the year
Exercise of options
Dividends paid
Shares purchased
Shares issued
Shares released
Other movements
Share premium
cancellation
Income tax
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(307.8)
–
202.3
1.3
203.6
–
(91.0)
–
–
–
–
307.8
0.7
Other reserves
Available
for sale
movements
reserve
£ million
–
Share-
based
payments
reserve
£ million
(14.3)
Exchange
movements
reserve
£ million
(1.1)
Cash flow
hedging
reserve
£ million
(6.7)
Total
attributable
to equity
holders
£ million
1,097.1
Non-
controlling
interests
£ million
(0.2)
Total
equity
£ million
1,096.9
i
S
t
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a
t
e
g
c
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p
o
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t
–
–
191.2
(0.3)
190.9
(0.4)
3.5
6.0
–
6.0
01
–
0.7
0.7
–
–
–
–
–
–
–
–
0.7
–
0.1
0.1
–
–
–
–
–
–
–
–
–
–
–
–
–
(12.7)
–
15.8
(0.7)
–
–
(0.4)
–
–
–
–
–
–
–
–
3.5
–
–
–
–
–
–
–
–
197.2
0.1
(85.6)
(12.7)
24.0
15.8
(0.5)
–
1.1
(0.3)
–
–
–
–
–
–
–
–
196.9
0.1
(85.6)
(12.7)
24.0
15.8
(0.5)
–
1.1
(11.9)
(1.5)
(3.2)
1,236.5
(0.5)
1,236.0
–
–
–
–
–
(16.0)
–
12.5
(0.5)
–
–
–
0.3
0.3
–
–
–
–
–
–
–
–
–
202.3
(0.3)
202.0
3.3
5.0
–
5.0
3.3
–
–
–
–
–
–
–
–
207.3
–
(91.0)
(16.0)
–
12.5
(0.5)
–
0.7
(0.3)
–
–
–
–
–
–
–
–
207.0
–
(91.0)
(16.0)
–
12.5
(0.5)
–
0.7
G
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03
At 31 July 2018
38.0
–
1,327.7
0.8
(15.9)
(1.2)
0.1
1,349.5
(0.8) 1,348.7
112
Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Consolidated Cash Flow Statement
for the year ended 31 July 2018
Net cash inflow from operating activities
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment
Intangible assets – software
Subsidiaries and non-controlling interest
Sale of:
Property, plant and equipment
Equity shares held for investment
Subsidiary
Net cash inflow before financing activities
Financing activities
Purchase of own shares for employee share award schemes
Equity dividends paid
Interest paid on subordinated loan capital and debt financing
Issuance/(redemption) of group bonds, net of transaction costs
Issuance of subordinated loan capital, net of transaction costs
Net increase/(decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note
27(a)
2018
£ million
306.0
2017
£ million
120.0
27(b)
27(c)
(11.4)
(33.0)
(1.2)
–
–
0.9
(7.1)
(33.1)
(6.3)
–
1.3
(0.3)
(44.7)
(45.5)
261.3
74.5
(16.0)
(91.0)
(10.8)
248.6
–
392.1
859.6
(12.7)
(85.6)
(13.6)
(200.0)
173.7
(63.7)
923.3
27(d)
1,251.7
859.6
Company Balance Sheet
at 31 July 2018
Fixed assets
Intangible assets
Property, plant and equipment
Investments in subsidiaries
Current assets
Amounts owed by subsidiaries due within one year
Amounts owed by subsidiaries due after more than one year
Corporation tax receivable
Deferred tax assets
Other debtors
Other investments
Cash at bank
Creditors: amounts falling due within one year
Debt securities in issue
Provisions
Other creditors
Accruals
Net current assets
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Debt securities in issue
Subordinated loan capital
Provisions
Net assets
Capital and reserves
Share capital
Share premium account
Profit and loss account
Other reserves
Shareholders’ funds
Close Brothers Group plc
| Annual Report 2018
113
Note
15
16
30
2018
£ million
2017
£ million
–
–
287.0
–
–
287.0
287.0
287.0
6
19
17
19
17
21
21
415.2
312.0
3.7
2.0
7.4
0.2
0.2
347.1
173.8
5.4
2.6
5.3
0.5
0.2
740.7
534.9
1.8
2.2
0.8
9.2
–
2.1
0.7
8.8
14.0
11.6
726.7
523.3
1,013.7
810.3
247.9
174.1
3.9
–
173.8
4.0
587.8
632.5
38.0
–
565.7
(15.9)
38.0
307.8
298.6
(11.9)
587.8
632.5
The Company reported a profit for the financial year ended 31 July 2018 of £48.7 million (2017: £50.7 million).
Approved and authorised for issue by the Board of Directors on 25 September 2018 and signed on its behalf by:
Michael N. Biggs
Chairman
P. Prebensen
Chief Executive
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114
Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Company Statement of Changes in Equity
for the year ended 31 July 2018
Share
capital
£ million
37.7
Share
premium
account
£ million
284.0
Profit
and loss
account
£ million
331.4
Other reserves
Share-
based
payments
reserve
£ million
(14.3)
Exchange
movements
reserve
£ million
0.1
Shareholders’
funds
£ million
638.9
At 1 August 2016
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense) for the year
Exercise of options
Dividends paid
Shares purchased
Shares issued
Shares released
Share premium cancellation
Other movements
–
–
–
–
–
–
0.3
–
–
–
–
–
–
0.1
–
–
23.7
–
–
–
50.7
2.2
52.9
–
(85.6)
–
–
–
–
(0.1)
At 31 July 2017
38.0
307.8
298.6
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Exercise of options
Dividends paid
Shares purchased
Shares issued
Shares released
Share premium cancellation
Other movements
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(307.8)
–
48.7
1.3
50.0
–
(91.0)
–
–
–
307.8
0.3
At 31 July 2018
38.0
–
565.7
(15.9)
–
–
–
–
–
(12.7)
–
15.8
–
(0.7)
(11.9)
–
–
–
–
–
(16.0)
–
12.5
–
(0.5)
–
(0.1)
(0.1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
50.7
2.1
52.8
0.1
(85.6)
(12.7)
24.0
15.8
–
(0.8)
632.5
48.7
1.3
50.0
–
(91.0)
(16.0)
–
12.5
–
(0.2)
587.8
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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 five
(2017: five) operating segments: Commercial, Retail, Property,
Securities and Asset Management, and is primarily located
within the UK.
The company financial statements (“the company accounts”) have
been prepared in compliance with United Kingdom Accounting
Standards, including Financial Reporting Standard 102 ‘‘The
Financial Reporting Standard applicable in the United Kingdom
and the Republic of Ireland’’ (‘‘FRS 102’’) and the Companies Act
2006, under the provision of the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008
(SI 2008/410).
As permitted by FRS 102, the company has chosen to adopt IAS
39 Financial Instruments where applicable and taken advantage of
the disclosure exemptions available under that standard in relation
to the presentation of a cash flow statement, share-based
payments and related party transactions. Where required,
equivalent disclosures are given in the consolidated financial
statements of the group. The company has also 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 adopted during the year
There were no new standards adopted during the year ended
31 July 2018. The accounting policies adopted are consistent
with those of the previous financial year.
Standards issued with effective dates, subject to EU
endorsement, which do not impact on these financial
statements
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments replaces IAS 39 Financial
Instruments: Recognition and Measurement and is effective for
the group from 1 August 2018. IFRS 9 will lead to significant
changes in the accounting for financial instruments, particularly
with regards to impairment.
Impairment
IFRS 9 replaces the incurred loss impairment approach under
IAS 39 with an Expected Credit Loss (“ECL”) approach. This will
result in impairment provisions being recognised earlier, as it is
no longer necessary for a loss event to be incurred before a
provision is recognised.
IFRS 9 will be applicable to all financial assets at amortised cost,
debt financial assets at fair value through other comprehensive
income, loan commitments and financial guarantees and lease
receivables.
Close Brothers Group plc
| Annual Report 2018
115
Under IFRS 9, expected credit losses are the unbiased
probability weighted average credit losses determined by
evaluating a range of possible outcomes and future economic
conditions. The ECL model has three stages:
Stage 1: when a significant increase in credit risk since initial
recognition has not occurred, 12 month expected credit losses
are recognised for all stage 1 financial assets. This requirement
does not exist under IAS 39 and will result in higher provisions as
an ECL will be recognised for performing loans.
Stage 2: when a significant increase in credit risk since initial
recognition has occurred, lifetime expected credit losses are
recognised. This concept does not exist under IAS 39 and
therefore it will result in an increased ECL provision as a result of
recognising a lifetime ECL for loans that are not considered to be
credit impaired.
Stage 3: when objective evidence exists that an asset is credit-
impaired, lifetime expected credit losses are recognised. This is
similar to the incurred loss approach under IAS 39; however, the
definition is extended to include a 90 days past due backstop.
IFRS 9 impairment models
The measurement of expected credit losses will involve increased
complexity and judgement. The group has developed new
models to meet the requirements of IFRS 9 and will use three key
input parameters for the calculation of expected credit losses:
probability of default (“PD”), loss given default (“LGD”) and
exposure at default (“EAD”). As required by the standard,
discounting will be applied using the original effective interest rate.
In assessing whether a significant increase in credit risk has
occurred the group will apply a multifactor approach using
quantitative measures (e.g. changes in PD or credit score since
origination) and qualitative factors (e.g. watch list processes).
As a backstop, all financial assets that are 30 days past due
will be considered to have experienced a significant increase
in credit risk.
A financial asset will only be considered credit impaired if there is
objective evidence of impairment. This will include financial
assets that are defaulted or 90 days past due.
IFRS 9 requires the incorporation of forward looking macro-
economic information that is reasonable and supportable. The
group will consider six forward looking economic scenarios on a
probability-weighted basis to ensure the overall ECL represents a
range of economic outcomes.
A jointly led Risk and Finance committee has implemented the
necessary changes to models and credit and finance processes.
Classification and measurement
Under IFRS 9, financial assets are required to be classified based
on the business model within which they are managed and their
contractual cash flow characteristics. These factors determine
whether the financial assets are measured at amortised cost, fair
value through other comprehensive income (“FVOCI”) or fair
value through profit or loss (“FVPL”). The requirements for the
classification of financial liabilities, as they currently apply to the
group, remain unchanged.
The adoption of IFRS 9, from 1 August 2018, will not result in any
material change to the measurement basis of financial assets.
The majority of the group’s financial assets are loans and
advances to customers currently classified under IAS 39 as loans
held at amortised cost. Under IFRS 9 they will continue to be
measured at amortised cost.
116
Close Brothers Group plc
|
Annual Report 2018
|
Financial Statements
The Notes continued
1. Significant accounting policies continued
Impact on 1 August 2018
The group will not restate comparatives on initial application of
IFRS 9. Instead the classification and measurement and
impairment requirements will be applied retrospectively by
adjusting the opening balance sheet on 1 August 2018. The
group estimates the transition to IFRS 9 will reduce shareholders’
equity by £44.9 million reflecting an increase in impairment
provisions of £59.0 million offset by a deferred tax asset of
£14.1 million.
Hedge accounting
IFRS 9 contains revised requirements which aim to simplify
hedge accounting. The standard does not yet address macro
hedge accounting strategies, which are being considered in a
separate project. IFRS 9 includes an accounting policy choice
between applying the hedge accounting requirements of IFRS 9
to continue to apply the existing hedge accounting requirements
in IAS 39 for all hedge accounting because it had not yet
completed its project on the accounting for macro hedging.
During this time the group will continue to apply IAS 39, although
it will implement the amended IFRS 7 hedge accounting
disclosure requirements from 1 August 2018.
IFRS 15 Revenue from Contracts with Customers
Effective for the group from 1 August 2018, this standard replaces
IAS 18 and IAS 11 and does not apply to financial instruments,
lease contracts or insurance contracts which fall under the scope
of other IFRSs. The standard introduces a new revenue
recognition model which features a contract-based five-step
analysis of transactions to determine whether, how much, and
when revenue is recognised. The group has assessed the impact of
IFRS 15 and the adoption of the standard is not anticipated to have
a material impact on the group’s financial statements.
IFRS 16 Leases
Effective for the group from 1 August 2019, the standard
replaces IAS 17 and introduces a new recognition model that
recognises all leases on a lessee’s balance sheet (subject to
certain exemptions). Lessor accounting is largely unchanged.
