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CLOSE BROTHERS GROUP PLC
ANNUAL REPORT 2019
TO HELP THE PEOPLE AND
BUSINESSES OF BRITAIN THRIVE
OVER THE LONG TERM
THRIVE...
WE WANT TO HELP YOU TO THRIVE, TO SUPPORT
YOU BY DOING THE THINGS THAT WE DO BEST.
WE WILL TAKE THE TIME TO LEARN ABOUT YOUR
WORLD SO WE KNOW HOW TO HELP IT FLOURISH, BY
HELPING YOU NAVIGATE UNCERTAINTY AND SEIZE
OPPORTUNITIES, ALLOWING YOU TO UNLOCK YOUR
POTENTIAL AND BUILD FOR 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.
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.
Annual Report 2019
Close Brothers Group plc
01
Financial Highlights1
for the year ending 31 July 2019
AD JUSTED 2 OPER ATING PROFIT
£270.5m
2019
2018
2017
2016
2015
£270.5M
£278.6M
£268.7M
£233.6M
£224.9M
ADJUSTED 3 BASIC E ARNINGS PER SHARE
136.7p
2019
2018
2017
2016
2015
136.7P
140.2P
133.6P
128.4P
120.5P
OPER ATING PROFIT BEFORE TA X
£264.7m
2018: £271.2M
BASIC E ARNINGS PER SHARE
133.5p
2018: 136.2P
RE TURN ON OPENING EQUIT Y4
PROFIT AT TRIBUTABLE TO SHAREHOLDERS
15.7%
2019
2018
2017
2016
2015
ORDINARY DIVIDEND PER SHARE 5
66.0p
2019
2018
2017
2016
2015
15.7%
17.0%
18.1%
18.9%
19.5%
66.0P
63.0P
60.0P
57.0P
53.5P
£201.6m
2018: £202.3M
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 2018 and 2019 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 £5.8 million
(2018: £7.4 million) and profit from discontinued operations of £0.8 million (2018: £3.0 million loss).
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.
Strategic Report
Governance Report
Financial Statements
02 Our Businesses
04 Our Purpose
05 Our Culture
06 Chairman’s Statement
08 Chief Executive’s Statement
12 Case Study BCW
14 Business Model
16 Strategy and Key Performance Indicators
18 Principal Risks and Uncertainties
24 Case Study Brighton Gin
26 Financial Overview
30 Banking
34 Asset Management
36 Securities
38 Non-Financial Information Statement
40 Case Study Nicholas King Homes
42 Sustainability Report
52 Board of Directors
54 Executive Committee
55 Directors’ Report
59 Corporate Governance Report
70 Risk Committee Report
72 Audit Committee Report
74 Nomination and Governance
Committee Report
76 Directors’ Remuneration Report
97 Independent Auditors’ Report
104 Consolidated Income Statement
105 Consolidated Statement of
Comprehensive Income
106 Consolidated Balance Sheet
107 Consolidated Statement of Changes in Equity
108 Consolidated Cash Flow Statement
109 Company Balance Sheet
110 Company Statement of Changes in Equity
111 The Notes
160 Glossary
163 Investor Relations/Cautionary Statement
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
02
Our Businesses
CLOSE BROTHERS IS A LEADING UK MERCHANT
BANKING GROUP PROVIDING LENDING, WEALTH
MANAGEMENT SERVICES AND SECURITIES
TRADING. WE OPERATE PRINCIPALLY IN THE UK
AND EMPLOY OVER 3,000 PEOPLE.
B A N K I N G READ MORE ABOUT BANKING – SEE PAGES 30 TO 33
C O M M E R C I A L
AD JUSTED OPER ATING PROFIT
£86.5m
2018: £76.1M
R E TA I L
AD JUSTED OPER ATING PROFIT4
£72.5m
2018: £81.1M
P R O P E R T Y
AD JUSTED OPER ATING PROFIT
£94.7m
2018: £94.6M
The Commercial business lends principally
to small and medium sized enterprises
(“SME”), both through its direct sales force
and via broker distribution channels.
The Asset Finance business has c.27,000
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, company car
fleets, energy production, and aircraft
and marine vessels. Our highly specialist
sales force operates through 15 offices
throughout the UK, Germany and Ireland.
The Invoice and Speciality Finance
business works with c.2,300 small
businesses, providing debt factoring, invoice
discounting and asset-based lending.
It also includes our smaller specialist
businesses such as Novitas, a specialist
provider of finance for the legal sector,
Brewery Rentals, which provides solutions
for brewery equipment and container
maintenance and vehicle hire, which
provides heavy goods and light commercial
vehicles on long-term rental contracts.
Loan book1: £1.0 billion
Average loan size3: c.£400,000
Typical loan maturity2,3: 2-3 months
Loan book1: £1.9 billion
Average loan size: c.£40,000
Typical loan maturity2: 3-5 years
The Retail business provides
loans to predominantly individuals
and small businesses, 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: £1.8 billion
Average loan size: c.£7,000
Typical loan maturity2: 3-5 years
The Property business specialises in
short-term residential development
finance through Property Finance. This
business operates in London, the South
East and selected regional locations,
lending to c.700 professional property
developers with a focus on small to
medium-sized residential developments.
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.£500
Typical loan maturity2: 10 months
It also offers refurbishment and bridging
loans through Commercial Acceptances.
Loan book: £1.8 billion
Average loan size: c.£1.4 million
Typical loan maturity2: 9-18 months
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
03
A S S E T M A N AG E M E N T READ MORE ABOUT ASSET MANAGEMENT – SEE PAGES 34 AND 35
A S S E T M A N A G E M E N T
AD JUSTED OPER ATING PROFIT
£21.8m
2018: £23.1M
Close Brothers Asset Management
provides financial advice and investment
management services to private clients
in the UK. We offer financial planning
advice with over 100 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: £13.3 billion
Managed assets: £11.7 billion
S E C U R I T I ES READ MORE ABOUT SECURITIES – SEE PAGES 36 AND 37
W I N T E R F L O O D
OPER ATING PROFIT
£20.0m
2018: £28.1M
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.56,000
Total counterparties: c.600
1 Excludes operating lease assets of £4.2 million (2018: £7.0 million) in Asset Finance and £216.2 million (2018:
£191.8 million) in Invoice and Speciality Finance.
2 Typical loan maturities for new business on a contractual basis, except Invoice Finance which is on a
behavioural basis. The average maturity of new business in the UK is presented for Motor Finance.
3 Loan book statistics include the Invoice Finance business only.
4 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.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
04
Our Purpose
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 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.
Annual Report 2019Strategic ReportGovernance ReportFinancial Statements Close Brothers Group plc
05
Our Culture
OUR CULTURE COMBINES EXPERTISE, SERVICE AND RELATIONSHIPS
WITH TEAMWORK, INTEGRITY AND PRUDENCE.
Adhering to these attributes ensures that we
continue to provide excellent service for our
customers and clients over the long term.
We’re proud of our people whose expertise,
passion and willingness to go the extra mile
really set us apart. It’s what builds our
long-term relationships with clients and
customers that stand the test of time.
EXPERTISE
We are committed to fostering
a culture that attracts talent,
grows and builds the expertise
of our employees.
INTEGRITY
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
We promote teamwork in a fair
and open environment, where
individuals and their contributions
are valued and respected.
SERVICE
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.
Annual Report 2019Strategic ReportGovernance ReportFinancial Statements Close Brothers Group plc
Annual Report 2019
06
Chairman’s Statement
A STRONG CULTURE FOR
LONG-TERM SUCCESS
CLOSE BROTHERS HAS AGAIN DELIVERED STRONG
RETURNS FOR SHAREHOLDERS, WHILE MAINTAINING
GOOD EMPLOYEE ENGAGEMENT AND HIGH LEVELS OF
CUSTOMER SATISFACTION.
MICHAEL N. BIGGS
CHAIRMAN
Iam pleased to report another solid
performance over the last year, in a
challenging market environment. The
Banking division has continued to grow
the loan book while maintaining the
discipline of our lending model; Close
Brothers Asset Management has
maintained strong net inflows despite
subdued investor activity; and Winterflood
has maintained solid trading profitability in
a volatile equity market.
As a result, although overall adjusted
operating profit reduced 3% reflecting
financial market conditions, we have once
again delivered strong returns for
shareholders, with a return on opening
equity of 15.7%.
The board is pleased to recommend a final
dividend of 44.0p per share. If approved at
the Annual General Meeting, this will result in
a full-year dividend of 66.0p, a 5% increase
on last year in line with our progressive
dividend policy.
STRATEGIC AND FINANCIAL DISCIPLINE
While the outlook for the UK economy
remains uncertain, our focus remains firmly
on maintaining the discipline of our business
model, which has allowed us to deliver
consistent service to our clients and solid
profitability in a wide range of market
conditions over many years.
The board plays a key role in supporting and
challenging the group’s long-term strategic
planning. This includes a rigorous assessment
of both the risks and opportunities presented
by the evolving market environment, and
considering the interests of key stakeholders.
In the last year, we have particularly focused
on ensuring that the business is prepared in
the event of a market downturn, drawing on
the significant experience and expertise of our
people to ensure we can both protect our
existing business and make the most of any
market opportunities.
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
07
We are equally focused on maintaining
investment in strategic initiatives and
technology, to protect and future proof our
businesses, enhance the efficiency and
effectiveness of our operations, and provide a
platform for future growth. This investment is
subject to rigorous challenge and
prioritisation, to ensure that we continue to
offer a service proposition which remains
relevant to customers, clients and partners,
and delivers value over the long term.
A DISTINCTIVE, CUSTOMER-
FOCUSED CULTURE
In last year’s Annual Report we introduced our
corporate purpose: to help the people and
businesses of Britain thrive over the long term.
This year has seen further embedding of the
corporate purpose both internally and in our
external communications, bringing to life the
deep relationships we form with customers
and partners. We have also launched our new
code of conduct, the Close Brothers Way,
which brings together the group’s purpose,
strategy, culture and the conduct standards
which underpin our behaviours.
At the heart of our purpose and strategy is an
absolute customer focus, which continues to
be evident in my interaction with our
businesses and employees. Continuous
engagement with customers, clients and
partners remains a key element of our strategy,
with a number of formal programmes in place
to listen, analyse and act on their feedback.
This customer focus continues to be reflected
in strong Net Promoter Scores and high levels
of repeat business.
TALENT AND DIVERSITY
Our long-term success is underpinned by our
people, who bring the expertise, industry
knowledge and commitment that help us
understand and react to the challenges and
opportunities that our customers and clients
face. We are committed to building a culture
that attracts talent, builds the expertise of our
employees, and allows our people to reach
their full potential. I have been delighted to
once again see strong engagement scores in
this year’s employee opinion survey.
Diversity remains an important area of focus
for the board and across the organisation,
with a number of programmes in place to
promote diversity at all levels. We remain
strongly committed to our target of 30%
female senior management by 2020.
COMMUNITIES AND THE ENVIRONMENT
I firmly believe that acting sustainably and
responsibly in our dealings with all our
stakeholders is fundamental to the long-term
success of our business. As a local employer
in many communities in the UK, charitable
activities and community engagement
remain an important part of our culture.
During the last year we have also made
significant progress with our environmental
agenda, including formalising an
environmental strategy with commitment to a
number of targets, notably towards a material
reduction in our fleet vehicle emissions. We
are in the process of developing a formal
framework to identify and respond to
emerging climate risks.
BOARD CHANGES
Maintaining depth and diversity of skills and
experience, while ensuring continuity in the
stewardship of the group and its business
model, remains an ongoing focus for the
board. In the last year Mike Morgan has
successfully transitioned to the role of group
finance director, following his appointment in
November after eight years as chief financial
officer of the Banking division. We were also
pleased to welcome Peter Duffy as a
non-executive director on 1 January, bringing
extensive experience of customer behaviour,
marketing and technological change.
In the last year we also announced the
retirement of Elizabeth Lee, who stepped
down as group head of legal and regulatory
affairs on 31 July 2019. On behalf of the
board, I would like to thank Elizabeth for her
wise counsel and significant contribution to
the group over many years.
We have recently announced that Preben
Prebensen will step down in the next year,
after 10 years as chief executive. I am
immensely grateful to Preben for his strong
and successful leadership during a period of
significant growth and development for the
group. The board will now commence a
thorough search for a successor, in line
with our established succession process,
to ensure we continue to protect and build
on our successful business model in years
to come.
OUR EMPLOYEES
I would like to thank all of our employees for
their support and dedication over the last
year. Together, we support a truly
successful business model, which delivers
strong employee engagement, high levels of
service and satisfaction for our customers
and clients, and strong returns for
shareholders.
We all have an important role to play in
delivering on our collective purpose: to help
the people and businesses of Britain thrive
over the long term, whatever the external
environment may bring.
MICHAEL N. BIGGS
CHAIRMAN
24 September 2019
“I firmly believe that acting sustainably
and responsibly in our dealings with
all our stakeholders is fundamental
to the long-term success of our
business.”
MICHAEL N. BIGGS | CHAIRMAN
DIVIDEND PER SHARE
66.0p
2018: 63.0P
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
08
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Chief Executive’s Statement
PREBEN PREBENSEN
CHIEF E XECUTIVE
DELIVERING STRONG
RETURNS AND
PROFITABILITY
I AM PLEASED THAT THE GROUP HAS DELIVERED
ANOTHER VERY SOLID PERFORMANCE, WHILE
MAINTAINING THE LONG-TERM DISCIPLINE OF OUR
SUCCESSFUL BUSINESS MODEL.
W e have maintained
strong returns and
profitability
notwithstanding the
challenging financial
market conditions in
the last year. Overall,
we have reported a 3%
reduction in adjusted operating profit to £270.5
million (2018: £278.6 million), with higher profit
in the Banking division, while profit reduced in
our market-facing businesses, Close Brothers
Asset Management and Winterflood. Statutory
operating profit decreased 2% to £264.7
million (2018: £271.2 million). Our equity base
continued to grow, and return on opening
equity was strong at 15.7% (2018: 17.0%).
Most importantly, we have maintained our
business and strategic discipline throughout
this period. In the Banking division, the net
interest margin was 7.9% (2018: 8.0%),
broadly stable on last year reflecting our
continued pricing discipline in a competitive
market. The bad debt ratio remains low at
0.6% (2018: 0.6%) with continued strong
credit performance across the businesses.
Close Brothers Asset Management has
maintained good momentum with net inflows
at 9% (2018: 12%) of opening managed
assets, and Winterflood has achieved solid
trading profitability with only two loss days in
the year (2018: nil).
We are committed to long-term investment
to protect, improve and extend our
established business model, and are
progressing a number of strategic investment
initiatives. At the same time, we maintain a
clear focus on cost and continuously seek
opportunities to improve operating efficiency
and free up resources for investment. Overall,
the expense/income ratio increased slightly to
50% (2018: 49%) in the Banking division, and
61% (2018: 60%) for the group as a whole.
We have maintained a strong balance
sheet, with a common equity tier 1 ratio
rising to 13.0% (1 August 2018: 12.7%),
comfortably ahead of regulatory
requirements, and a continued prudent
funding and liquidity position.
SPECIALISM AND DIVERSITY
While all our businesses share a common
culture, built on our core attributes of service,
expertise and relationships, each is a
specialist in its own market, with a distinct
product offering and customer base. This
specialism and diversity protects our
business, and has allowed us to deliver good
performance through the cycle, reflecting the
differing market and competitive dynamics
across our portfolio of businesses.
This is evident in the divergent performance
in the last year: while the market-facing
businesses, Close Brothers Asset
Management and Winterflood, have been
impacted by the challenging equity market
environment, the Banking division has
continued to deliver solid profitability and
strong returns.
Adjusted operating profit in the Banking
division increased 1% overall to £253.7 million
(2018: £251.8 million). This in turn reflects a
range of differing competitive dynamics and
investment cycles across our lending
businesses. Profits increased in Commercial,
reflecting particularly good loan book growth;
profits reduced in Retail, reflecting ongoing
investment in that business; and Property
was broadly flat on the prior year.
The diversity of our lending also supports our
long-term growth, driven by both the
resilience of our core businesses and new
product initiatives and extensions. In the last
financial year, the loan book grew 5.7% to
£7.6 billion, with a particularly strong
contribution from Commercial, supported by
expansion of our offering in the personal
contract hire market, growth in our asset-
based lending product as well as expansion
of the litigation finance offering in Novitas.
Within Retail, the Motor Finance business
returned to growth following a period of
modest decline, benefiting from a
strengthened sales capability in the UK
business. The Premium Finance business
continued to grow, reflecting a number of
new significant distribution relationships with
insurance brokers.
Although we see good underlying demand,
the Property loan book increased modestly
overall, reflecting a significant level of
repayments in the year. The business has
continued to increase its reach in regional
markets, with the opening of a new bridging
finance office in Manchester and the
extension of its development finance offering
to Northern Ireland.
A PROVEN, RESILIENT
BUSINESS MODEL
We have a proven and resilient lending model
which is underpinned by strong margins,
disciplined and consistent underwriting, and
prudent levels of funding, capital and liquidity.
This model has been extensively tested
through past cycles, and we have a long track
record of supporting our clients and lending
profitably in a wide range of market
conditions. As our loan book has grown in
recent years, we have maintained strong
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
09
credit quality based predominantly on
secured lending supported by local, specialist
underwriting expertise and with significantly
strengthened risk management capabilities.
“The specialism and diversity of our
businesses allows us to deliver good
performance through the cycle.”
PREBEN PREBENSEN | CHIEF EXECUTIVE
In Asset Management, our focus on investing
for long-term capital preservation protects us
against short-term market movements and
swings in market sentiment, demonstrated by
last year’s continued strong new business
volumes. Winterflood once again proved its
ability to maintain trading profitability in a
difficult trading environment, with only two
loss days in a year of significant market
volatility.
Our priority remains to maintain the discipline
of this model, building capital and
maintaining funding flexibility for the future. In
the last year we have spent significant time
on contingency planning for any widespread
downturn in the UK economy, including the
development of playbooks and simulation
exercises for our lending businesses. This
will ensure that we leverage the significant
experience in our businesses and mobilise
the resources required to both protect our
existing business, and make the most of any
market opportunity which may arise.
INVESTING FOR THE FUTURE
Maintaining long-term investment to protect,
improve and extend our business is a key
strategic priority. This includes ongoing
investment in operational resilience,
compliance and technology to keep our
organisation safe, as well as a number of
strategic investment projects. Investment
plans are subject to strict challenge and
prioritisation, with a rigorous assessment of
the financial investment case, and several of
our ongoing initiatives are already delivering
meaningful financial benefits.
In 2016 we initiated a significant investment
programme in our Premium Finance
business, to upgrade its technology
infrastructure, strengthen the service
proposition to customers and brokers, and
meet evolving regulatory requirements with a
total budgeted spend of over £30 million. This
includes a new contact centre, enhanced
digital service capabilities and more
sophisticated use of data to support our
service proposition to customers. The
benefits have been substantial and in excess
of our original projections: a 34% increase in
loan book, which is now over £1 billion, with
several significant new broker relationships as
a direct result of the enhanced service
capability, and substantial cost savings.