The standard is not anticipated to have a material impact on the
group’s financial statements.
(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 Directors’ Report.
(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.
(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.
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Close Brothers Group plc
| Annual Report 2018
117
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) Adjusted items
The consolidated income statement is presented on both a
statutory and adjusted basis. The adjusted basis excludes
exceptional items and amortisation of intangible assets on
acquisition. Exceptional items are income and expense items that
are material by size and/or nature and are non-recurring. The
separate reporting of these items helps give an indication of the
group’s underlying performance. Amortisation of intangible assets
on acquisition is excluded to present the performance of the
group’s acquired businesses consistent with its other businesses.
(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.
Financial assets and liabilities are classified as held for trading
either if acquired principally for the purpose of selling in the
short term, or they are derivatives (not in qualifying hedge
relationships).
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 bid or offer 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 the assets continue to be
recognised to the extent of the group’s continuing involvement.
Financial liabilities are derecognised when they are extinguished.
(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. Individually assessed financial
assets which are not considered impaired may also be included in
collective assessment. 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.
118
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Annual Report 2018
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Financial Statements
The Notes continued
1. Significant accounting policies continued
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 are recorded at the amount payable. Interest
is paid on the loans.
(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
The group securitises its own financial assets via the sale of these
assets to special purpose entities, which in turn issue securities to
investors. All financial assets continue to be held on the group’s
consolidated balance sheet together with debt securities in issue
recognised for the funding – see derecognition policy (i).
(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.
(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.
(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 which are reviewed at least annually.
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 which are reviewed at
least annually. 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 20 years
5 years
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119
(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.
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 26 and in the Directors’
Remuneration Report.
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.
(v) Share-based payments to employees
At 31 July 2018, the group operates four share-based award
schemes: the Deferred Share Awards (“DSA”) scheme, the Long
Term Incentive Plan (“LTIP”), the Share Matching Plan (“SMP”),
and the HMRC approved Save As You Earn (“SAYE”) scheme.
The costs of the awards granted under the DSA scheme 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 costs of LTIP, SMP and SAYE are 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 LTIP and SMP and the
Black-Scholes pricing model for 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
(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 deemed 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. Deferred tax
liabilities are offset against deferred tax assets when there is both
a legal right to set off and an intention to settle on a net basis.
(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) Segmental 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.
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. The group’s
estimates and assumptions are based on historical experience
and expectations of future events and are reviewed on an
ongoing basis.
120
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Financial Statements
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. At 31 July 2018, gross
impaired loans were £131.0 million (31 July 2017: £135.8 million)
against which a £39.1 million (31 July 2017: £52.4 million)
provision was recorded. A 10% increase or decrease in expected
future recoveries in respect of these impaired loans would
decrease or increase provisions respectively by £9.2 million
(31 July 2017: £8.3 million).
3. Segmental analysis
The directors manage the group by class of business and present
the segmental analysis on that basis. The group’s activities are
presented in five (2017: five) operating segments: Retail,
Commercial, Property, Securities and Asset Management.
In the segmental reporting information that follows, Group
consists of central functions as well as various non-trading head
office companies and consolidation adjustments and is
presented in order that the information presented reconciles to
the consolidated income statement. The Group balance sheet
primarily includes treasury assets and liabilities comprising cash
and balances at central banks, debt securities, customer
deposits and other borrowings.
Divisions continue to charge market prices for the limited
services rendered to other parts of the group. Funding charges
between segments take into account commercial demands.
More than 90% of the group’s activities, revenue and assets are
located in the UK.
The Notes continued
2. Critical accounting estimates and judgements continued
Critical accounting judgements
In the application of the group’s accounting policies, which are
described in note 1, judgements that are considered by the
board to have the most significant effect on the amounts in the
financial statements are as follows.
Revenue recognition
Interest income is recognised using the effective interest rate
method, which applies a rate that discounts estimated future
cash payments or receipts relating to a financial instrument to
their net carrying amount. The estimated future cash flows take
into account all contractual terms and expected behavioural life
of the financial instrument including transaction fees and costs
and all other premiums or discounts but not future credit losses.
Other fees and commissions are recognised as services are
provided or on completion of the execution of a significant act.
Judgement is required in determining the fees and costs which
are integral to the yield and recognised as interest income and in
determining the period over which to recognise non-interest
income.
Loan impairment provisions
Loan 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.
Determining whether such objective evidence has arisen
requires judgement.
Key sources of estimation uncertainty
Loan impairment provisions
At the balance sheet date, the directors consider that loan
impairment provisions are a key source of estimation uncertainty
which, depending on a range of factors such as changes in the
economic environment in the UK, could result in a material
adjustment to the carrying amounts of assets and liabilities in the
next financial year.
Loan impairment provisions represent management’s estimate of
the losses incurred in the loan portfolios at the balance sheet
date. 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.
Close Brothers Group plc
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121
Banking
Retail
£ million
Commercial
£ million
Property
£ million
Securities
£ million
Asset
Management
£ million
Group
£ million
Total
£ million
Summary income statement
for the year ended 31 July 2018
Net interest income/(expense)
Non-interest income
195.9
29.6
160.9
64.6
129.8
0.2
(0.7)
109.8
Operating income
225.5
225.5
130.0
109.1
Administrative expenses
Depreciation and amortisation
Impairment losses on loans and advances
(109.5)
(9.7)
(25.2)
(124.2)
(8.0)
(17.2)
(27.2)
(3.9)
(4.3)
(79.2)
(1.8)
–
0.1
115.4
115.5
(90.6)
(1.8)
–
0.1
0.1
0.2
486.1
319.7
805.8
(24.6)
–
–
(455.3)
(25.2)
(46.7)
Total operating expenses
(144.4)
(149.4)
(35.4)
(81.0)
(92.4)
(24.6)
(527.2)
Adjusted operating profit/(loss)1
Amortisation of intangible assets on acquisition
81.1
(0.3)
76.1
(1.6)
94.6
–
28.1
–
23.1
(5.5)
(24.4)
–
278.6
(7.4)
Operating profit/(loss) before tax from
continuing operations
Operating loss before tax from
discontinued operations
80.8
74.5
94.6
28.1
17.6
(24.4)
271.2
(3.0)
–
–
–
–
–
(3.0)
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Operating profit/(loss) before tax
77.8
74.5
94.6
28.1
17.6
(24.4)
268.2
External operating income/(expense)
Inter segment operating (expense)/income
265.3
(39.8)
270.7
(45.2)
154.4
(24.4)
109.1
–
115.6
(0.1)
(109.3)
109.5
805.8
–
Segment operating income
225.5
225.5
130.0
109.1
115.5
0.2
805.8
1 Adjusted operating profit/(loss) is stated before amortisation of intangible assets on acquisition, loss from discontinued operations and tax.
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Balance sheet information at 31 July 2018
Total assets1
Total liabilities
Banking
Retail
£ million
Commercial
£ million
Property
£ million
Securities
£ million
Asset
Management
£ million
Group2
£ million
Total
£ million
2,686.4
–
2,982.4
–
1,827.5
–
711.4
640.3
119.4
63.9
1,923.9 10,251.0
8,902.3
8,198.1
1 Total assets for the Banking operating segments comprise the loan book and operating lease assets only.
2 Balance sheet includes £1,915.0 million assets and £8,278.6 million liabilities attributable to the Banking division primarily comprising the treasury balances described in the
second paragraph of this note.
Equity is allocated across the group as set out below. Banking division equity, which is managed as a whole rather than on a segmental
basis, reflects loan book and operating lease assets of £7,496.3 million, in addition to assets and liabilities of £1,915.0 million and
£8,278.6 million respectively primarily comprising treasury balances which are included within the Group column above.
Equity
Banking
£ million
1,132.7
Securities
£ million
71.1
Asset
Management
£ million
55.5
Group
£ million
89.4
Total
£ million
1,348.7
Other segmental information
for the year ended 31 July 2018
Employees (average number)1
1 Banking segments are inclusive of a central function headcount allocation.
Banking
Retail Commercial
Property
Securities
Asset
Management
Group
Total
1,079
1,046
146
262
647
61
3,241
122
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Financial Statements
The Notes continued
3. Segmental analysis continued
Summary income statement for the year
ended 31 July 20171
Net interest income/(expense)
Non-interest income
Banking
Retail
£ million
Commercial
£ million
Property
£ million
Securities
£ million
Asset
Management
£ million
Group
£ million
Total
£ million
191.8
26.4
146.4
66.9
119.8
(0.2)
(0.9)
107.6
(0.1)
103.0
Operating income
218.2
213.3
119.6
106.7
102.9
Administrative expenses
Depreciation and amortisation
Impairment losses on loans and advances
(99.8)
(11.0)
(24.6)
(117.4)
(7.8)
(15.5)
(24.9)
(3.8)
1.1
(76.7)
(1.9)
–
(83.7)
(1.8)
–
0.5
0.2
0.7
(24.9)
–
–
457.5
303.9
761.4
(427.4)
(26.3)
(39.0)
Total operating expenses
(135.4)
(140.7)
(27.6)
(78.6)
(85.5)
(24.9)
(492.7)
Adjusted operating profit/(loss)2
Amortisation of intangible assets on acquisition
82.8
(0.4)
72.6
(0.5)
92.0
–
28.1
–
17.4
(5.3)
(24.2)
–
268.7
(6.2)
Operating profit/(loss) before tax from
continuing operations
Operating loss before tax from
discontinued operations
82.4
72.1
92.0
28.1
12.1
(24.2)
262.5
(3.9)
–
–
–
–
–
(3.9)
Operating profit/(loss) before tax
78.5
72.1
92.0
28.1
12.1
(24.2)
258.6
External operating income/(expense)
Inter segment operating (expense)/income
262.0
(43.8)
260.9
(47.6)
141.8
(22.2)
106.7
–
103.2
(0.3)
(113.2)
113.9
761.4
–
Segment operating income
218.2
213.3
119.6
106.7
102.9
0.7
761.4
1 Restated – see note 7.
2 Adjusted operating profit/(loss) is stated before amortisation of intangible assets on acquisition, loss from discontinued operations and tax.
Balance sheet information at 31 July 2017
Total assets1
Total liabilities
Banking
Retail
£ million
Commercial
£ million
Property
£ million
Securities
£ million
Asset
Management
£ million
Group2
£ million
Total
£ million
2,702.8
–
2,730.4
–
1,629.3
–
699.5
628.8
113.2
57.7
1,410.0
7,362.7
9,285.2
8,049.2
1 Total assets for the Banking operating segments comprise the loan book and operating lease assets only.
2 Balance sheet includes £1,402.7 million assets and £7,490.9 million liabilities attributable to the Banking division primarily comprising the treasury balances described in the
second paragraph of this note.
Equity1
Banking
£ million
974.3
Securities
£ million
70.7
Asset
Management
£ million
55.5
Group
£ million
135.5
Total
£ million
1,236.0
1 Equity of the Banking division reflects loan book and operating lease assets of £7,062.5 million, in addition to assets and liabilities of £1,402.7 million and £7,490.9 million
respectively primarily comprising treasury balances which are included within the Group column in the balance sheet information above.
Other segmental information
for the year ended 31 July 2017
Employees (average number)1
1 Banking segments are inclusive of a central function headcount allocation.
Banking
Retail
Commercial
Property
Securities
Asset
Management
Group
Total
1,055
1,013
139
246
600
61
3,114
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 expense2
Net fee and commission income
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£ million
20171
£ million
4.0
0.3
594.4
2.3
2.0
0.1
570.0
2.2
601.0
574.3
(0.2)
(67.8)
(41.7)
(5.2)
(0.4)
(70.2)
(39.9)
(6.3)
(114.9)
(116.8)
486.1
457.5
02
2018
£ million
20171
£ million
87.8
116.3
9.2
89.8
102.8
13.8
213.3
206.4
(13.7)
(16.7)
199.6
189.7
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1 Restated – see note 7.
2 Prior year fee and commission expense restated to exclude other direct costs of £12.3 million, which are now presented alongside depreciation of operating lease assets on
the consolidated income statement.
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 £87.8 million (2017: £89.8 million) and £11.5 million (2017: £14.0 million) respectively.
Fee income and expense arising from trust and other fiduciary activities amounted to £116.3 million (2017: £102.8 million) and
£1.7 million (2017: £2.2 million) respectively.
Other income
Operating lease assets rental income
Other
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.