More recently, we have begun an extensive
investment programme in the Motor Finance
business, where we see a clear opportunity
to further strengthen our service-oriented,
people-based proposition, supported by
deep knowledge of the second-hand car
and dealership market, drawing on extensive
market research and feedback from partners
and end customers. Over time, we expect
increased new business volumes and
improved cost efficiency; we have already
seen early benefits in terms of increased
sales volumes in the core UK market.
RE TURN ON OPENING EQUIT Y
AD JUSTED BASIC E ARNINGS PER SHARE
15.7%
2018: 17.0%
136.7p
2018: 140.2P
Close Brothers Group plc
Annual Report 2019
10
Chief Executive’s Statement
continued
These initiatives will provide additional
diversification and resilience.
MANAGEMENT CHANGES
During the year we completed the transition
of group finance director to Mike Morgan,
following the departure of Jonathan Howell in
November. We have also been pleased to
welcome Martyn Atkinson to the Group
Executive Committee as chief operating
officer in February, and Angela Yotov as
group general counsel, following the
retirement of Elizabeth Lee on 31 July.
On 24 September, we announced that I have
decided that the time has come to step
down as chief executive in the next 12
months. It has been a privilege to lead such
a special and successful organisation. The
group is clearly well positioned for the future,
with an excellent team in place, and I look
forward to working closely with the board
over the next year to continue delivering on
our strategy and ensure a smooth and
successful transition.
OUTLOOK
We are committed to maintaining the
discipline of our business model, investing in
key strategic initiatives and technology, and
continually seeking to improve and extend
our product offering.
We are closely monitoring external market
and economic developments, and our
diverse portfolio of businesses and strong
credit quality position us well to lend
consistently and profitably, and to support
our customers and clients throughout the
economic cycle.
The Banking division is committed to
maintaining pricing and underwriting
discipline, and progressing with key strategic
investment initiatives.
The Asset Management division is focused on
long-term growth in client assets and profits,
through organic new business and selective
hiring of advisers and portfolio managers.
Winterflood maintains a strong position in its
markets, but as a daily trading business it
remains sensitive to financial market
conditions.
Overall, the group remains well positioned to
support our customers and clients in a wide
range of market conditions.
PREBEN PREBENSEN
CHIEF EXECUTIVE
24 September 2019
In the last financial year, we have rolled out our
new treasury deposit platform, which will
allow us to broaden the range and distribution
of our deposit products. In December we
successfully transferred 37,000 customers
and over £3.8 billion of deposits to the new
platform and have launched a number of new
deposit products, including both retail and
SME notice accounts. This will further
increase our future funding flexibility, and
optimise the cost of funding.
Our planned transition to the Internal Ratings
Based (“IRB”) approach for capital remains
another key strategic priority, which builds on
our existing modelling capabilities to further
enhance our risk management framework,
optimise our capital requirements and
increase our long-term strategic flexibility. We
are making good progress towards our IRB
application, with increasing visibility and
confidence as we move through our
preparations. We have completed the
development of our initial model suite, which
is now undergoing testing and validation. We
currently expect to be in a position to submit
our formal application to the Prudential
Regulation Authority (“PRA”) around the 2020
financial year end.
MAXIMISING LONG-TERM GROWTH
POTENTIAL IN CLOSE BROTHERS
ASSET MANAGEMENT
We have continued to achieve good
momentum in Close Brothers Asset
Management, with strong net inflows at 9%,
resulting in 12% growth in managed assets
including market movements to £11.7 billion.
Despite the ongoing market uncertainty, we
continued to achieve good new business
levels both through our own advisers and
third party IFAs, and benefited from the hire
of additional bespoke portfolio managers in
the period. However, adjusted operating
profit reduced slightly on the prior year,
reflecting difficult financial market conditions
and our ongoing investment in people,
technology and research capability.
In the last year we have made significant
progress on upgrading and consolidating
our technology platform, which will further
enhance operating efficiency and improve
client experience. We have built a strong
reputation in the wealth management
market, and have attracted a number of key
hires in the period, with the opening of a
new client office in the West End of London.
We believe that our integrated business
model, combining professional financial
advice with institutional quality investment
management and a clear client-focused
offering, is well positioned with significant
future growth potential.
RESILIENT TRADING PERFORMANCE
IN WINTERFLOOD
Winterflood has maintained solid trading
profitability in a difficult trading environment,
delivering operating profit of £20.0 million
(2018: £28.1 million). The last year has been
characterised by severe dislocation in the
equity markets, driven by concerns around UK
and global political events and ongoing
economic uncertainty, resulting in low levels of
risk appetite particularly among retail investors.
Winterflood’s strong risk management,
discipline in trading positions and significant
market expertise has supported its
consistently profitable trading performance,
with only two loss days in the year – a
significant achievement in this environment.
However, income reduced as a result of low
market activity, with average bargains per
day down 18% on the prior year.
Winterflood has maintained a strong market
position as a leading market maker to retail
stockbrokers in the UK, and continues to
build its presence in the institutional market
in response to increasing demand for
execution services post MiFID II. It has
recently obtained a licence to trade directly
with institutions in the US, and also continues
to develop Winterflood Business Services,
which provides outsourced dealing and
custody to fund managers and platforms.
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Strategic Report
Close Brothers Group plc
11
EVERY ONE OF US CAN THRIVE…
IT’S NOT ALWAYS EASY, AND TAKES REAL
COMMITMENT, DETERMINATION AND PASSION,
BUT IT’S WITHIN ALL OF US.
Governance ReportFinancial Statements Close Brothers Group plc
Annual Report 2019
12
Case Study | BCW
A CHANCE ENCOUNTER AT A TRADE EXHIBITION OVER
16 YEARS AGO LED TO A LOAN ALLOWING BCW, THEN
A START UP, TO BUY ITS FIRST PIECE OF EQUIPMENT.
THIS LED TO A RELATIONSHIP THAT WOULD STAND THE
TEST OF TIME.
R
O
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C
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R
I
D
I
G
N
G
A
N
A
M
|
E
I
S
S
A
C
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L
A
“Even though we don’t
have to use Close Brothers
now that we are more
established, we do use
Close Brothers because
we remember what they
did for us and when they
backed us when other
people wouldn’t.”
BCW now has over 100 machine
tools and is one of the UK’s most
advanced, vertically integrated
precision engineering companies,
making machined, welded and
assembled aluminium extrusions,
aluminium castings, assembled
steel products, cast iron castings
and hot warm and cold forgings.
A people business, BCW has
built a company with young
people at its heart. Working
with universities and colleges,
along with young people from
disadvantaged backgrounds,
BCW strives to support the next
generation of UK engineers.
HELPING
B U S I N E S S E S
T H R I V E
W W W.C LO S E B R OT H E R S .C O M / T H R I V E
Governance ReportFinancial StatementsStrategic Report
Annual Report 2019
Close Brothers Group plc
13
HELPING
B U S I N E S S E S
T H R I V E
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
14
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 STRAIGHTFORWARD PRODUCTS AND SERVICES IN
SECTORS WE KNOW AND UNDERSTAND, AND DELIVERING
QUALITY AND RELIABILITY FOR OUR CLIENTS.
OUR BUSINESS MODEL
IS BASED ON BUILDING
LE A DING POS ITION S IN
SPECIALIST MARKE TS. WE
FOCUS ON THE QUALIT Y
AND RE TURNS OF OUR
BUSINESS R ATHER THAN
OVER ALL GROW TH OR
MARKE T SHARE.
IT PROV IDES LONG -
TE RM RE TURN S FOR
OUR SHAREHOLDERS
WHILE ALSO
MAINTAINING A STRONG
CAPITAL BASE AND
BAL ANCE SHEE T.
THIS ALLOWS US TO
RE IN V EST IN OUR
BUS INES S THROUGH
THE ECONOMIC CYCLE
AND CONSISTENTLY
SUPPORT OUR CLIENTS
AND CUSTOMERS.
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.
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Close Brothers Group plc
15
L O N G E S TA B L I S H E D P R O V E N
B U S I N E S S M O D E L
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 at all stages of the financial
cycle. Our lending is predominantly secured,
with conservative loan to value ratios, small
loan sizes and short maturities. Our strong
margins and service-led customer relationships
position us well to respond to any change in
market conditions.
PRUDENT CAPITAL AND
FUNDING
We take a prudent approach to managing our
financial resources. A fundamental part of our
business model is ensuring we have a strong
capital position which allows us to grow, invest
and meet all regulatory requirements. We also
take a conservative approach to funding,
focused on diversity of sources and a prudent
maturity profile.
CONTINUOUS INVESTMENT
WITHIN THE MODEL
Our focus on quality of returns and prudent
funding and capital management enables us to
reinvest through the cycle to protect, improve
and extend our business. We continue to invest
in our businesses to enhance our customer
proposition and identify new products and
opportunities within the boundaries of our
model. Keeping our organisation safe with
ongoing investment in operational resilience,
compliance and technology remains a strategic
priority for the group.
DIVERSIFIED PORTFOLIO
OF BUSINESSES
In addition to our diversified portfolio of lending
businesses, we also provide wealth
management services and securities trading,
which contribute to further diversification of
income streams in the long term. We are
constantly looking to maximise market
opportunities for our businesses, both in existing
and new markets, and tend to target segments
of the market where clients value our personal
service and expertise.