2018
£ million
2017
£ million
56.3
8.8
65.1
50.0
7.3
57.3
2018
£ million
20171
£ million
247.0
35.9
6.0
11.2
300.1
25.2
155.2
234.0
33.0
6.0
10.3
283.3
26.3
144.1
480.5
453.7
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Financial Statements
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
Other services
The auditor of the group was PricewaterhouseCoopers LLP (2017: 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 charge for the current year
Adjustments in respect of previous years
Tax on items not charged/(credited) to the income statement
Current tax relating to:
Financial instruments classified as available for sale
Share-based payments
Deferred tax relating to:
Cash flow hedging
Defined benefit pension scheme
Financial instruments classified as available for sale
Share-based payments
Currency translation gains
Reconciliation to tax expense
UK corporation tax for the year at 19.0% (2017: 19.7%) on operating profit
Gain on sale of subsidiary
Effect of different tax rates in other jurisdictions
Disallowable items and other permanent differences
Banking surcharge
Deferred tax impact of (increased)/decreased tax rates
Prior year tax provision
2018
£ million
2017
£ million
0.2
1.5
0.3
0.2
2.2
0.3
1.0
0.4
0.4
2.1
2018
£ million
20171
£ million
64.7
1.5
(2.3)
63.9
1.1
2.0
65.9
2.1
(0.6)
67.4
0.5
0.9
67.0
68.8
–
(0.3)
1.1
0.4
0.2
(0.4)
–
1.0
51.5
–
(0.2)
1.1
15.1
(0.2)
(0.3)
0.2
(1.0)
1.2
0.5
0.1
(0.1)
0.8
1.7
51.7
(0.3)
(0.4)
0.9
14.5
2.1
0.3
67.0
68.8
1 Restated – see note 7.
The standard UK corporation tax rate for the financial year is 19.0% (2017: 19.7%). However, an additional 8% surcharge applies to
banking company profits as defined in legislation. The effective tax rate of 24.7% (2017: 26.2%) is above the UK corporation tax rate
primarily due to the surcharge applying to most of the group’s profits.
Close Brothers Group plc
| Annual Report 2018
125
Movements in deferred tax assets and liabilities were as follows:
Group
At 1 August 2016
(Charge)/credit to the income statement
Charge to other comprehensive income
Credit to equity
Acquisitions
At 31 July 2017
(Charge)/credit to the income statement
Charge to other comprehensive income
Credit to equity
Acquisitions
At 31 July 2018
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
44.9
(1.5)
(0.8)
–
–
42.6
(4.2)
–
–
–
38.4
(0.3)
–
(0.5)
–
–
(0.8)
0.1
(0.4)
–
–
(1.1)
10.2
(0.8)
–
0.1
–
9.5
(0.3)
–
0.4
–
–
–
(0.1)
–
–
(0.1)
–
(0.2)
–
–
9.6
(0.3)
2.3
–
(1.2)
–
–
1.1
–
(1.1)
–
–
–
(2.6)
1.1
–
–
(3.9)
(5.4)
1.3
–
–
–
(4.1)
0.7
(0.2)
–
–
–
0.5
–
–
–
–
0.5
55.2
(1.4)
(2.6)
0.1
(3.9)
47.4
(3.1)
(1.7)
0.4
–
43.0
Capital
allowances
£ million
Pension
scheme
£ million
Share-based
payments and
deferred
compensation
£ million
Total
£ million
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Company
At 1 August 2016
Charge to the income statement
(Charge)/credit to statement of recognised gains and losses
At 31 July 2017
Credit/(charge) to the income statement
Charge to statement of recognised gains and losses
At 31 July 2018
0.3
(0.1)
–
0.2
–
–
0.2
(0.3)
–
(0.5)
(0.8)
0.1
(0.4)
(1.1)
3.5
(0.5)
0.2
3.2
(0.3)
–
2.9
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3.5
(0.6)
(0.3)
2.6
(0.2)
(0.4)
2.0
As the group has been and is expected to continue to be consistently profitable, the full deferred tax assets have been recognised.
7. Discontinued operations and non-current assets held for sale
On 14 September 2018, the group announced the sale of Close Brothers Retail Finance, which provides unsecured retail point of sale
finance to consumers, to Klarna Bank AB.
At the balance sheet date, the business fulfilled the requirements of IFRS 5 to be classified as “discontinued operations” in the
consolidated income statement. Additionally, the assets that have not yet been sold are presented as “held for sale” in the 31 July
2018 consolidated balance sheet.
Results of discontinued operations
Operating income
Operating expenses
Impairment losses on loans and advances
Operating loss before tax
Tax
Impairment of plant, property and equipment and intangible assets
Loss after tax
2018
£ million
6.6
(7.2)
(2.3)
(2.9)
0.8
(0.1)
2017
£ million
4.2
(6.9)
(1.2)
(3.9)
1.1
–
(2.2)
(2.8)
126
Close Brothers Group plc
|
Annual Report 2018
|
Financial Statements
The Notes continued
7. Discontinued operations and non-current assets held for sale continued
Assets and liabilities held for sale
The major classes of assets and liabilities classified as held for sale are as follows:
Balance sheet
Intangible assets
Loans and advances to customers
Other assets
Total assets classified as held for sale
Other liabilities
Total liabilities classified as held for sale
Cash flow from discontinued operations
Net cash flow from operating activities
Net cash flow from investing activities
Net cash flow from financing activities
2018
£ million
0.9
66.2
0.4
67.5
0.6
0.6
2018
£ million
(31.9)
(0.4)
–
2017
£ million
(14.4)
(0.3)
–
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
1 Restated – see note 7.
2 Excludes amortisation of intangible assets on acquisition and their tax effects.
Profit attributable to shareholders
Less loss from discontinued operations, net of tax
Profit attributable to shareholders on continuing operations
Adjustments:
Amortisation of intangible assets on acquisition
Tax effect of adjustments
2018
20171
136.2p
135.3p
140.2p
139.3p
130.2p
129.3p
133.6p
132.7p
134.7p
133.8p
128.3p
127.5p
2018
£ million
202.3
(2.2)
204.5
7.4
(1.3)
2017
£ million
191.2
(2.8)
194.0
6.2
(1.2)
Adjusted profit attributable to shareholders on continuing operations
210.6
199.0
Average number of shares
Basic weighted
Effect of dilutive share options and awards
Diluted weighted
2018
million
2017
million
150.2
1.0
149.0
1.0
151.2
150.0
Close Brothers Group plc
| Annual Report 2018
127
9. Dividends
For each ordinary share
Final dividend for previous financial year paid in November 2017: 40.0p (2016: 38.0p)
Interim dividend for current financial year paid in April 2018: 21.0p (2017: 20.0p)
2018
£ million
2017
£ million
59.7
31.3
91.0
56.0
29.6
85.6
A final dividend relating to the year ended 31 July 2018 of 42.0p, amounting to an estimated £62.7 million, is proposed. This final
dividend, which is due to be paid on 20 November 2018 to shareholders on the register at 12 October 2018, is not reflected in these
financial statements.
10. Loans and advances to banks
At 31 July 2018
At 31 July 2017
11. Loans and advances to customers
On demand
£ million
125.5
71.8
Within three
months
£ million
0.5
8.8
Between
three months
and one year
£ million
9.2
1.7
Between
one and
two years
£ million
2.5
8.7
Between
two and
five years
£ million
2.5
8.8
Total
£ million
140.2
99.8
At 31 July 2018
At 31 July 2017
On demand
£ million
Within three
months
£ million
Between
three months
and one year
£ million
77.3
59.3
2,135.8
1,914.3
2,301.1
2,115.2
Between
one and
two years
£ million
1,324.3
1,340.7
Between
two and
five years
£ million
1,402.3
1,431.6
After
more than
five years
£ million
95.8
76.0
Impairment
provisions
£ million
(39.1)
(52.4)
Total
£ million
7,297.5
6,884.7
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
2018
£ million
2017
£ million
52.4
46.7
(60.0)
39.1
59.7
40.2
(47.5)
52.4
2,852.4
447.6
3,997.5
2,842.9
418.9
3,622.9
7,297.5
6,884.7
At 31 July 2018, gross impaired loans were £131.0 million (31 July 2017: £135.8 million) and equate to 1.8% (31 July 2017: 2.0%) 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.
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128
Close Brothers Group plc
|
Annual Report 2018
|
Financial Statements
The Notes continued
11. Loans and advances to customers continued
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
2018
£ million
2017
£ million
1,387.5
2,372.1
66.0
3,825.6
(513.3)
1,356.1
2,396.9
26.1
3,779.1
(501.6)
3,312.3
3,277.5
1,202.1
2,058.1
52.1
1,174.2
2,080.9
22.4
3,312.3
3,277.5
The aggregate cost of assets acquired for the purpose of letting under finance leases and hire purchase agreements was
£5,978.8 million (2017: £5,738.6 million). The average effective interest rate on finance leases approximates to 9.6% (2017: 10.0%).
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.
12. Debt securities
Long trading positions in debt securities
Certificates of deposit
Sovereign and central bank debt
At 31 July 2018
Long trading positions in debt securities
Certificates of deposit
Sovereign and central bank debt
At 31 July 2017
Movements on the book value of sovereign and central bank debt comprise:
Sovereign and central bank debt at 1 August
Additions
Currency translation differences
Movement in value
Sovereign and central bank debt at 31 July
Held for
trading
£ million
25.6
–
–
Available
for sale
£ million
–
–
44.5
Loans and
receivables
£ million
–
250.5
–
Total
£ million
25.6
250.5
44.5
25.6
44.5
250.5
320.6
Held for
trading
£ million
16.2
–
–
Available
for sale
£ million
–
–
43.6
Loans and
receivables
£ million
–
180.3
–
Total
£ million
16.2
180.3
43.6
16.2
43.6
180.3
240.1
2018
£ million
43.6
–
–
0.9
2017
£ million
–
41.6
1.7
0.3
44.5
43.6
Close Brothers Group plc
| Annual Report 2018
129
13. Equity shares
Long trading positions
Other equity shares
Movements on the book value of other equity shares comprise:
Other equity shares held at 1 August
Disposals
Currency translation differences
Movement in value of:
Equity shares classified as available for sale
Other equity shares held at 31 July
31 July
2018
£ million
31.6
0.5
31 July
2017
£ million
31.9
0.8
32.1
32.7
2018
£ million
0.8
(0.3)
–
–
0.5
2017
£ million
2.1
(1.4)
0.1
–
0.8
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14. Derivative financial instruments
The group enters into derivative contracts with a number of financial institutions 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
31 July 2018
31 July 2017
Notional
value
£ million
120.3
3,530.9
Assets
£ million
0.1
16.5
Liabilities
£ million
0.7
15.0
Notional
value
£ million
118.9
3,661.6
Assets
£ million
0.1
26.9
Liabilities
£ million
0.7
10.8
3,651.2
16.6
15.7
3,780.5
27.0
11.5
Notional amounts of interest rate contracts totalling £2,781.4 million (31 July 2017: £2,513.1 million) and exchange rate contracts
totalling £nil (31 July 2017: £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 2018
31 July 2017
Notional
value
£ million
Assets
£ million
Liabilities
£ million
Notional
value
£ million
Assets
£ million
Liabilities
£ million
719.9
1.4
1.3
781.7
0.5
1,202.3
14.1
12.1
1,225.1
24.6
4.7
4.1
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 (2017: seven) 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 2018 and 2017 were immaterial.
The gain recognised in equity for cash flow hedges during the year was £3.3 million (2017: £3.5 million).
The fair value hedges seek to mitigate the interest rate risk in recognised financial instruments; the gain on the hedged items was
£18.9 million (2017: £19.1 million gain) which was offset by a loss of £18.9 million (2017: £19.5 million loss) on the hedging instrument.
130
Close Brothers Group plc
|
Annual Report 2018
|
Financial Statements
The Notes continued
15. Intangible assets
Cost
At 1 August 2016
Additions
Disposals
At 31 July 2017
Additions
Disposals
At 31 July 2018
Amortisation and impairment
At 1 August 2016
Amortisation charge for the year
Disposals
At 31 July 2017
Amortisation charge for the year
Disposals
At 31 July 2018
Net book value at 31 July 2018
Net book value at 31 July 2017
Net book value at 1 August 2016
Goodwill
£ million
Software
£ million
Intangible
assets on
acquisition
£ million
Group total
£ million
Company
software
£ million
140.8
16.9
(7.0)
150.7
–
–
104.6
31.1
(4.1)
131.6
36.2
(7.0)
44.3
22.7
–
67.0
–
–
289.7
70.7
(11.1)
349.3
36.2
(7.0)
150.7
160.8
67.0
378.5
54.9
–
(7.0)
47.9
–
–
47.9
102.8
102.8
85.9
59.1
17.2
(0.6)
75.7
16.6
(4.4)
87.9
72.9
55.9
45.5
27.8
6.2
–
34.0
7.4
–
41.4
141.8
23.4
(7.6)
157.6
24.0
(4.4)
177.2
25.6
201.3
33.0
16.5
191.7
147.9
0.4
–
–
0.4
–
–
0.4
0.4
–
–
0.4
–
–
0.4
–
–
–
Additions in goodwill in 2017 of £12.1 million, £3.9 million and £0.9 million and intangible assets on acquisition of £15.9 million,
£5.1 million and £1.7 million relate to the 100% acquisitions of Novitas Loans Limited (“Novitas”), EOS Wealth Management Limited
(“EOS”) and Adrian Smith & Partners Limited (“ASPL”) respectively. Novitas is a specialist provider of secured finance to law firms and
their clients and EOS and ASPL are independent financial advisers. These acquisitions are 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 £7.0 million disposal of goodwill in 2017 relates to the sale of Asset Management’s OLIM Limited business.
Intangible assets on acquisition relate to broker and customer relationships and are amortised over a period of eight to 20 years.
In the 2018 financial year, £7.4 million (2017: £6.2 million) of the amortisation charge is included in amortisation of intangible assets on
acquisition and £16.6 million (2017: £17.2 million) of the amortisation charge is included in administrative expenses shown in the
consolidated income statement.
Impairment tests for goodwill
At 31 July 2018, goodwill has been allocated to nine individual CGUs. 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.
For cash flows beyond the group’s three year planning horizon, a terminal value was calculated using a prudent annual growth rate of
0% (2017: 0%). The 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 following table.
At 31 July 2018, 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.
Close Brothers Group plc
| Annual Report 2018
131
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
Novitas
Other
16. Property, plant and equipment
Group
Cost
At 1 August 2016
Additions
Disposals
At 31 July 2017
Additions
Disposals
At 31 July 2018
Depreciation
At 1 August 2016
Charge for the year
Disposals
At 31 July 2017
Charge for the year
Disposals
At 31 July 2018
Net book value at 31 July 2018
Net book value at 31 July 2017
Net book value at 1 August 2016
31 July 2018
31 July 2017
Pre-tax
discount rate
%
11.9
10.0
10.2
10.2-11.3
Goodwill
£ million
23.3
38.5
12.1
28.9
102.8
Goodwill
£ million
23.3
38.5
12.1
28.9
102.8
Pre-tax
discount rate
%
13.7
9.5
11.1
11.1-12.3
Leasehold
property
£ million
Fixtures,
fittings and
equipment
£ million
Assets
held under
operating
leases
£ million
Motor
vehicles
£ million
Total
£ million
21.5
1.6
(0.7)
22.4
0.3
(0.3)
40.2
5.4
(0.5)
45.1
11.2
(0.5)
201.4
56.2
(26.8)
230.8
79.6
(41.5)
0.4
–
(0.1)
0.3
–
(0.2)
263.5
63.2
(28.1)
298.6
91.1
(42.5)
22.4
55.8
268.9
0.1
347.2
9.7
2.0
(0.6)
11.1
2.1
(0.3)
26.1
7.1
(1.5)
31.7
6.5
(0.2)
41.6
25.0
(13.6)
53.0
31.3
(14.2)
12.9
38.0
70.1
9.5
11.3
11.8
17.8
13.4
14.1
198.8
177.8
159.8
0.3
–
(0.2)
0.1
–
–
0.1
77.7
34.1
(15.9)
95.9
39.9
(14.7)
121.1
–
226.1
0.2
0.1
202.7
185.8
The gain from the sale of assets held under operating leases for the year ended 31 July 2018 was £0.1 million (2017: £0.1 million loss).
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132
Close Brothers Group plc
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Annual Report 2018
|
Financial Statements
The Notes continued
16. Property, plant and equipment continued
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 2016
Disposals
At 31 July 2017
Disposals
At 31 July 2018
Depreciation
At 1 August 2016
Charge for the year
Disposals
At 31 July 2017
Charge for the year
Disposals
At 31 July 2018
Net book value at 31 July 2018
Net book value at 31 July 2017
Net book value at 1 August 2016
The net book value of leasehold property comprises:
Long leasehold property
Short leasehold property
31 July
2018
£ million
31 July
2017
£ million
39.4
61.0
0.8
39.1
84.9
0.9
101.2
124.9
Leasehold
property
£ million
Fixtures,
fittings and
equipment
£ million
Total
£ million
2.7
–
2.7
–
2.7
2.7
–
–
2.7
–
–
2.7
–
–
–
1.3
(0.2)
1.1
–
1.1
1.3
–
(0.2)
1.1
–
–
1.1
–
–
–
4.0
(0.2)
3.8
–
3.8
4.0
–
(0.2)
3.8
–
–
3.8
–
–
–
Group
Company
31 July
2018
£ million
1.5
8.0
31 July
2017
£ million
1.6
9.7
31 July
2018
£ million
–
–
31 July
2017
£ million
–
–
9.5
11.3
–
–
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 2016
Additions
Utilised
Released
At 31 July 2017
Additions
Utilised
Released
At 31 July 2018
Company
At 1 August 2016
Additions
Utilised
Released
At 31 July 2017
Additions
Utilised
Released
At 31 July 2018
Close Brothers Group plc
| Annual Report 2018
133
31 July
2018
£ million
31 July
2017
£ million
135.6
51.5
117.6
41.1
187.1
158.7
148.0
80.1
21.5
138.6
71.8
22.7
249.6
233.1
Claims
£ million
Property
£ million
Other
£ million
Total
£ million
0.1
0.3
–
(0.2)
0.2
0.4
(0.4)
(0.2)
–
8.3
0.6
(0.5)
(0.5)
7.9
0.4
(0.2)
–
8.1
7.3
11.3
(2.3)
(1.7)
14.6
2.9
(2.8)
(1.3)
15.7
12.2
(2.8)
(2.4)
22.7
3.7
(3.4)
(1.5)
13.4
21.5
Property
£ million
Other
£ million
Total
£ million
1.9
–
–
0.1
2.0
–
–
0.1
2.1
5.1
1.9
(1.4)
(1.5)
4.1
1.8
(1.3)
(0.6)
4.0
7.0
1.9
(1.4)
(1.4)
6.1
1.8
(1.3)
(0.5)
6.1
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, 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 nine years.
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Financial Statements
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
2018
£ million
512.5
31 July
2017
£ million
524.9
16.4
14.2
30.6
11.5
16.2
27.7
543.1
552.6
Within
three
months
£ million
16.1
1,275.0
5.2
23.1
Between
three
months and
one year
£ million
31.2
2,570.6
–
561.3
On demand
£ million
7.9
86.5
9.6
0.6
Between
one and
two years
£ million
–
1,142.6
–
190.3
Between
two and
five years
£ million
–
422.5
495.0
709.9
After
more than
five years
£ million
–
–
–
288.2
Total
£ million
55.2
5,497.2
509.8
1,773.4
At 31 July 2018
104.6
1,319.4
3,163.1
1,332.9
1,627.4
288.2
7,835.6
Deposits by banks
Deposits by customers
Loans and overdrafts from banks
Debt securities in issue
On demand
£ million
18.4
123.4
12.3
13.6
Within
three
months
£ million
15.4
956.6
74.9
22.8
Between
three months
and one year
£ million
37.5
2,528.2
–
108.4
Between
one and
two years
£ million
0.7
991.3
20.5
516.0
Between
two and
five years
£ million
–
513.6
223.2
540.9
After
more than
five years
£ million
–
–
–
287.9
Total
£ million
72.0
5,113.1
330.9
1,489.6
At 31 July 2017
167.7
1,069.7
2,674.1
1,528.5
1,277.7
287.9
7,005.6
At 31 July 2018, the company held £249.7 million (31 July 2017: £nil) debt securities in issue.
As discussed in note 28(c) the group has accessed £495.0 million (31 July 2017: £224.4 million) cash under the Bank of England’s
Term Funding Scheme and £nil (31 July 2017: £197.5 million) UK Treasury Bills under the Bank of England’s Funding for Lending
Scheme. At 31 July 2017, £100.0 million of the £197.5 million UK Treasury Bills drawn under the Funding for Lending Scheme were
lent in exchange for cash. The UK Treasury Bills were not recorded on the group’s consolidated balance sheet as ownership remained
with the Bank of England. Cash from the Term Funding Scheme and repurchase agreements is included within bank loans and
overdrafts. Residual maturities of the Term Funding Scheme and repurchase agreements are as follows:
At 31 July 2018
At 31 July 2017
20. Subordinated loan capital
Final maturity date
2026
2026
2027
On demand
£ million
Within
three
months
£ million
Between
three months
and one year
£ million
–
1.2
0.2
69.9
–
–
Between
one and
two years
£ million
–
20.5
Between
two and
five years
£ million
495.0
223.2
After
more than
five years
£ million
–
–
Total
£ million
495.2
314.8
Prepayment
date
Initial
interest
rate
31 July
2018
£ million
31 July
2017
£ million
2021
2021
2022
7.42%
7.62%
4.25%
15.5
30.9
171.5
15.5
30.9
174.3
217.9
220.7
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21. Share capital and reserves
Group and company
Allotted, issued and fully paid
Ordinary shares of 25p each
31 July 2018
31 July 2017
million
£ million
million
£ million
152.1
38.0
152.1
38.0
Further analysis of the group’s and company’s share capital and reserves is shown on pages 111 and 114. As noted in the Directors’
Report, the company’s share premium account of £307.8 million was cancelled and the amount credited to distributable profits, resulting
in an increase in the company’s distributable reserves.
22. 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 below. 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 a “Total Capital Requirement” (“TCR”) that the group and its
regulated subsidiaries are required to hold at all times. The TCR is currently set at 9.9%, of which 5.6% needs to be met with common
equity tier 1 (“CET1”) capital. This includes the Pillar 1 requirements (4.5% and 8% respectively for CET1 and total capital) and a Pillar
2A component of 1.9%, of which 1.1% needs to be met with CET1 capital. Pillar 3 requires firms to publish a set of disclosures which
allow market participants to assess information on that group’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 TCR and
additional Capital Requirements Directive buffers at all times. As a result, the group maintains capital adequacy ratios above minimum
regulatory requirements, which are currently set at a minimum CET1 capital ratio of 7.9% and a minimum total capital ratio of 12.2%.
The minimum capital requirements are inclusive of the capital conservation buffer (currently 1.875% for both CET1 capital and total
capital) and the countercyclical buffer (currently 0.45% effective rate for the group, for both CET1 capital and total capital). 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 2018 and 2017.
A full analysis of the composition of regulatory capital and Pillar 1 risk weighted assets (“RWAs”), a reconciliation between equity and
CET1 capital after deductions and a table showing the movement in CET1 capital during the year are shown on the following pages.
All RWAs and capital ratios shown are unaudited.
At 31 July 2018, the group’s CET1 capital ratio was 12.7% (31 July 2017: 12.6%). CET1 capital increased to £1,084.4 million (31 July
2017: £990.6 million) primarily due to retained profit.
RWAs, calculated using the standardised approaches, increased to £8,547.5 million (31 July 2017: £7,859.0 million) as a result of
growth in credit and counterparty risk associated with the loan book. Notional RWAs for operational risk also increased reflecting
increased revenues and loan book growth over recent years.