D R I V I N G S U S TA I N A B L E
O U T C O M E S A N D B U S I N E S S
P E R F O R M A N C E
HIGH NET INTEREST
MARGIN AND 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 strong returns. The strength of
our client proposition has supported a loan
book growth of between 6% and 23% and
a net interest margin between 7.9% and
9.8% over the last 10 years across a range
of market conditions.
RESILIENCE IN ALL
MARKET CONDITIONS
Our consistent application of
underwriting discipline and responsible
lending criteria has resulted in a low bad
debt ratio ranging from 0.6% to 2.4%
over the last 10 years.
STRONG RETURNS
Our customer-focused approach and
disciplined lending have supported
consistently strong returns at all stages of
the financial cycle. Return on net loan
book ranged from 3.0% to 3.7% and
group return on opening equity averaged
16% over the last 10 years.
PROGRESSIVE DIVIDEND
The consistent profitability and prudent
management of capital has enabled us to
deliver a long track record of progressive
and sustainable dividend growth while
maintaining a prudent dividend cover.
Since listing in 1984, our dividend per
share has grown progressively to 66.0p
and has never been cut.
STRONG NET INFLOWS AND
CONSISTENT TRADING
PROFITABILITY IN OUR
MARKET-FACING DIVISIONS
We have seen strong growth in our Asset
Management business with net inflows
as a percentage of opening managed
assets ranging from 6% to 12% over the
past five years. We continue to increase
the scale and profitability of the Asset
Management division through strong net
inflows from a range of channels.
Winterflood has a long track record of
profitable trading in a wide range of
market conditions, with only two loss
days in the last financial year.
C R E AT I N G V A L U E F O R
S TA K E H O L D E R S
CONSISTENT CUSTOMER
SERVICE
Across our businesses we have a deep
knowledge of the industry sectors and
asset classes we serve, leading to firmer
lending decisions and faster access to
funds when clients need them most. 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 levels of repeat
business and strong Net Promoter Scores
across our businesses.
Read more on pages 46 and 47.
STRONG SHAREHOLDER
RETURNS
We have achieved strong returns for
shareholders in a range of market
conditions, and continue to deliver over
the long term. This is reflected in our long
run total shareholder return of 197% over
the last 10 years.
ENGAGED EMPLOYEES
We continue to recruit, develop and retain
high calibre employees by recognising their
values and supporting and motivating them
to realising 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.
Read more on pages 44 and 45.
SUPPORTING THE
COMMUNITIES AND THE
ENVIRONMENT
We are committed to contributing lasting
value and making a positive impact on
the wider community in which we
operate. We closely engage with our
clients and all relevant stakeholders’
communities across our business lines.
Further, we are happy to promote a wide
range of programmes that help support
the causes that are beneficial to all those
around us.
Read more on pages 48 to 51.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
16
Strategy and Key Performance Indicators
OUR LONG-TERM STRATEGIC APPROACH FOCUSES ON WAYS
TO PROTECT, IMPROVE AND EXTEND OUR MODEL, WHICH IN
TURN ALLOWS US TO DELIVER EXCELLENT STAKEHOLDER
OUTCOMES IN A WIDE RANGE OF MARKET CONDITIONS.
S T R AT E G I C O B J E C T I V E S
2 0 1 9 P R O G R E S S
F U T U R E P R I O R I T I E S
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 our strategic imperative of
investing to protect our business
• Maintain disciplined underwriting and
margin in all market conditions.
• Maintain capital flexibility in an evolving
regulatory environment and submit
application for Internal Ratings Based
approach.
• Ensure our compliance with ongoing
regulatory change.
• Monitor and mitigate external threats,
including competition from both
established and emerging players and the
UK’s departure from the EU.
• Continue to invest in our operational
resilience, core technology and regulatory
compliance.
• Maintained firm adherence to our
disciplined lending model, prudent loan to
value ratios and strong margin in a
competitive environment.
• Maintained a prudent capital position with
good headroom to regulatory requirements
and very strong leverage ratio.
• Good progress made on our preparation
for applying to use the Internal Ratings
Based approach.
• Further strengthened and diversified our
funding position with the launch of a new
treasury deposit platform and renewed
premium securitisation.
• Maintained close risk management at
Winterflood in challenging trading
conditions, with only two loss days.
• Conducted detailed preparatory work
on managing for a potential downturn in
the economy, with business-level
scenario analysis and playbooks.
IMPROVE: ENGAGING
STAKEHOLDERS AND
INVESTING TO STRENGTHEN
OUR PROPOSITION.
4. Help our customers do business with
us by adapting to their needs and
investing in technology, people and
products to improve our proposition
5. Maintain a disciplined approach to
cost management and operational
efficiency
6. Empower our employees through
training, development and diversity
• Motor Finance transformation programme
progressing well, with roll out of new sales
competencies, process and methodology.
• Maintained our cost discipline and operating
efficiencies, freeing up capacity to invest.
• Continued strong employee engagement.
• Enhanced our extensive Voice of the
Customer programme to listen, analyse and
act upon feedback from our customers.
• Benefits of our Premium Finance
transformation investment programme
materially exceeding original business case.
• Maintain cost discipline by continuously
seeking operating efficiencies and
opportunities for rationalisation.
• Develop new customer centric capabilities in
Motor Finance to increase value add and
support dealer partners.
• Monitor customer needs, preferences and
trends in technology through research and
responding to customer feedback.
• Ensure we retain and attract staff and
maximise productivity by responding to
employee engagement, training and
developing our people and investment in tools
and technology.
EXTEND: CREATING FUTURE
VALUE THROUGH MAXIMISING
OUR POTENTIAL AND
IDENTIFYING NEW
OPPORTUNITIES.
• Maintained strong growth momentum in
Asset Management with good net inflow
levels and attracting new hires in a
challenging market environment.
• Selective regional expansion in Property
Finance including a new office in
Manchester, and a new offering in
Northern Ireland.
• Continue growing client assets and
making incremental hires in Asset
Management.
• Maximise the lending opportunity while
maintaining our disciplined approach.
• Continue to identify and explore new
business areas that fit with our specialist
business model and generate strong returns.
7. Maximise the opportunity in each
• Continued growth of Novitas via its
• Leverage investment in new deposit
of our markets, within the boundaries
of the model
8. Identify new products, distribution
channels and adjacent market
opportunities
litigation finance product.
• Achieved good uptake of asset based
lending and personal contract hire
products.
• Good progress made in expanding
Winterflood’s institutional relationships and
Winterflood Business Services.
platform to launch new savings products,
access new distribution channels, improve
operating efficiency and further diversify
our deposit offering.
• Continue to develop Winterflood’s
institutional franchise and grow
Winterflood Business Services.
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
17
S T R AT E G I C O B J E C T I V E S
K E Y P E R F O R M A N C E I N D I C AT O R S
C O M M O N E Q U I T Y T I E R 1 C A P I T A L R A T I O
P E R C E N T
F U N D I N G C O V E R O F L O A N B O O K
P E R C E N T
2019
2018
2017
13.0
12.7
12.6
2019
2018
2017
129
132
127
N E T I N T E R E S T M A R G I N
P E R C E N T
B A D D E B T R A T I O
P E R C E N T
2019
2018
2017
7.9
8.0
8.1
2019
2018
2017
0.6
0.6
0.6
C R E AT I N G L O N G -T E R M
S H A R E H O L D E R V A L U E
G R O U P R E T U R N O N O P E N I N G E Q U I T Y
P E R C E N T
2019
2018
2017
15.7
17.0
18.1
A D J U S T E D B A S I C E A R N I N G S P E R S H A R E
P E N C E
B A N K I N G E X P E N S E / I N C O M E R A T I O
P E R C E N T
E M P L O Y E E E N G A G E M E N T
P E R C E N T
2019
2018
2017
N E T P R O M O T E R S C O R E S
2 0 1 9
Retail deposits brand
Bespoke Asset
Management
Asset Finance
Premium Finance
50
49
48
56
51
2019
2018
2017
P R O P E R T Y R E P E A T B U S I N E S S
P E R C E N T
73
79
2019
2018
2017
88
89
89
78
77
75
2019
2018
2017
D I V I D E N D P E R S H A R E
P E N C E
2019
2018
2017
136.7
140.2
133.6
66.0
63.0
60.0
L O A N B O O K G R O W T H 1
P E R C E N T
NE T INFLOWS
P E R C E N T O F O P E N I N G A U M
2019
2018
2017
6
7
7
2019
2018
2017
9
9
12
1 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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Annual Report 2019
18
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
and 15;
• 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 66 and
67. 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 70 and 71. We believe the key risks
facing the group include: the current
economic uncertainty; 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. The potential impact of the UK’s
anticipated departure from the EU and how it
could impact our customers also continues
to be closely monitored and managed
through the firm’s emerging risk framework.
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, 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.
K E Y : N O C H A N G E R I S K D E C R E A S E D R I S K I N C R E A S E D
R I S K
CREDIT RISK
As a lender to 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
2019 the group had loans and advances to
customers amounting to £7.6 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.
M I T I G AT I O N
C H A N G E
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:
• excess liquidity of £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.
Credit losses have again remained low
during the year to 31 July 2019 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 and the UK
economic outlook combined with rising
consumer debt levels. These factors
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 30
to 33. Further details on loans and
advances to customers and debt securities
held are in notes 11 and 12 on pages 125
to 128 of the financial statements.
Our approach to credit risk management
and monitoring is outlined in more detail
in note 28 on page 148.
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Close Brothers Group plc
19
R I S K
M I T I G AT I O N
C H A N G E
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 the
inability of our customers to service debt
and lower asset values on which loans are
secured; and
• increased volatility in funding markets.
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 so
doing building 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.
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,
litigation or 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 seeks to manage these risks by:
• 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;
• providing straightforward and transparent
products and services to our clients;
• reviewing and approving new products
and services through a clear governance
and approval process; and
• maintaining a prudent capital position
with headroom above minimum capital
requirements.
Although UK economic performance has
remained largely resilient to date,
economic uncertainty and risk to the
macroeconomic outlook remains elevated
due to Brexit and wider global events.
While a broadly stable macroeconomic
backdrop is anticipated in our current base
case scenario, stress testing and
contingency planning continue to be
employed to support preparedness for a
range of possible scenarios. The potential
economic impacts of the UK’s planned
departure from the EU continue to be
closely monitored through the firm’s
emerging risk framework.
Further commentary on the attributes and
resilience of the group’s diversified
business model is shown on pages 14
and 15.
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 the customer
experience within the asset management
industry. For example, we continue to
monitor the potential for regulatory
change in the motor finance market
following publication of the FCA’s final
report in March 2019.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
20
Principal Risks and Uncertainties
continued
R I S K
M I T I G AT I O N
C H A N G E
OPERATIONAL RISK
The group is exposed to various operational
risks through its day-to-day operations, all of
which have the potential to result in financial
loss or adverse impact.
Losses typically crystallise as a result of
inadequate or failed internal processes,
people and systems, or as a result of
external factors.
Adverse impacts to the business, customers,
third parties and the markets in which we
operate are considered within a developing
focus on resilient end-to-end delivery of
critical business services.
The group seeks to maintain its operational
resilience through:
• sustaining robust operational risk
management processes, governance and
management information;
• identifying key systems, third party
relationships, processes and staff, to
enable effective investment decisions;
• investing in technology to provide
reliable and contemporary customer
service offerings;
• investing in cyber security including
expertise, tools and staff engagement;
• maintaining focus on data protection;
• adopting fraud prevention and detection
capabilities aligned with our risk profile; and
• testing recovery capabilities and planning
communications approaches for possible
scenarios.
COMPETITION
The group operates in competitive markets
and experiences competition from traditional
and new players, varying in both nature and
extent across its divisions.
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
• our offering of 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.
Market and regulatory expectations
continue to increase in relation to
operational risk management and
resilience. In line with this environment, the
group continues to develop and evolve its
capacity to reliably deliver key services.
We continue to invest in and upgrade our
IT infrastructure, third party management
framework, operational processes and
cyber security capability to keep abreast
of these risks.
For further information on our approach to
operational resilience and also our
response to cyber threats, see page 71 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 30. Our business model
is set out on pages 14 and 15.
Governance ReportFinancial StatementsStrategic Report R I S K
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.
FUNDING AND LIQUIDITY
The Banking division’s access to funding
remains key to support our lending activities
and the liquidity requirements of the group.
Annual Report 2019
Close Brothers Group plc
21
M I T I G AT I O N
C H A N G E
The group seeks to attract, retain and
develop staff by:
• operating remuneration and benefits
structures which are competitive and
recognise and reward performance;
• creating an inclusive environment that
embraces diversity;
• listening to employee feedback through
engagement surveys and developing
action plans;
• implementing succession planning for
key roles;
• improving our talent pipeline via our graduate
and school leavers programmes and our
sales 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.
Our funding approach is based on the
principle of “borrow long, lend short”. The
average maturity of funding allocated to the
loan book was 20 months at 31 July 2019.
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 2019 the group’s funding position
was strong with total available funding equal
to 129% of the loan book. This provides a
prudent level of liquidity to support our
lending activities.
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 42 to 51.
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.
Our new customer deposit platform will
further increase our funding resilience
with access to a wider range of deposit
and savings products, and an online
distribution capability.
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 28 and 29.
Further financial analysis of our funding
is shown in note 19 on page 135 of the
financial statements.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
22
Principal Risks and Uncertainties
continued
R I S K
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.
M I T I G AT I O N
C H A N G E
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.
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 154 and
155 of the financial statements.
The sensitivity analysis on interest rate
exposures shown in note 28 on page
154 demonstrates the limited level of
exposure to interest rate and foreign
exchange movements.
EMERGING RISKS
The group utilises an established framework to monitor its portfolio for emerging risks,
supporting organisational readiness for external volatility.
This incorporates input and insight from both a top-down and bottom-up perspective:
• Top-down: Emerging risks identified by directors and executives at a group level via
the Group Risk and Compliance Committee and the board.
• Bottom-up: Emerging risks identified at a business level and escalated, where appropriate,
via risk updates into the Group Risk and Compliance Committee and the board.
Group-level emerging risks are monitored by the Group Risk and Compliance Committee and
the Risk Committee on an ongoing basis, with agreed actions tracked to ensure the group’s
preparedness should an emerging risk crystallise.
Current group-level emerging risks are detailed below:
E M E R G I N G R I S K
M I T I G AT I N G A C T I O N S
1. Risk of economic and political uncertainty
as a result of the UK’s exit from the EU
Brexit Forum established in 2016 to track ongoing developments and develop
appropriate contingency plans. Appropriate preparations made for a potential “no deal”
exit, including the establishment of a new Irish subsidiary and subsequent approval of a
MoneyLender licence in the Republic of Ireland to support continuation of our continental
Retail and SME Premium Finance business.
2. Risk of financial loss resulting from the
physical or transitional impacts of
climate change
Climate Risk Working Group established in 2019 with responsibility for developing an
appropriate and regulatory-compliant firm-wide climate risk framework. Senior management
responsibility has been assigned to the group chief risk officer while the Risk Committee has
assumed responsibility for overseeing and challenging the developing framework.
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
23
THRIVING…
IS FOLLOWING YOUR AMBITION, NOT LIMITING IT,
SETTING NEW GOALS AND PUSHING
YOURSELF FORWARD.
Close Brothers Group plc
Close Brothers Group plc
24
24
Annual Report 2019
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
HELPING
CUST OMERS
T H R I V E
W W W.C LO S E B R OT H E R S .C O M / T H R I V E
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
25
HELPING
CUST OMERS
T H R I V E
Case Study | Brighton Gin
FOLLOWING MONTHS OF EXPERIMENTATION WITH
INGREDIENTS AND COMBINATIONS IN A PUB BASEMENT,
TO NOW BEING IN LARGER PREMISES, BRIGHTON GIN IS
NOT ONLY BRIGHTON’S FIRST LEGAL DISTILLERY, BUT
ALSO A MULTI-AWARD WINNING GIN.
D
N
A
R
E
D
N
U
O
F
|
N
O
T
A
C
Y
H
T
A
K
R
O
T
C
E
R
I
D
I
G
N
G
A
N
A
M
“In order to take the next
leap onwards, working
with Close Brothers has
really freed up our cash
flow and let us do things
like give people jobs, buy
kit and really ramp up our
production.”
Like many small businesses
starting out, cash flow can be a
major issue. By working with
Close Brothers, Brighton Gin was
able to free up working capital to
meet customer goals and
demands, grow their premises,
buy equipment, provide
employment opportunities and
increase production.
Close Brothers was there to
help turn their dream into a
reality, supporting Brighton Gin
every step of the way and
helping them to thrive.
Governance ReportFinancial StatementsStrategic Report
Close Brothers Group plc
Annual Report 2019
26
Financial Overview
CLOSE BROTHERS DELIVERED
A SOLID PERFORMANCE IN
THE YEAR, MAINTAINING
STRONG RETURNS AND
PROFITABILITY.
T he group delivered another
solid performance, maintaining
strong returns and profitability.
Adjusted operating profit
decreased 3% to £270.5
million (2018: £278.6 million),
reflecting a challenging
environment for our market-
facing businesses and continued investment
across all our businesses. Statutory
operating profit before tax from continuing
operations decreased 2% to £264.7 million
(2018: £271.2 million). The operating margin
reduced by 2% to 33% (2018: 35%).
The Banking division continued to perform
well and slightly ahead of the prior year,
delivering an adjusted operating profit of
£253.7 million (2018: £251.8 million), with
good income growth and continued low bad
debt ratios across the businesses, offset by
higher adjusted operating expenses as we
increased investment in our business. The
Asset Management division continued to
achieve strong net inflows, although
operating profit of £21.8 million (2018: £23.1
million) was down 6% on the prior year
reflecting lower average market levels
throughout the year and continued
investment to support the long-term growth
potential of the business. The Securities
division delivered solid trading profitability
despite difficult market conditions, with
operating profit of £20.0 million (2018: £28.1
million), down 29% on a strong prior year.
Group net expenses, which include the
central functions such as finance, legal and
compliance, risk and human resources were
up 2% at £25.0 million (2018: £24.4 million).
Adjusted operating income increased 1% to
£816.4 million (2018: £805.8 million), as good
income growth in the Banking and Asset
Management divisions was partially offset by
reduced trading income in the Securities
division. Income in the Banking division
increased 4%, reflecting loan book growth
across all businesses and a broadly stable
net interest margin of 7.9% (2018: 8.0%).
Income in the Asset Management division
was up 4%, reflecting higher client assets and
a £1.4 million gain on disposal of assets in the
second half of the financial year. Income in
the Securities division declined 14% as a
result of significantly lower trading volumes
driven by subdued investor appetite.
Adjusted operating expenses increased 4%
to £497.4 million (2018: £480.5 million), with
most of the increase in the Banking division,
where we continue to invest in a number of
strategic projects and business initiatives.