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Close Brothers Group plc
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Annual Report 2018
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Financial Statements
The Notes continued
22. Capital continued
CET1 capital
Called up share capital
Share premium account
Retained earnings
Other reserves recognised for CET1 capital
Deductions from CET1 capital
Intangible assets, net of associated deferred tax liabilities
Foreseeable dividend1
Investment in own shares
Pension asset, net of associated deferred tax liabilities
Prudent valuation adjustment
CET1 capital
Tier 2 capital – subordinated debt2
Total regulatory capital
RWAs (notional) – unaudited
Credit and counterparty credit risk
Operational risk3
Market risk3
CET1 capital ratio – unaudited
Total capital ratio – unaudited
31 July
2018
£ million
38.0
–
1,327.7
21.3
(198.1)
(62.7)
(37.6)
(4.0)
(0.2)
31 July
2017
£ million
38.0
307.8
906.6
21.4
(186.3)
(59.8)
(34.1)
(2.8)
(0.2)
1,084.4
990.6
197.9
205.6
1,282.3
1,196.2
7,605.4
845.8
96.3
6,967.6
806.8
84.6
8,547.5
7,859.0
12.7%
15.0%
12.6%
15.2%
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2018 and 31 July 2017 for a foreseeable dividend being the proposed
final dividend as set out in note 9.
2 Shown after applying the Capital Requirements Regulations transitional and qualifying own funds arrangements.
3 Operational and market risk include a notional adjustment at 8% in order to determine notional RWAs.
The following table shows a reconciliation between equity and CET1 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
Prudent valuation adjustment
Other reserves not recognised for CET1 capital:
Cash flow hedging reserve
Non-controlling interests
CET1 capital
31 July
2018
£ million
1,348.7
31 July
2017
£ million
1,236.0
(198.1)
(62.7)
(4.0)
(0.2)
(0.1)
0.8
(186.3)
(59.8)
(2.8)
(0.2)
3.2
0.5
1,084.4
990.6
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2018 and 31 July 2017 for a foreseeable dividend being the proposed
final dividend as set out in note 9.
Close Brothers Group plc
| Annual Report 2018
137
The following table shows the movement in CET1 capital during the year:
CET1 capital at 31 July 2017
Profit in the period attributable to shareholders
Dividends paid and foreseen
Increase in intangible assets, net of associated deferred tax liabilities
Share premium cancellation
Other movements in reserves recognised for CET1 capital
Other movements in deductions from CET1 capital
CET1 capital at 31 July 2018
£ million
990.6
202.3
(93.9)
(11.8)
(307.8)
309.7
(4.7)
1,084.4
23. Contingent liabilities, guarantees and commitments
Contingent liabilities
Financial Services Compensation Scheme (“FSCS”)
A principal subsidiary of the group, Close Brothers Limited (“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.
Compensation has previously been paid out by the FSCS funded by loan facilities provided by HM Treasury to FSCS in support
of the 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. In the event of a shortfall, the FSCS will recover the shortfall by raising levies on the industry. 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
2018
£ million
162.4
31 July
2017
£ million
175.8
31 July
2018
£ million
159.3
31 July
2017
£ million
161.7
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 year1
1 Prior year figure restated to exclude an inter-group commitment.
31 July
2018
£ million
1,091.7
35.7
31 July
2017
£ million
1,088.9
2.7
1,127.4
1,091.6
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Close Brothers Group plc
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Annual Report 2018
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Financial Statements
The Notes continued
23. Contingent liabilities, guarantees and commitments continued
Operating lease commitments
Minimum operating lease payments recognised in the consolidated income statement amounted to £9.1 million
(2017: £8.9 million).
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 2018
31 July 2017
Premises
£ million
12.8
29.5
6.6
Other
£ million
4.2
5.2
–
Premises
£ million
11.5
34.2
9.7
Other
£ million
3.1
4.9
–
48.9
9.4
55.4
8.0
Other commitments
Subsidiaries had contracted capital commitments relating to capital expenditure of £12.1 million (2017: £17.7 million).
24. Related party transactions
Transactions with key management
Details of directors’ remuneration and interests in shares are disclosed in the Directors’ Remuneration Report on pages 80 to 101.
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
2018
£ million
2017
£ million
4.2
0.6
4.0
2.5
11.3
3.5
14.8
4.6
0.7
4.6
2.5
12.4
4.2
16.6
Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled
£6.3 million (2017: £10.3 million).
Key management have banking and asset management relationships with group entities which are entered into in the normal course
of business. Amounts included in deposits by customers at 31 July 2018 attributable, in aggregate, to key management were
£0.2 million (31 July 2017: £0.1 million). A member of key management has a holding of 500,000 of the company’s 4.25%
subordinated loan notes.
Close Brothers Group plc
| Annual Report 2018
139
25. 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
£11.0 million (2017: £10.2 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 2018 this scheme had
41 (31 July 2017: 47) deferred members and 46 (31 July 2017: 45) pensioners and dependants.
Funding position
The scheme’s most recent triennial actuarial valuation at 31 July 2015 showed that the scheme was fully funded. As such, no further
contributions are scheduled.
IAS 19 valuation
The following disclosures are reported in accordance with IAS 19. Significant actuarial assumptions are as follows:
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Inflation rate (Retail Price Index)
Inflation rate (Consumer Price Index)
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
2018
%
3.3
2.3
2.5
2.5
24.3
25.9
25.1
28.0
2017
%
3.4
2.4
2.5
2.5
24.2
25.8
25.0
27.9
1 Based on market yields at 31 July 2018 and 2017 on high quality sterling-denominated corporate bonds, adjusted to be consistent with the estimated term of the post-
employment benefit obligation, using the Willis 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 2014 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 “Other assets and
other liabilities”.
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, and accordingly the scheme surplus is recognised on the consolidated balance sheet.
Fair value of scheme assets1:
Equities
Bonds
Cash
Total fair value of scheme assets
Present value of scheme liabilities
Surplus
2018
£ million
2017
£ million
2016
£ million
2015
£ million
2014
£ million
12.7
28.7
0.1
41.5
(36.4)
20.9
20.6
0.3
41.8
(38.2)
35.9
8.7
0.2
44.8
(43.6)
33.0
8.5
0.2
41.7
(38.6)
31.8
7.9
0.2
39.9
(35.0)
5.1
3.6
1.2
3.1
4.9
1 There are no amounts included within the fair value of scheme assets relating to the financial instruments of Close Brothers Group plc.
140
Close Brothers Group plc
|
Annual Report 2018
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Financial Statements
The Notes continued
25. Pensions continued
Movement in the present value of scheme liabilities during the year:
Carrying amount at 1 August
Interest expense
Benefits paid
Actuarial gains/(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
Administrative costs paid
Return on scheme assets, excluding interest income
Carrying amount at 31 July
Historical experience of actuarial gains/(losses) are shown below:
Experience gains on scheme assets
Experience gains/(losses) on scheme liabilities
Impact of changes in assumptions on scheme liabilities
Total actuarial gains/(losses) on scheme liabilities
2018
£ million
(38.2)
(0.9)
2.3
0.4
2017
£ million
(43.6)
(0.9)
7.3
(1.0)
(36.4)
(38.2)
2018
£ million
41.8
1.0
(2.3)
(0.3)
1.3
2017
£ million
44.7
0.9
(7.3)
(0.2)
3.7
41.5
41.8
2018
£ million
1.3
–
0.4
0.4
2017
£ million
3.7
–
(1.0)
(1.0)
2016
£ million
3.6
1.3
(6.8)
(5.5)
2015
£ million
2.9
–
(4.9)
(4.9)
2014
£ million
1.7
(0.1)
(3.2)
(3.3)
Total actuarial gains/(losses)
1.7
2.7
(1.9)
(2.0)
(1.6)
Total actuarial gains have been recognised in other comprehensive income. Income of £0.1 million (2017: £nil) from the interest on the
scheme surplus has been recognised within administrative expenses in the consolidated income statement. The group’s policy is not
to allocate the net defined benefit cost between group entities participating in the scheme.
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 2018 and 2017 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.
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
Impact on defined benefit obligation
increase/(decrease)
2018
2017
%
(5.0)
2.0
3.0
£ million
(1.8)
0.7
1.1
%
(5.0)
2.0
3.0
£ million
(1.9)
0.8
1.1
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): The scheme’s assets are invested 31% in global equities and 69% in
bonds and the scheme’s liabilities are measured with reference to corporate bond yields. The performance 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.
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26. Share-based awards
The Save As You Earn (“SAYE”), 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 Directors’ Remuneration Report on pages 80 to 101.
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 2018, 0.6 million (31 July 2017: 0.3 million) and
2.2 million (31 July 2017: 2.4 million) of these shares were held respectively and in total £37.6 million (2017: £34.1 million) was
recognised within the share-based payments reserve. During the year £12.5 million (2017: £15.8 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 £21.7 million (2017: £22.2 million). The share-based awards charge of £6.0 million (2017: £6.0 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:
SAYE
LTIP
DSA
SMP
At 1 August 2016
Granted
Exercised
Forfeited
Lapsed
Weighted
average
exercise
price
–
Number
1,033,470
505,229
(372,823)
1,160.6p
997.5p
(91,100) 1,135.6p
(5,207) 1,049.4p
Number
1,463,455
422,325
(322,097)
(11,413)
(174,787)
At 31 July 2017
1,069,569
–
1,377,483
Granted
Exercised
Forfeited
Lapsed
At 31 July 2018
Exercisable at:
31 July 2018
31 July 2017
455,385
1,155.2p
(210,104) 1,095.5p
1,174.1p
(139,666)
(6,299) 1,170.2p
594,194
(221,266)
(105,559)
(212,823)
1,168,885
– 1,432,029
–
20,711
–
1,154.2p
–
–
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
538,635
313,375
(291,664)
–
–
560,346
426,184
(280,978)
(6,309)
(4,838)
694,405
15,585
13,169
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
1,135,823
395,813
(310,106)
–
(82,812)
1,138,718
–
(255,429)
(20,136)
(118,509)
744,644
–
–
The table below shows the weighted average market price at the date of exercise:
SAYE
LTIP
DSA
SMP
2018
1,432.0p
1,453.4p
1,473.2p
1,463.7p
2017
1,484.6p
1,387.5p
1,403.4p
1,382.3p
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G
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03
142
Close Brothers Group plc
|
Annual Report 2018
|
Financial Statements
The Notes continued
26. Share-based awards continued
The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are as follows:
SAYE
Between £6 and £7
Between £9 and £10
Between £11 and £12
Between £12 and £13
LTIP
Nil
DSA
Nil
SMP
Nil
Total
2018
Options outstanding
2017
Options outstanding
Weighted
average
remaining
contractual
life
Years
–
0.8
2.4
2.5
Number
outstanding
–
71,486
931,585
165,814
Number
outstanding
18,741
79,618
758,178
213,032
1,432,029
2.3
1,377,483
694,405
744,644
4,039,963
1.9
1.7
2.1
560,346
1,138,718
4,146,116
Weighted
average
remaining
contractual
life
Years
0.8
1.8
2.2
3.5
2.2
1.7
2.2
2.2
For the share-based awards granted during the year, the weighted average fair value of those options at 31 July 2018 was 1,022.6p
(31 July 2017: 788.1p). The main assumptions for the valuation of these share-based awards comprised:
Exercise period
SAYE
1 Dec 2020 to 31 May 2021
1 Dec 2022 to 31 May 2023
1 Jun 2021 to 30 Nov 2021
1 Jun 2023 to 30 Nov 2023
LTIP
3 Oct 2020 to 2 Oct 2021
DSA
3 Oct 2018 to 2 Oct 2019
3 Oct 2019 to 2 Oct 2020
3 Oct 2020 to 2 Oct 2021
30 Oct 2020 to 29 Oct 2021
9 Mar 2019 to 8 Mar 2020
9 Mar 2020 to 8 Mar 2021
9 Mar 2021 to 8 Mar 2022
Share price
at issue
Exercise
price
Expected
volatility
Expected
option life
in years
Dividend
yield
Risk free
interest rate
1,452.0p
1,452.0p
1,426.0p
1,426.0p
1,459.0p
1,459.0p
1,459.0p
1,459.0p
1,396.8p
1,424.0p
1,424.0p
1,424.0p
1,162.0p
1,162.0p
1,141.0p
1,141.0p
–
–
–
–
–
–
–
–
24.0%
22.0%
25.0%
23.0%
24.0%
–
–
–
–
–
–
–
3
5
3
5
3
–
–
–
–
–
–
–
4.3%
4.3%
4.4%
4.4%
0.6%
0.9%
0.9%
1.1%
4.1%
0.6%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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 2018
143
27. 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
Loss before tax from discontinued operations1
Tax paid
Depreciation and amortisation
(Increase)/decrease in:
Interest receivable and prepaid expenses
Net settlement balances and trading positions
Net loans to/from money brokers 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
Certificates of deposit
Sovereign and central bank debt
Other assets less other liabilities
Increase/(decrease) in:
Deposits by banks
Deposits by customers
Loans and overdrafts from banks
Issuance/redemption of debt securities, net of transaction costs
31 July
2018
£ million
31 July
2017
£ million
271.2
(3.0)
(66.8)
63.9
(18.4)
15.9
0.3
9.4
262.5
(3.9)
(63.6)
57.5
(18.1)
6.7
(21.9)
19.1
272.5
238.3
16.4
(449.8)
(68.0)
(70.2)
(0.9)
14.1
(16.8)
384.1
178.9
45.7
0.3
(453.1)
(43.2)
20.7
(44.5)
22.5
0.9
218.5
(138.2)
297.8
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s
Net cash inflow from operating activities
306.0
120.0
03
(b) Analysis of net cash outflow in respect of the purchase of subsidiaries and
non-controlling interests
Cash consideration paid
(c) Analysis of net cash inflow/(outflow) in respect of the sale of a subsidiary
Cash consideration received
Cash and cash equivalents disposed of
(d) Analysis of cash and cash equivalents2
Cash and balances at central banks
Loans and advances to banks repayable on demand
1 Restated – see note 7.
2 Excludes Bank of England cash reserve account and amounts held as collateral.
(1.2)
(6.3)
0.9
–
0.9
0.3
(0.6)
(0.3)
1,126.2
125.5
798.2
61.4
1,251.7
859.6
During the year ended 31 July 2018, the non-cash changes on debt financing amounted to £9.4 million (31 July 2017: £8.3 million)
arising largely from interest accretion.