While investment costs have increased, we
have continued to improve operational
efficiency and, as a result, the Banking
expense/income ratio only increased to 50%
(2018: 49%). Costs also increased in the
Asset Management division, driven by
continued hiring of advisers and portfolio
managers and investments in technology
and our research capability. Expenses in the
Securities division reduced, reflecting lower
variable costs. Overall, the group’s expense/
income ratio was marginally higher at 61%
(2018: 60%) but the group’s compensation
ratio reduced slightly to 36% (2018: 37%).
The group’s loan impairment losses are now
reported under IFRS 9. The application of the
new standard accelerates the recognition of
impairment, principally as loans move
between “stages” due to changes in their
credit profile or to reflect changes in the
macroeconomic outlook. In the last year,
impairment losses increased 4% to £48.5
million (2018: £46.7 million under IAS 39). The
bad debt ratio remained low at 0.6% (2018:
0.6%), reflecting the continued prudent
application of our lending criteria and
consistently strong credit performance
across our lending portfolios.
The tax charge in the period was £64.4 million
(2018: £67.0 million), which corresponds to an
effective tax rate of 24% (2018: 25%), reflecting
a one-off credit due to the release of a tax
provision. Adjusted basic earnings per share
(“EPS”) from continuing operations decreased
2% to 136.7p (2018: 140.2p) and basic EPS
from continuing operations decreased 2% to
133.5p (2018: 136.2p).
DISCONTINUED OPERATIONS
On 1 January 2019, the group completed the
sale of its unsecured retail point of sale finance
business, which has been treated as a
discontinued operation in the income
statement for the 2018 and 2019 financial
years, and as an asset held for sale on the
balance sheet at 31 July 2018 and 1 August
2018. The profit from discontinued operations
was £1.1 million (2018: £2.2 million loss) and
included a £2.7 million profit on disposal net of
tax. Basic EPS from continuing and
discontinued operations was 134.2p (2018:
134.7p), broadly in line with the prior year.
DIVIDEND
The board is proposing a final dividend per
share of 44.0p (2018: 42.0p), resulting in a
full-year dividend per share of 66.0p (2018:
63.0p), 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
26 November 2019 to shareholders on the
register at 11 October 2019.
RE TURN ON OPENING EQUIT Y
15.7%
2018: 17.0%
AD JUSTED OPER ATING PROFIT
£270.5m
2018: £278.6M
“The group has delivered another solid
performance, maintaining strong returns
and profitability.”
PREBEN PREBENSEN | CHIEF EXECUTIVE
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
27
BASIS OF PRESENTATION
Results are presented both on a statutory
and an adjusted basis to aid comparability
between periods. Adjusted measures are
presented on a basis consistent with prior
periods and 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.
Discontinued operations relate to the
unsecured retail point of sale finance
business, which was sold on 1 January
2019, and has been classified as a
discontinued operation in the group’s
income statement for the 2018 and 2019
financial years. The related assets and
liabilities are classified as held for sale on
the group’s balance sheet at 31 July 2018
and 1 August 2018.
GROUP INCOME STATEMENT
Continuing operations
Adjusted operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profit
Banking
Commercial
Retail
Property
Asset Management
Securities
Group
Amortisation of intangible assets on acquisition
Operating profit before tax
Tax
Profit after tax: continuing operations
Profit/(loss) from discontinued operations, net of tax
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
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 in the
2018 financial year comparative period
excludes the unsecured retail point of sale
finance loan book from both the opening
and closing loan book.
2019
£ million
2018
£ million
Change
%
816.4
(497.4)
(48.5)
805.8
(480.5)
(46.7)
270.5
253.7
86.5
72.5
94.7
21.8
20.0
(25.0)
(5.8)
264.7
(64.4)
200.3
1.1
(0.2)
278.6
251.8
76.1
81.1
94.6
23.1
28.1
(24.4)
(7.4)
271.2
(67.0)
204.2
(2.2)
(0.3)
201.6
202.3
136.7p
140.2p
133.5p
136.2p
134.2p
66.0p
15.7%
134.7p
63.0p
17.0%
1
4
4
(3)
1
14
(11)
0
(6)
(29)
2
(22)
(2)
(4)
(2)
(0)
(2)
(2)
(0)
5
As previously communicated, the group has
adopted IFRS 9 Financial Instruments with
effect from 1 August 2018, and is presenting its
results for the 2019 financial year under IFRS 9.
As permitted by IFRS 9, comparative
information has not been restated and
transitional adjustments have been accounted
for through retained earnings at 1 August 2018.
The comparative income statement for the
2018 financial year continues to be reported
under IAS 39 Financial Instruments –
Recognition and Measurement. The group
has presented its opening balance sheet at
1 August 2018 and reported under IFRS 9 to
aid comparability and consistency with the
2019 financial year closing balances (see
also note 30 to the consolidated financial
statements).
BALANCE SHEET
We maintain a prudent approach to managing
our financial resources, which is reflected in
our strong and transparent balance sheet.
The structure of the balance sheet remains
unchanged, with most of the assets and
liabilities relating to our lending activities.
Loans and advances make up the majority of
our assets. Our loan book is predominantly
secured across a diverse range of asset
classes and is generally short term in nature
with low average loan size.
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.
Close Brothers Group plc
28
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Financial Overview
continued
Total assets increased 3% to £10.6 billion
(1 August 2018: £10.2 billion), driven by loan
book growth in the year. Total liabilities were
up 3% to £9.2 billion (1 August 2018: £8.9
billion) driven by an increase in borrowings and
deposits to fund loan book growth.
Shareholders’ equity of £1.4 billion (1 August
2018: £1.3 billion) continued to build, with
profit in the period partially offset by dividend
payments of £95.5 million (2018: £91.0 million).
The group’s return on assets remained
broadly stable at 1.9% (2018: 2.0%).
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 common equity
tier 1 (“CET1”) capital ratio increased to
13.0% (1 August 2018: 12.7%), reflecting
continued profitability and slower loan book
growth at this stage in the cycle. The total
capital ratio increased to 15.2% (1 August
2018: 15.0%).
GROUP BAL ANCE SHEET
Loans and advances to customers
Treasury assets2
Market-making assets3
Other assets
Total assets
Deposits by customers
Borrowings
Market-making liabilities3
Other liabilities
Total liabilities
Equity
Total liabilities and equity
In the last year, we generated £87.0 million of
CET1 capital, reflecting £201.6 million of profit
in the year, partially offset by the regulatory
deduction of dividends paid and foreseen of
£98.5 million, an increase in intangibles, and
other movements in reserves. As a result,
CET1 capital increased 8% to £1,169.2 million
(1 August 2018: £1,082.2 million).
Risk weighted assets also increased 5% to
£9.0 billion (1 August 2018: £8.5 billion),
primarily reflecting continued loan book
growth.
The leverage ratio, which is a transparent
measure of capital strength not affected by
risk weightings, remains strong at 11.0%
(1 August 2018: 10.6%).
The group’s capital ratios at 31 July 2019 are
presented on a transitional basis after applying
IFRS 9 arrangements that allow the capital
impact of expected credit losses to be phased
in over a five-year period, and the Capital
Requirements Regulation (“CRR”) transitional
arrangements for grandfathered Tier 2 capital
31 July
2019
£ million
7,649.6
1,395.4
666.1
850.2
1 August
2018
£ million1
7,239.3
1,435.1
635.7
896.0
10,561.3
10,206.1
5,638.4
2,601.0
582.4
333.1
5,497.2
2,501.1
565.5
338.5
9,154.9
8,902.3
1,406.4
1,303.8
10,561.3
10,206.1
1 Opening balance sheet reported under IFRS 9.
2 Treasury assets comprise cash and balances at central banks, and debt securities held to support lending in the
Banking division.
3 Market-making assets and liabilities comprise settlement balances, long and short trading positions and loans to 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
31 July
2019
£ million
1,169.2
1,364.6
8,967.4
13.0%
15.2%
11.0%
1 August
2018
£ million
1,082.2
1,280.1
8,542.6
12.7%
15.0%
10.6%
instruments. Before the transitional
adjustments, the group’s fully loaded CET1
and total capital ratios at 31 July 2019 were
12.6% (1 August 2018: 12.2%) and 14.5%
(1 August 2018: 14.2%), respectively.
The group and its individual regulated entities
complied with all of the externally imposed
capital requirements to which they are
subject for the financial years ended 31 July
2019 and 2018. The group’s capital ratios
remain comfortably ahead of minimum
regulatory requirements. Our 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.400 bps in our CET1 capital ratio, and
c.180 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 capital adequacy
reforms, commonly referred to as Basel 4.
We are making good progress towards our
IRB application, with increasing visibility and
confidence as we move through our
preparations. We have completed the
development of our initial model suite, which
is now undergoing testing and validation. We
currently expect to be in a position to submit
our formal application to the PRA around the
2020 financial year end.
FUNDING
The primary purpose of our treasury function
is to manage funding and liquidity to support
the lending businesses and manage interest
rate risk. We maintain a conservative
approach, with diverse funding sources and
a prudent maturity profile, which increases
our resilience and flexibility and helps to
manage changes in the cost of funding.
Total funding increased to £9.9 billion
(1 August 2018: £9.6 billion) and accounted
for 129% (1 August 2018: 132%) of the loan
book at the balance sheet date. Our average
cost of funding of 1.7% (2018: 1.6%) was
marginally up on the prior year, though our
effective management of funding sources
kept this increase comfortably below the
25 bps rise in the Bank of England base rate
in August 2018.