144
Close Brothers Group plc
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Annual Report 2018
|
Financial Statements
The Notes continued
28. 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 pages 71 and 72. 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.
At 31 July 2018
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
Held at
amortised
cost
£ million
Derivatives
held for
hedging
£ million
Total
£ million
–
–
–
–
25.6
31.6
–
1.1
–
58.3
30.6
–
–
–
–
–
–
2.3
–
32.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4.2
4.2
–
–
–
–
44.5
0.5
–
–
2.1
1,140.4
512.2
140.2
7,297.5
250.5
–
66.4
–
73.6
47.1
9,480.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
512.5
55.2
5,497.2
509.8
1,773.4
22.4
217.9
–
115.8
–
–
–
–
–
–
–
15.5
–
1,140.4
512.2
140.2
7,297.5
320.6
32.1
66.4
16.6
75.7
15.5
9,601.7
–
–
–
–
–
–
–
13.4
–
543.1
55.2
5,497.2
509.8
1,773.4
22.4
217.9
15.7
120.0
8,704.2
13.4
8,754.7
Close Brothers Group plc
| Annual Report 2018
145
Designated
at fair value
through
profit or loss
£ million
Held for
trading
£ million
Available for
sale
£ million
Loans and
receivables
£ million
Held at
amortised
cost
£ million
Derivatives
held for
hedging
£ million
Total
£ million
At 31 July 2017
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
–
–
–
–
16.2
31.9
–
1.8
–
49.9
27.7
–
–
–
–
–
–
2.6
–
30.3
–
–
–
–
–
–
–
0.1
–
0.1
–
–
–
–
–
–
–
0.1
4.8
4.9
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p
o
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01
G
o
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a
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02
i
F
n
a
n
c
a
i
l
S
t
a
t
e
m
e
n
t
s
–
–
–
–
43.6
0.8
–
–
2.7
805.1
546.7
99.8
6,884.7
180.3
–
48.6
–
66.3
47.1
8,631.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
25.1
–
805.1
546.7
99.8
6,884.7
240.1
32.7
48.6
27.0
69.0
25.1
8,753.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
524.9
72.0
5,113.1
330.9
1,489.6
4.3
220.7
–
114.8
7,870.3
–
–
–
–
–
–
–
8.8
–
8.8
552.6
72.0
5,113.1
330.9
1,489.6
4.3
220.7
11.5
119.6
7,914.3
03
(b) Valuation
The fair values of the group’s financial assets and liabilities are not materially different from their carrying values. The main differences
are as follows:
Subordinated loan capital
Debt securities in issue
31 July 2018
31 July 2017
Fair
value
£ million
233.7
1,797.4
Carrying
value
£ million
217.9
1,773.4
Fair
value
£ million
242.0
1,522.8
Carrying
value
£ million
220.7
1,489.6
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 quoted prices in less active markets for identical assets or liabilities or those
derived from inputs other than quoted prices 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 sovereign and central bank debt and liquid listed equity shares.
Investments classified as Level 2 predominantly comprise less liquid listed equity shares, investment grade corporate bonds and
over-the-counter derivatives.
146
Close Brothers Group plc
|
Annual Report 2018
|
Financial Statements
The Notes continued
28. Financial risk management continued
Investments classified as Level 3 predominantly comprise contingent consideration payable and receivable in relation to the
acquisitions and the disposal of subsidiaries.
The valuation of contingent consideration is determined on a discounted expected cash flow basis. 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.
There were no significant transfers between Level 1, 2 and 3 in 2018 and 2017.
The tables below show the classification of financial instruments held at fair value into the valuation hierarchy.
At 31 July 2018
Assets
Debt securities:
Long positions in debt securities held for trading
Sovereign and central bank debt classified as available for sale
Equity shares:
Held for trading
Fair value through profit or loss
Available for sale
Derivative financial instruments
Contingent consideration
Liabilities
Short positions held for trading:
Debt securities
Equity shares
Derivative financial instruments
Contingent consideration
Level 1
£ million
Level 2
£ million
Level 3
£ million
Total
£ million
22.9
44.5
5.5
–
–
–
–
72.9
14.2
4.2
–
–
18.4
2.7
–
26.1
–
–
16.6
–
45.4
2.2
10.0
15.7
–
27.9
–
–
–
–
0.5
–
2.1
2.6
–
–
–
5.4
5.4
25.6
44.5
31.6
–
0.5
16.6
2.1
120.9
16.4
14.2
15.7
5.4
51.7
Close Brothers Group plc
| Annual Report 2018
147
Level 1
£ million
Level 2
£ million
Level 3
£ million
Total
£ million
13.7
43.6
5.4
–
–
–
–
62.7
8.0
4.7
–
–
2.5
–
26.5
–
–
27.0
–
56.0
3.5
11.5
11.5
–
12.7
26.5
–
–
–
–
0.8
–
2.7
3.5
–
–
–
6.6
6.6
16.2
43.6
31.9
–
0.8
27.0
2.7
122.2
11.5
16.2
11.5
6.6
45.8
Equity
shares
available
for sale
£ million
2.0
0.1
–
–
(1.3)
Contingent
consideration
£ million
–
–
–
(6.6)
2.7
0.8
–
–
–
(0.3)
0.5
(3.9)
0.6
0.3
(1.2)
0.9
(3.3)
At 31 July 2017
Assets
Debt securities:
Long positions in debt securities held for trading
Sovereign and central bank debt classified as available for sale
Equity shares:
Held for trading
Fair value through profit or loss
Available for sale
Derivative financial instruments
Contingent consideration
Liabilities
Short positions held for trading:
Debt securities
Equity shares
Derivative financial instruments
Contingent consideration
Movements in financial assets categorised as Level 3 were:
At 1 August 2016
Total gains recognised in the consolidated income statement
Total gains recognised in other comprehensive income
Purchases and issues
Sales and settlements
At 31 July 2017
Total gains recognised in the consolidated income statement
Total gains recognised in other comprehensive income
Purchases and issues
Sales and settlements
At 31 July 2018
The losses recognised in the consolidated income statement relating to instruments held at the year end amounted to £nil (2017: £nil).
i
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148
Close Brothers Group plc
|
Annual Report 2018
|
Financial Statements
The Notes continued
28. Financial risk management continued
(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 as they fall due. Credit risk across the group mainly arises through the lending and
treasury activities of the Banking division.
The Banking division applies consistent and prudent lending criteria to mitigate credit risk. Its lending activities are predominantly
secured across a diverse range of asset classes and are generally short term in nature with low average loan size. This ensures
concentration risk is controlled in both the loan book and associated collateral.
The group has established limits for all counterparties with whom it places deposits, enters into derivative contracts or whose debt
securities are held and the credit quality of the counterparties is monitored. While 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 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 counterparty risk is limited to price movements in the underlying securities. Counterparty
exposure and settlement failure monitoring controls are in place.
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. 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 commitments1
Total maximum exposure to credit risk
1 Prior year figure restated to reflect irrevocable commitments only.
31 July
2018
£ million
31 July
2017
£ million
1,140.4
512.2
140.2
7,297.5
320.6
66.4
16.6
75.7
9,569.6
805.1
546.7
99.8
6,884.7
240.1
48.6
27.0
69.0
8,721.0
191.0
97.8
9,760.6
8,818.8
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 borrowing contracts.
At 31 July 2018, the group was a participant of the Bank of England’s Term Funding Scheme. Under this scheme, asset finance loan
receivables of £773.8 million (31 July 2017: £525.1 million) were positioned as collateral with the Bank of England, against which
£495.0 million of cash (31 July 2017: £224.4 million) was drawn. The term of these transactions is four years from the date of each
drawdown but the group may choose to repay earlier at its discretion. The risks and rewards of the loan receivables remain with the
group and continue to be recognised in loans and advances to customers on the consolidated balance sheet.
The Bank of England’s Funding for Lending Scheme was closed for new drawings on 31 January 2018 and the group no longer had
any drawings from the scheme at 31 July 2018. UK Treasury Bills drawn under the scheme of £197.5 million at 31 July 2017 were fully
repaid during the year.
The group has securitised without recourse and restrictions £1,499.3 million (31 July 2017: £1,486.3 million) of its insurance premium
and motor loan receivables in return for cash and asset-backed securities in issue of £983.3 million (31 July 2017: £1,046.9 million).
This includes £118.1 million (31 July 2017: £157.3 million) asset-backed securities in issue retained for liquidity purposes. 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.
Close Brothers Group plc
| Annual Report 2018
149
Loans to money brokers against stock advanced of £66.4 million (31 July 2017: £48.6 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 35 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.
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 those credit committees. Retail, Commercial and Property
Finance 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 customer’s ability to repay and the quality of the underlying security to
minimise any loss should the customer not be able to repay; and
• applying greater scrutiny both analytically and in terms of escalation of sanctioning authority where the security collateralising a loan
is less tangible, or in cases of higher loan to valuation (“LTV”).
Collections and recoveries processes are designed to provide a fair, consistent and effective operation for arrears management. We
seek 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.
Forbearance
Forbearance occurs when a customer is experiencing difficulty in meeting their financial commitments and a concession is granted,
by changing the terms of the financial arrangement, which would not otherwise be considered. This arrangement can be temporary or
permanent depending on the customer’s circumstances.
The Banking division maintains a forbearance policy to ensure the necessary processes are in place to enable consistently fair
treatment of each customer and that they are managed based on their individual circumstances. The arrangements agreed with
customers will aim to create a sustainable and affordable financial position, thereby reducing the likelihood of suffering a credit loss.
The forbearance policy is periodically reviewed to ensure it is still effective.
The Banking division offers a range of assistance to support customers which vary depending on the product and the customer’s
status. Such concessions could involve changing the terms and conditions of a loan. The primary forbearance types granted are
agreement to terms outside of policy (for example a higher loan to value) and rescheduling of arrears, which may incorporate an
extension of the loan tenor. Other forms of forbearance (for example, grace periods; covenant waivers; rate concessions) would also
be considered. The extent and type of forbearance granted reflects the predominantly secured nature of the portfolio.
Loans are classified as forborne at the time a customer in financial difficulty is granted a concession. Where forbearance has been
granted, the customer will remain treated and recorded as forborne until the following exit conditions are met:
1. When all due payments, as per the amended contractual terms, have been made in a timely manner over a continuous repayment
period (loan is considered as performing);
2. A minimum two-year probation period has passed from the date the forborne exposure was considered as performing; and
3. None of the customer’s exposures with the Banking division are more than 30 days past due at the end of the probation period.
At 31 July 2018 the gross carrying amount of exposures with forbearance measures was £148.6 million (31 July 2017: £120.4 million).