We maintain a diverse range of funding
sources across a series of maturities, including
several public debt securities at both group
and operating company level as well as a
number of securitisation facilities. Over the
year, we increased our volumes of customer
deposits, and have continued to make use of
smaller private placements.
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
29
Our range of secured funding facilities
include securitisations of our Premium and
Motor Finance loan books. During the year
we renewed and increased our Motor
Finance securitisation facility by £100 million,
at lower pricing, and renewed and increased
our Premium Finance securitisation facility to
£500 million over a two-year period. We have
made limited use of the Term Funding
Scheme, which accounted for only 5% of our
total funding at the year end. The first of our
public Motor Finance securitisations was fully
redeemed on 16 September 2019, with all
public interest repaid at 31 July 2019.
Deposits increased 3% overall to £5.6 billion
(1 August 2018: £5.5 billion) with non-retail
deposits decreasing slightly to £3.5 billion
(1 August 2018: £3.6 billion) and retail deposits
increasing by 12% to £2.1 billion (1 August
2018: £1.9 billion). Unsecured funding
remained broadly unchanged at £1.5 billion
(1 August 2018: £1.4 billion).
We have maintained a prudent maturity
profile. Term funding, with a residual maturity
over one year, increased to £5.5 billion
(1 August 2018: £4.9 billion), reflecting the
renewal of long-term facilities, and now
covers 72% (1 August 2018: 68%) of the loan
book. The average maturity of funding
allocated to the loan book remained
significantly ahead of the loan book at 20
months (1 August 2018: 23 months), while
the average loan book maturity remained at
14 months (1 August 2018: 14 months).
During the year we implemented a new
customer deposit platform, which will allow us
to offer a wider range of deposit products to
further diversify our funding as well as improve
customer experience. We completed the
successful migration of c.37,000 customers
and £3.8 billion of deposits onto the new
platform in December 2018, and have since
launched new notice accounts as an
additional product for our retail, pension and
SME customers. In the 2020 financial year we
will be introducing a suite of new savings
products and a new online portal.
Our strong credit ratings have been reaffirmed
by both Moody’s Investors Services
(“Moody’s”) and Fitch Ratings (“Fitch”) during
the year. Moody’s rates Close Brothers Group
A3/P2 and Close Brothers Limited Aa3/P1,
with stable outlook. Fitch affirmed ratings for
both entities “A/F1” in August 2019, having
previously revised the outlook to rating watch
negative alongside UK peers in March 2019 to
reflect their view of the increased risk
of a disruptive “no deal” Brexit scenario.
GROUP FUNDING1
Customer deposits
Secured funding
Unsecured funding2
Equity
Total available funding
Of which term funding (>1 year)
Total funding as % of loan book
Term funding as % of loan book
Average maturity of funding allocated to loan book3
31 July
2019
£ million
5,638.4
1,404.8
1,462.2
1,406.4
1 August
2018
£ million
5,497.2
1,360.3
1,421.2
1,303.8
9,911.8
9,582.5
5,493.4
129%
72%
20 months
4,913.6
132%
68%
23 months
1 Numbers relate to core funding and exclude working capital facilities at the business level.
2 Unsecured funding excludes £29.0 million (2018: £14.6 million) of non-facility overdrafts included in borrowings and
includes £295.0 million (2018: £295.0 million) of undrawn facilities.
3 Average maturity of total funding excluding equity and funding held for liquidity purposes.
GROUP LIQUIDIT Y
Cash and balances at central banks
Sovereign and central bank debt
Certificates of deposit
31 July
2019
£ million
1,106.4
48.3
240.7
1 August
2018
£ million
1,140.3
44.5
250.3
Treasury assets
1,395.4
1,435.1
LIQUIDITY
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
with central banks. In the year, treasury
assets remained broadly stable at £1.4 billion
(1 August 2018: £1.4 billion) and were
predominantly held on deposit with the Bank
of England, giving us continued good
headroom to both internal and external
liquidity requirements.
We regularly assess and stress test our
liquidity requirements and continue to
comfortably meet the liquidity coverage ratio
requirements under the Capital
Requirements Directive IV (“CRD IV”), with a
12-month average liquidity coverage ratio of
823% (2018: 1,038%).
COMMON EQUIT Y TIER 1 CAPITAL R ATIO
13.0%
2018: 12.7%
TOTAL FUNDING
£9.9bn
1 AUGUST 2018: £9.6BN
TRE ASURY ASSE TS
£1.4bn
1 AUGUST 2018: £1.4BN
Close Brothers Group plc
Annual Report 2019
30
Banking
SOLID PERFORMANCE
WHILE MAINTAINING
PRICING AND
UNDERWRITING DISCIPLINE.Banking adjusted operating
profit was up 1% to £253.7
million (2018: £251.8 million),
with solid loan book growth
and broadly stable net interest
margin offsetting an increase
in investment. Statutory
operating profit from
continuing operations increased 1% to
£251.8 million (2018: £249.9 million).
The loan book grew 5.7% (2018: 6.6%
excluding discontinued operations), with
growth across all our lending businesses,
reflecting our strong customer proposition
and benefiting from the diversity of our
business portfolio. The return on net loan
book remained strong at 3.3% (2018: 3.5%).
Adjusted operating income was up 4% at
£602.6 million (2018: £581.0 million),
supported by loan book growth across the
lending businesses.
BUILDING STRONG
REL ATIONSHIPS
NE T INTEREST MARGIN
7.9%
2018: 8.0%
The net interest margin remained strong at
7.9% (2018: 8.0%), reflecting continued pricing
discipline. The slight reduction compared to
the prior year reflects a combination of lower
fee income and higher cost of funds.
Adjusted operating expenses increased 6%
to £300.5 million (2018: £282.5 million). Over
two-thirds of the increase relate to
investment in strategic projects and new
business initiatives, in line with our long-term
strategy. This includes our multi-year
investment programme in Motor Finance, our
new customer deposit platform and
investment to support our IRB application.
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
31
RE TURN ON OPENING EQUIT Y
KEY FINANCIALS
17.5%
2018: 19.5%
The remaining cost increase largely relates to
strengthening our operational resilience and
core technology. Despite the increase in overall
costs, we have continued with our efforts to
improve operating efficiency and carefully
manage non-investment spend. Staff costs,
which represent the majority of the cost base,
remained flat on the prior year. The expense/
income ratio was marginally up to 50% (2018:
49%), while the compensation ratio reduced
slightly to 28% (2018: 29%).
We have maintained strong credit quality
across our businesses and the bad debt ratio
remained low at 0.6% (2018: 0.6%).
Return on opening equity remained strong at
17.5% (2018: 19.5%) reflecting the ongoing
strong profitability of the business, offset by
continued growth in the equity base.
Continuing operations1
Adjusted operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profit
Net interest margin2
Expense/income ratio
Bad debt ratio2
Return on net loan book2
Return on opening equity
Change
%
4
6
4
1
2019
£ million
602.6
(300.5)
(48.4)
253.7
7.9%
50%
0.6%
3.3%
17.5%
2018
£ million
581.0
(282.5)
(46.7)
251.8
8.0%
49%
0.6%
3.5%
19.5%
Average loan book and operating lease assets3
7,654.0
7,261.1
5
1 Results from continuing operations exclude the unsecured retail point of sale finance business, which was classified as
a discontinued operation in the group’s income statement for the 2018 and 2019 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.
3 Re-presented to exclude the unsecured retail point of sale finance loan book in both the 2018 and 2019 financial years
and is used to calculate net interest margin, bad debt ratio and return on net loan book.
LOAN BOOK ANALYSIS
Commercial2
Asset Finance
Invoice and Speciality Finance
Retail
Motor Finance
Premium Finance
Property
Closing loan book
Operating lease assets3
31 July
2019
£ million
2,991.3
1,946.4
1,044.9
2,810.7
1,775.6
1,035.1
1,847.6
7,649.6
220.4
1 August
2018
£ million1
2,747.5
1,828.2
919.3
2,670.5
1,722.7
947.8
1,821.3
7,239.3
198.6
Change
%
8.9
6.5
13.7
5.2
3.1
9.2
1.4
5.7
11.0
KEY PERFORMANCE INDICATORS
NE T INTEREST MARGIN
PER CENT
2019
2018
2017
BAD DEBT R ATIO
PER CENT
2019
2018
2017
RE TURN ON NE T LOAN BOOK
PER CENT
2019
2018
2017
Closing loan book and operating lease assets
7,870.0
7,437.9
5.8
1 The loan book at 1 August 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.
7.9
8.0
8.1
2 The Asset Ireland loan book has been reclassified in the period from Asset Finance to Invoice and Speciality Finance,
to align with where this business is managed. Both the 31 July 2019 and comparative 1 August 2018 opening loan
book figures have been re-presented accordingly.
3 Operating lease assets of £4.2 million (1 August 2018: £7.0 million) relate to Asset Finance and £216.2 million (1 August
2018: £191.8 million) to Invoice and Speciality Finance.
0.6
0.6
0.6
3.3
3.5
3.6
LOAN BOOK
Loan book growth has always been an output
of our business model, and we continue to
prioritise our margins and credit quality. We
have a diverse portfolio of businesses, which
ensures that our model remains resilient
through the cycle. Loan book growth was
5.7% in the year to £7.6 billion (1 August 2018:
£7.2 billion), with all five businesses growing,
reflecting a resilient performance in our core
businesses and new product initiatives and
extensions.
We achieved particularly good growth in our
Commercial business lines, across both our
core Asset and Invoice Finance businesses, as
well as the newer Novitas business.