Analysis of forborne accounts is shown in the table below:
31 July 2018
31 July 2017
Gross loans
and advances
to customers
£ million
7,336.6
6,937.1
Forborne loans
as a percentage
of gross loans and
advances to
customers
£ million
2.0%
1.7%
Forborne
loans
£ million
148.6
120.4
Provision on
forborne loans
£ million
8.5
23.6
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150
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Annual Report 2018
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Financial Statements
The Notes continued
28. Financial risk management continued
Divisional credit risk
Retail is predominantly high volume secured lending with a small average loan size. Credit issues are identified early via largely
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 specialist secured niche lending businesses with a diverse mix of loans in terms of assets
financed, average loan size and LTV percentage. Credit quality is predominately assessed on an individual loan by loan basis.
Collection and recovery activity is executed promptly by experts with experience 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.
In Property and Commercial 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 the 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 £4.2 billion (2017: £3.8 billion) having a
contractual maturity of less than 12 months.
The following table shows the ageing based on contractual maturity 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 2018
Loans and advances to customers
31 July 2017
Loans and advances to customers
Individually
assessed
£ million
725.2
426.5
1,177.5
1,003.6
Collectively
assessed
£ million
393.4
452.8
1,056.2
1,710.7
Total
£ million
1,118.6
879.3
2,233.7
2,714.3
Individually
assessed
£ million
601.4
363.5
968.9
943.3
Collectively
assessed
£ million
362.0
440.2
1,091.6
1,786.3
Total
£ million
963.4
803.7
2,060.5
2,729.6
3,332.8
3,613.1
6,945.9
2,877.1
3,680.1
6,557.2
(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 based on the period loans and advances to customers have been past due, split by credit
assessment method, 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
1 Prior year figures restated.
31 July 2018
Loans and advances to customers
31 July 20171
Loans and advances to customers
Individually
assessed
£ million
98.3
46.1
18.3
9.4
Collectively
assessed
£ million
83.5
3.4
0.7
–
Total
£ million
181.8
49.5
19.0
9.4
Individually
assessed
£ million
93.5
39.0
22.8
13.7
Collectively
assessed
£ million
72.7
1.6
0.7
0.1
Total
£ million
166.2
40.6
23.5
13.8
172.1
87.6
259.7
169.0
75.1
244.1
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| Annual Report 2018
151
(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. 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 LTV 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 30% (2017: 39%).
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 2018
Loans and advances to customers
31 July 2017
Loans and advances to customers
Individually
assessed
£ million
59.4
(17.1)
Collectively
assessed
£ million
71.6
(22.0)
Total
£ million
131.0
(39.1)
Individually
assessed
£ million
62.9
(30.5)
Collectively
assessed
£ million
72.9
(21.9)
Total
£ million
135.8
(52.4)
42.3
49.6
91.9
32.4
51.0
83.4
The amount of interest income accrued on impaired loans and advances to customers was £8.2 million (31 July 2017: £12.9 million).
The group holds collateral against loans and advances to customers in the form of residential and commercial property and 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 ratios between 80% and 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 2018
LTV
Less than 70%
70% to 90%
Greater than 90%
At 31 July 2017
Retail
£ million
Commercial
£ million
Property
£ million
Total
£ million
–
7.5
17.2
24.7
237.3
514.5
201.2
1,529.1
13.1
–
1,766.4
535.1
218.4
953.0
1,542.2
2,519.9
Retail
£ million
Commercial
£ million
Property
£ million
Total
£ million
–
4.6
16.3
20.9
212.1
352.0
138.6
1,331.3
9.1
–
1,543.4
365.7
154.9
702.7
1,340.4
2,064.0
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152
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Annual Report 2018
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Financial Statements
The Notes continued
28. Financial risk management continued
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 2018
31 July 2017
Neither past
due nor
impaired
£ million
489.7
–
–
–
Past due
but not
impaired
£ million
19.4
1.5
1.2
0.4
Neither past
due nor
impaired
£ million
523.7
–
–
–
Total
£ million
509.1
1.5
1.2
0.4
Past due
but not
impaired
£ million
20.0
1.8
0.6
0.6
Total
£ million
543.7
1.8
0.6
0.6
489.7
22.5
512.2
523.7
23.0
546.7
(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 risk arises in the Banking division and the remainder of this section relates to the Banking
division accordingly. Interest rate risk in the group’s other divisions is considered to be immaterial.
The group has a simple and transparent balance sheet and a low appetite for interest rate risk which is limited to that required to
operate efficiently.
The group’s policy is to match repricing characteristics of assets and liabilities naturally where possible or by using interest rate swaps
to secure the margin on its loans and advances to customers. These interest rate swaps are disclosed in note 14.
The Asset and Liability Committee monitors the interest rate risk exposure across the balance sheet. There are three main sources of
interest rate risk recognised, which could adversely impact future income or the value of the balance sheet:
• repricing risk – occurs when assets and liabilities reprice at different times;
• embedded optionality risk – occurs as a result of special conditions attached to contract terms embedded in some loans; and
• basis risk – occurs where there is a mismatch in the interest rate reference rate for assets and liabilities.
The table below sets out the assessed impact on our base case earnings at risk (“EaR”) due to a parallel shift in interest rates at
31 July 2018:
0.5% increase
0.5% decrease
2018
£ million
(4.9)
5.8
2017
£ million
(8.7)
6.2
The table below sets out the assessed impact on our base case economic value of equity (“EVE”) due to a shift in interest rates at
31 July 2018:
0.5% increase
0.5% decrease
2018
£ million
0.8
(0.8)
2017
£ million
0.2
(0.1)
Close Brothers Group plc
| Annual Report 2018
153
Foreign currency risk
The group has limited exposure to foreign currency risk which derives from the equity balances of its overseas operations, which are
not hedged. These balances are predominantly in euros. Foreign exchange differences which arise from the translation of these
operations are recognised directly in equity.
A change in the euro exchange rate would decrease the group’s equity by the following amounts:
20% strengthening of sterling against the euro
2018
£ million
(3.9)
2017
£ million
(3.4)
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:
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For the year ended 31 July 2018
Equity shares
Long
Short
Debt securities
Long
Short
For the year ended 31 July 2017
Equity shares
Long
Short
Debt securities
Long
Short
Highest
exposure
£ million
Lowest
exposure
£ million
Average
exposure
£ million
Exposure
at 31 July
£ million
i
F
n
a
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a
i
41.1
29.1
24.8
9.4
30.4
19.7
12.0
8.5
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32.0
16.0
16.0
22.2
11.8
10.4
31.6
14.2
17.4
25.6
16.4
9.2
Highest
exposure
£ million
Lowest
exposure
£ million
Average
exposure
£ million
Exposure
at 31 July
£ million
42.4
24.6
22.3
9.7
20.6
13.4
10.4
5.3
31.6
15.7
15.9
14.8
9.0
5.8
31.9
16.2
15.7
16.2
11.5
4.7
With respect to the long and short positions on debt securities £10.8 million and £0.8 million (2017: £3.5 million and £1.4 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
(2017: £1.6 million decrease) in the group’s income and net assets on the equity trading book and a £0.9 million decrease (2017: £0.5
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.
154
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Financial Statements
The Notes continued
28. Financial risk management continued
(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.
The group has a prudent liquidity position with total available funding at 31 July 2018 of £9.6 billion (31 July 2017: £8.8 billion). This
funding is significantly in excess of its loans and advances to customers at 31 July 2018 of £7.3 billion (31 July 2017: £6.9 billion). The
group has a large portfolio of high quality liquid assets principally including cash placed on deposit with the Bank of England. 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.
At 31 July 2018
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
–
8.0
81.3
9.6
–
22.4
–
0.3
11.0
512.5
16.1
1,279.7
5.6
29.5
–
1.7
4.7
97.5
–
28.9
914.6
0.6
86.1
–
3.7
3.4
2.3
–
2.2
1,686.5
1.2
499.6
–
5.4
7.8
1.6
–
–
1,610.4
500.1
990.1
–
44.5
50.2
7.5
In more
than five
years
£ million
–
–
–
–
317.0
–
255.1
14.9
0.1
Total
£ million
512.5
55.2
5,572.5
517.1
1,922.3
22.4
310.4
81.3
120.0
Total
132.6
1,947.3
1,039.6
2,204.3
3,202.8
587.1
9,113.7
At 31 July 2017
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
–
18.5
117.5
12.3
–
4.3
–
0.1
12.5
524.9
15.4
961.4
75.1
26.7
–
1.7
5.2
97.0
–
30.0
923.3
0.1
28.0
–
3.7
2.7
1.1
–
7.6
1,634.6
21.0
102.3
–
5.4
6.4
1.2
–
0.7
1,550.1
224.6
1,133.9
–
36.2
44.7
7.8
In more
than five
years
£ million
–
–
–
–
324.8
–
274.2
19.8
–
Total
£ million
524.9
72.2
5,186.9
333.1
1,615.7
4.3
321.2
78.9
119.6
Total
165.2
1,707.4
988.9
1,778.5
2,998.0
618.8
8,256.8
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 2018
At 31 July 2017
In more than
three months
but not more
than six
months
£ million
3.4
2.7
In more than
six months
but not more
than one
year
£ million
7.8
6.4
In more than
one year but
not more
than five
years
£ million
50.2
44.7
In less
than three
months
£ million
63.5
74.6
On
demand
£ million
42.1
19.8
In more
than five
years
£ million
14.9
19.8
Total
£ million
181.9
168.0
Close Brothers Group plc
| Annual Report 2018
155
(f) Offsetting
The following table shows the impact on derivative financial assets and liabilities which have not been offset but for which the group
has enforceable master netting arrangements in place with counterparties. The net amounts show the exposure to counterparty
credit risk after offsetting benefits and collateral, and are not intended to represent the group’s actual exposure to credit risk.
Master netting arrangements allow outstanding transactions with the same counterparty to be offset and settled net, either
unconditionally or following a default or other predetermined event. Financial collateral on derivative financial instruments consists of
cash settled, typically daily, to mitigate the mark to market exposures.
At 31 July 2018
Derivative financial assets
Derivative financial liabilities
At 31 July 2017
Derivative financial assets
Derivative financial liabilities
Gross
amounts
recognised
£ million
Master netting
arrangements
£ million
Financial
collateral
£ million
Net amounts
after offsetting
£ million
16.6
15.7
27.0
11.5
(8.3)
(8.3)
(7.8)
(7.8)
(7.7)
(7.2)
(18.4)
(1.9)
0.6
0.2
0.8
1.8
29. Interest in unconsolidated structured entities
Structured entities are those entities that have been designed so that voting or similar rights are not the dominant factor in deciding
who has control, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by
means of contractual arrangements.
The group has interests in structured entities as a result of contractual arrangements arising from the management of assets on
behalf of its clients as part of its Asset Management division. These structured entities consist of unitised vehicles such as Authorised
Unit Trusts (“AUTs”) and Open Ended Investment Companies (“OEICs”) which entitle investors to a percentage of the vehicle’s net
asset value. The structured entities are financed by the purchase of units or shares by investors. The group does not hold direct
investments in its structured entities.
As fund manager, the group does not guarantee returns on its funds or commit to financially support its funds. The business activity
of all structured entities is the management of assets in order to maximise investment returns for investors from capital appreciation
and/or investment income. The group earns a management fee from its structured entities, based on a percentage of the entity’s net
asset value.
The main risk the group faces from its interest in assets under management on behalf of external investors is the loss of fee income as
a result of the withdrawal of funds by clients. Outflows from funds are dependent on market sentiment, asset performance and
investor considerations. The assets under management of unconsolidated structured entities managed by the group were
£4,348 million at 31 July 2018 (31 July 2017: £3,830 million). Included in revenue on the consolidated income statement is
management fee income of £27.6 million (2017: £22.8 million) from unconsolidated structured entities managed by the group.
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Close Brothers Group plc
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Annual Report 2018
|
Financial Statements
The Notes continued
30. 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 2018 which are
all wholly owned and incorporated in the UK unless otherwise stated.
Group
Close Brothers Holdings Limited1
Banking
Air and General Finance Limited2
Armed Services Finance Limited5
Arrow Audit Services Limited11, 20
Brook Funding (No.1) Limited14, 20
CBM Holdings Limited1
CLL I Limited15
Close Asset Finance Limited2
Close Brewery Rentals Limited6
Close Brothers Asset Finance GmbH (Germany)17
Close Brothers Factoring GmbH (Germany)17
Close Brothers Finance plc1
Close Brothers Limited1
Close Brothers Military Services Limited5
Close Brothers Technology Services Limited (85%
shareholding)1
Close Brothers Vehicle Hire Limited16
Close Business Finance Limited2
Close Credit Management (Holdings) Limited1
Close Finance (CI) Limited (Jersey)18
Close International Bank Holdings Limited (Guernsey)4
Close Invoice Finance Limited1
Close Leasing Limited15
Close Motor Finance Limited5
Close PF Funding I Limited13, 20
Close Trust Nominees Limited1
Commercial Acceptances Limited7
Commercial Finance Credit Limited2
Ecasks Limited6
Finance for Industry Limited1
Banking continued
Finance for Industry Services Limited1
Kingston Asset Finance Limited2
Kingston Asset Leasing Limited2
Metropolitan Factors Limited1
Micgate Holdings (UK) Limited1
Novitas Loans Limited2
Novitas (Salisbury) Limited2
Orbita Funding 2016-1 plc14, 20
Orbita Funding 2017-1 plc14, 20
Orbita Holdings Limited14, 20
Surrey Asset Finance Limited2
Securities
W.S. (Nominees) Limited3
Winterflood Client Nominees Limited3
Winterflood Gilts Limited3
Winterflood Securities Holdings Limited3
Winterflood Securities Limited3
Winterflood Securities US Corporation19
Asset Management
Adrian Smith & Partners Limited1
Cavanagh Financial Management Limited8
CBF Wealth Management Limited (80% shareholding)1
CFSL Management Limited1
Chartwell Private Client Limited1
Close Asset Management Holdings Limited1
Close Asset Management Limited1
Close Asset Management (UK) Limited1
Close Investments Limited1
Close Portfolio Management Limited1
Close Properties Jersey Limited (Jersey)9
EOS Wealth Management Limited1
Lion Nominees Limited1
Mackay Stewart and Brown Limited10
Place Campbell Close Brothers Limited (50% shareholding)12
Registered offices:
1 10 Crown Place, London EC2A 4FT, United Kingdom.
2 Wimbledon Bridge House, Hartfield Road, Wimbledon, London SW19 3RU, United Kingdom.
3 The Atrium Building Cannon Bridge, 25 Dowgate Hill, London EC4R 2GA, United Kingdom.
4 1st and 2nd Floors, Elizabeth House, Les Ruettes Brayes, St Peter Port GY1 1EW, Guernsey.
5 Roman House, Roman Road, Doncaster, South Yorkshire DN4 5EZ, United Kingdom.
6 Unit 1, Kingfisher Park, Headlands Business Park, Ringwood, Hampshire BH24 3NX, United Kingdom.
7 100 George Street, London W1U 8NU, United Kingdom.
8 4th Floor, The Athenaeum Building, 8 Nelson Mandela Place, Glasgow G2 1BT, United Kingdom.
9 47 Esplanade, St Helier JE1 0BD, Jersey.
10 Saltire Court, 3rd Floor, West Wing, 20 Castle Terrace, Edinburgh, Scotland EH1 2EN, United Kingdom.
11 6 Coldbath Square, London EC1R 5HL, United Kingdom.
12 Wilmington House, High Street, East Grinstead, West Sussex RH19 3AU, United Kingdom.
13 3rd Floor, 1 King’s Arms Yard, London EC2R 7AF, United Kingdom.
14 35 Great St. Helen’s, London EC3A 6AP, United Kingdom.
15 Olympic Court Third Avenue, Trafford Park Village, Manchester M17 1AP, United Kingdom.
16 Lows Lane, Stanton-By-Dale, Ilkeston, Derbyshire DE7 4QU, United Kingdom.
17 Grosse Bleiche 35-39, 55116, Mainz, Germany.
18 Conway House, Conway Street, St Helier JE4 5SR, Jersey.
19 1209 Orange Street, Wilmington 19801, New Castle, Delaware, U.S.A.
Subsidiaries by virtue of control:
20 The related undertakings are included in the consolidated financial statements as they are controlled by the group.
Close Brothers Group plc
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Glossary
Adjusted
Adjusted measures are used to increase comparability between periods and exclude
amortisation of intangible assets on acquisition, any exceptional items and
discontinued operations
Adjusted operating profit
(“AOP”)
Calculated as adjusted operating income less adjusted operating expenses and impairment
losses on loans and advances
Asset Risk Consultants
(“ARC”)
Independent investment management consultant providing manager research and
benchmarking for private client investment managers, charities, trustees and family offices
Bad debt ratio1
Impairment losses as a percentage of average net loans and advances to customers and
operating lease assets
Bargains per day
Average number of Winterflood’s trades with third parties
Buy-as-you-earn (“BAYE”)
The HM Revenue & Customs approved Share Incentive Plan that gives all employees the
opportunity to become shareholders in the group
Capital Requirements
Directive IV (“CRD IV”)
Capital Requirements
Regulation (“CRR”)
CET1 capital ratio
European Union regulation implementing the Basel III requirements in Europe, alongside CRR
European Union regulation implementing the Basel III requirements in Europe, alongside CRD IV
Measure of the group’s CET1 capital as a percentage of risk weighted assets, as required
by CRR
Common equity tier 1 (“CET1”)
capital
Consists of the highest quality capital including ordinary shares, share premium account,
retained earnings and other reserves
Compensation ratio
Total staff costs as a percentage of operating income
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Dividend per share (“DPS”)
Comprises the final dividend proposed for the respective year together with the interim dividend
declared and paid in the year
Earnings per share (“EPS”)
Profit attributable to shareholders divided by number of basic shares
Effective tax rate
Tax on operating profit/(loss) as a percentage of profit/(loss) on ordinary activities before tax
Employee engagement score
A measure, in percentage terms, of the extent to which staff are enthusiastic about their
jobs, their level of commitment to the company, and how motivated they are to put effort
into their work
Expense/income ratio
Total adjusted operating expenses divided by adjusted operating income
Financial Conduct Authority
(“FCA”)
A financial regulatory body in the UK, regulating financial firms and maintaining integrity of the
UK’s financial market
Financial Reporting Council
(“FRC”)
An independent regulatory body responsible for promoting high quality corporate governance
and reporting amongst UK companies
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Funding allocated to loan book Total funding excluding equity and funding held for liquidity purposes
Funding % loan book
Total funding divided by net loans and advances to customers
General Data Protection
Regulation (“GDPR”)
Regulation intended to strengthen and unify data protection for all individuals within the
European Union
High quality liquid assets
(“HQLAs”)
Assets which qualify for regulatory liquidity purposes, including Bank of England deposits, and
sovereign and central bank debt, including funds drawn under the Funding for Lending Scheme
Independent Financial Adviser
(“IFA”)
Professional offering independent, whole of market advice to clients including investments,
pensions, protection and mortgages
Internal Capital Adequacy
Assessment Process
(“ICAAP”)
An annual self-assessment of a bank’s material risks and the associated level of capital needed
to be held, and undertaking appropriate stress testing of capital adequacy
Internal Ratings Based (“IRB”)
approach
A supervisor approved method using internal models, rather than standardised risk weightings,
to calculate regulatory capital requirements for credit risk
International Accounting
Standards (“IAS”)
Older set of standards issued by the International Accounting Standards Council, setting up
accounting principles and rules for preparation of financial statements. IAS are being
superseded by IFRS
International Financial
Reporting Standards (“IFRS”)
Globally accepted accounting standards issued by the IFRS Foundation and the International
Accounting Standards Board
Leverage ratio
Tier 1 capital as a percentage of total balance sheet assets, adjusted for certain capital
deductions, including intangible assets, and off balance sheet exposures
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Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Glossary continued
Liquidity coverage ratio
Measure of the group’s HQLAs as a percentage of expected net cash outflows over the next
30 days in a stressed scenario
Loan to value ratio (“LTV”)
For a secured loan, the loan balance as a percentage of the total value of the asset
Managed assets
Market abuse regulation
(“MAR”)
MiFID II
Net interest margin (“NIM”)1
Net Promoter Score (“NPS”)
Total market value of assets which are managed by Close Brothers in one of our
investment solutions
European regulation aimed at increasing market integrity and investor protection
The Markets in Financial Instruments Directive is the EU legislation that regulates firms who
provide services to clients linked to financial instruments, and the venues where those
instruments are traded
Income generated by lending activities, including interest income net of interest expense, fees
and commissions income net of fees and commissions expense, and operating lease income
net of operating lease expense, less depreciation on operating lease assets, divided by average
loans and advances to customers (net of impaired loans) and operating lease assets
A measure of a customer’s likelihood to recommend us, and reflects their overall satisfaction
with us as a business. Unfavourable ratings are deducted from favourable ratings; hence a score
above 0 is good, and above 50 is excellent
Operating margin
Adjusted operating profit divided by adjusted operating income
Personal Contract Plan
(“PCP”)
PCP is an alternative form of car finance, where the customer pays smaller monthly instalments.
At the end of the loan period, a customer can decide whether to: a) pay a balloon payment and
take the ownership of the vehicle; b) return the car with no additional payment; or c) use the
value of the car paid to negotiate a deal on another car
Prudential Regulation
Authority (“PRA”)
A financial regulatory body, responsible for regulating and supervising banks and other financial
institutions in the UK
Return on assets
Profit attributable to shareholders divided by total assets at balance sheet date
Return on net loan book
(“RoNLB”)1
Adjusted operating profit from lending activities divided by average net loans and advances to
customers, and operating lease assets
Return on opening equity
(“RoE”)
Adjusted operating profit after tax and non-controlling interests divided by opening equity,
excluding non-controlling interests
Revenue margin
Income from advice, investment management and related services divided by average total
client assets
Risk weighted assets (“RWA”)
A measure of the amount of a bank’s assets, adjusted for risk. It is used in determining the
capital requirement for a financial institution
Save-as-you-earn (“SAYE”)
Scheme intended to encourage saving and build long-term share ownership in the group
Secured debt
Senior debt
Debt backed or secured by collateral
Represents the type of debt that takes priority over other unsecured or more junior debt owed
by the issuer. Senior debt is first to be repaid ahead of other lenders or creditors
Standardised approach
Generic term for regulator defined approaches for calculating credit, operational and market risk
capital requirements as set out in the CRR
Subordinated debt
Term funding
Tier 2 capital
Total client assets
Represents debt that ranks below, and is repaid after claims of, other secured or senior debt
owed by the issuer
Funding with a remaining maturity greater than 12 months
Additional regulatory capital that along with tier 1 capital makes up a bank’s total regulatory
capital. Includes qualifying subordinated debt
Total market value of all client assets including both managed assets and assets under advice
and/or administration
Total shareholder return
(“TSR”)
Measure of shareholder return including share price appreciation and dividends, which are
assumed to be re-invested in the company’s shares
1 The calculation for the 2018 and 2017 financial years excludes the unsecured retail point of sale finance loan book from both the opening and closing loan book.
Investor Relations
Financial calendar (provisional)
Event
First quarter trading update
Annual General Meeting
Final dividend payment
Pre-close trading update
Half year end
Interim results
Third quarter trading update
Pre-close trading update
Financial year end
Preliminary results
Close Brothers Group plc
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Date
November 2018
15 November 2018
20 November 2018
January 2019
31 January 2019
March 2019
May 2019
July 2019
31 July 2019
September 2019
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. Past performance is no guide to future performance and persons needing advice should consult an
independent financial adviser.
This report does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to subscribe for or purchase
any shares or other securities in the company or any of its group members, 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 or other securities of the company or any of its group members. 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.
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Close Brothers Group plc
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Annual Report 2018
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Financial Statements
Auditor
PricewaterhouseCoopers LLP
Solicitor
Slaughter and May
Corporate Brokers
J.P. Morgan Cazenove
UBS Investment Bank
Registrar
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Customer support centre: 0871 664 0300 (Calls cost 12p per minute plus your phone company’s access charge)
From overseas: +44 (0)371 664 0300
Lines are open from 9.00 am to 5.30 pm Monday to Friday, excluding UK public holidays
Email: enquiries@linkgroup.co.uk
Website: www.signalshares.com
Registered Office
Close Brothers Group plc
10 Crown Place
London EC2A 4FT
Telephone: +44 (0)333 321 6100
Email: enquiries@closebrothers.com
Website: www.closebrothers.com
Company No. 520241
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Close Brothers Group plc
10 Crown Place
London EC2A 4FT
Tel: +44 (0)333 321 6100
www.closebrothers.com
LENDING | DEPOSITS | WEALTH MANAGEMENT | SECURITIES