Premium Finance also delivered good
growth in the year and Motor Finance saw a
slight return to growth, benefiting from recent
investment, while we continue to prioritise
our strict lending criteria in the face of
ongoing competition.
Property grew modestly in the year, with
continued regional growth offsetting a
significant level of repayments and slightly
lower new business volumes in London and
the South East. We continue to see strong
structural demand for new build family
housing, and the new business pipeline
remains solid.
Close Brothers Group plc
32
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Banking
continued
BANKING: COMMERCIAL
Operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profit
Net interest margin
Expense/income ratio
Bad debt ratio
Change
%
11
6
35
14
2019
£ million
249.9
(140.1)
(23.3)
86.5
8.1%
56%
0.8%
2018
£ million
225.5
(132.2)
(17.2)
76.1
7.9%
59%
0.6%
Average loan book and operating lease assets
3,078.9
2,856.4
8
BANKING: RETAIL
Continuing operations1
Adjusted operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profit
Net interest margin2
Expense/income ratio
Bad debt ratio2
Average loan book3
Change
%
(1)
5
–
(11)
2019
£ million
223.2
(125.5)
(25.2)
72.5
8.1%
56%
0.9%
2018
£ million
225.5
(119.2)
(25.2)
81.1
8.4%
53%
0.9%
2,740.6
2,676.3
2
1 Results from continuing operations exclude the unsecured retail point of sale finance business, which was
classified as a discontinued operation in the group’s income statement for the 2018 and 2019 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.
3 Re-presented to exclude the unsecured retail point of sale finance loan book in both the 2018 and 2019
financial years and is used to calculate net interest margin, bad debt ratio and return on net loan book.
COMMERCIAL
The Commercial businesses provide
specialist, secured lending principally to the
SME market and include Asset and Invoice
and Speciality Finance. The latter includes
smaller specialist businesses such as
Novitas, a specialist provider of finance to
the legal sector, Brewery Rentals, which
provides service and finance solutions for
brewery equipment and containers, and
Vehicle Hire, which provides heavy goods
and light commercial vehicles on a
predominantly long-term hire basis.
The Commercial loan book increased 9%
overall to £3.0 billion (1 August 2018: £2.7
billion), with particularly strong growth in the
core Asset and Invoice Finance businesses,
and in Novitas. The Asset Finance loan
book was up 6% in the year, benefiting from
solid performance in our well-established
sectors, with good growth in transport, and
particularly aviation and marine,
notwithstanding continued active
competition from both new and existing
lenders in the asset finance market. We have
also made good progress in expanding our
core offerings, with increased uptake of
personal contract hire within Asset Finance
and of our asset based lending proposition
within Invoice Finance.
Adjusted operating profit of £86.5 million
(2018: £76.1 million) was up 14%, driven by
good income growth and continued low bad
debt. Statutory operating profit increased
14% to £84.9 million (2018: £74.5 million).
Operating income of £249.9 million (2018:
£225.5 million) was 11% higher than the prior
year, reflecting strong growth in the loan
book. We have maintained a strong net
interest margin of 8.1% (2018: 7.9%), ahead of
the prior year reflecting growth in higher
margin business lines.
Costs grew by 6% to £140.1 million (2018:
£132.2 million), significantly below the increase in
operating income, and resulting in an expense/
income ratio that reduced to 56% (2018: 59%).
The bad debt ratio increased to 0.8% (2018:
0.6%), reflecting very low bad debts in the
prior year, and remains close to historically low
levels, with good credit performance overall.
RETAIL
The Retail businesses provide intermediated
finance, principally to individuals and small
businesses, through motor dealers and
insurance brokers.
The Retail loan book increased 5% to £2.8
billion (1 August 2018: £2.7 billion), reflecting
loan book growth in both Premium Finance
and Motor Finance.
Premium Finance delivered good growth of
9% to £1.0 billion (1 August 2018: £0.9 billion)
driven by several new significant broker
relationships in the period, with strong
growth in Personal lines and continued good
growth in Commercial. The Premium
Finance business continues to be well
positioned competitively, benefiting from the
multi-year investment programme in its
infrastructure over recent years to improve
both broker and end customer experience.
The Motor Finance loan book increased 3% to
£1.8 billion (1 August 2018: £1.7 billion). The UK
book returned to growth in the period,
benefiting from recent improvements in sales
capability. This was supported by further
growth in the Republic of Ireland, which
accounts for 28% (2018: 26%) 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 only 12% of the Motor Finance
loan book at 31 July 2019.
On 1 January 2019 we completed 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 classified as held for
sale at 31 July 2018.
Overall, adjusted operating profit for Retail of
£72.5 million (2018: £81.1 million) was down
11% on the prior year, and statutory operating
profit from continuing operations reduced
11% to £72.2 million (2018: £80.8 million).
Adjusted operating income was down 1%
year-on-year at £223.2 million (2018: £225.5
million) with a slight decline in net interest
margin to 8.1% (2018: 8.4%), due to lower fee
income in the Motor Finance business and
the mix impact of growth in lower margin
business in Ireland.
Adjusted operating expenses increased 5%
to £125.5 million (2018: £119.2 million), and
the expense/income ratio increased to 56%
(2018: 53%), reflecting our ongoing
investment in both Premium Finance and
Motor Finance. Our investment in the
infrastructure of the Premium Finance
business is now delivering substantial
Annual Report 2019
Close Brothers Group plc
33
BANKING: PROPERT Y
Operating income
Operating expenses
Impairment losses on financial assets
Operating profit
Net interest margin
Expense/income ratio
Bad debt ratio
Average loan book
2019
£ million
129.5
(34.9)
0.1
94.7
7.1%
27%
(0.0%)
2018
£ million
130.0
(31.1)
(4.3)
94.6
7.5%
24%
0.2%
1,834.5
1,728.4
Change
%
(0)
12
(102)
0
6
benefits in the form of significant new broker
relationships and cost savings through
operational efficiencies. This has resulted in a
20% growth in the number of cases and a
34% increase in loan book since the 2016
financial year. We are making good progress
with our Motor Finance transformation
programme which is aimed at improving the
service proposition, enhancing operational
efficiency, improving our credit acceptance
process and increasing sales effectiveness.
We expect to realise further benefits as this
investment programme progresses.
Credit performance remains in line with our
expectations at this stage of the cycle, with
the bad debt ratio stable at 0.9% (2018:
0.9%), reflecting continued commitment to
our strict lending criteria.
PROPERTY
Property comprises Property Finance and
Commercial Acceptances. The Property
Finance business is focused on specialist
residential development finance to established
professional developers in the UK.
Commercial Acceptances provides bridging
loans and loans for refurbishment projects.
We do not lend to the buy-to-let sector, or
provide residential or commercial mortgages.
Property delivered 1% loan book growth, to
£1.8 billion (1 August 2018: £1.8 billion),
reflecting a significant level of repayments,
which offset new business. We continued to
see good regional growth, with an increase in
the number of clients in the period, which is
offsetting slower markets in London and the
South East.
We continue to see good structural demand
in our core market of property development
finance for new build family housing. London
and the South East represent c.70% of the
portfolio, however there remains strong
growth opportunity in regional locations
around major commuting hubs. During the
year we launched a new bridging finance
office in Manchester and expanded our
development finance offering in Northern
Ireland. Our long track record, expertise and
quality of service ensure the business remains
resilient to competition and continues to
generate high levels of repeat business.
The business delivered an operating profit of
£94.7 million (2018: £94.6 million), broadly flat on
the prior year. The net interest margin reduced
to 7.1% (2018: 7.5%), reflecting an increase in
cost of funds driven by the base rate increase in
August 2018, and lower transactional fees in the
latter part of the year. The business reported a
bad debt ratio of (0.0%) (2018: 0.2%).
Operating expenses of £34.9 million (2018:
£31.1 million) were up 12%, reflecting the
increase in technology investment across the
Banking division. The expense/income ratio
remained low at 27% (2018: 24%), reflecting
the lower operational requirements of the
business with larger transaction sizes and a
relatively small number of loans.
COMMERCIAL AD JUSTED OPER ATING
RE TAIL AD JUSTED OPER ATING
PROPERT Y OPER ATING PROFIT
PROFIT
£86.5m
PROFIT
£72.5m
£94.7m
2018: £76.1M
2018: £81.1M
2018: £94.6M
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
34
Asset Management
CONTINUED GOOD
MOMENTUM
ASSET MANAGEMENT CONTINUED ITS GROWTH
MOMENTUM ACHIEVING STRONG NET INFLOWS,
WITH GOOD DEMAND FOR OUR INTEGRATED
ADVICE AND INVESTMENT MANAGEMENT
SERVICES, NOTWITHSTANDING THE SUBDUED
INVESTOR ACTIVITY OVER THE PERIOD.
T he division delivered
£21.8 million (2018: £23.1
million) adjusted operating profit
and an operating margin of 18%
(2018: 20%). Statutory operating
profit before tax was £17.9
million (2018: £17.6 million).
Net inflows were £894 million
(31 July 2018: £1,083 million) in the year, or
9% (2018: 12%) of opening managed assets.
Including market movements, total managed
assets increased 12% to £11.7 billion (2018:
£10.4 billion).
Total operating income increased 4% to £120.4
million (2018: £115.5 million), driven by higher
investment management income from
continued growth in managed assets.
The reduction in income on advice and other
services reflects lower initial fees associated
with new advice business levels due to weaker
market sentiment, compared to the prior year.
The revenue margin decreased to 93 bps
(2018: 98 bps) reflecting the lower average
market levels throughout the year, which
affected income, and higher market and
asset levels at the beginning and end of the
financial year.
Adjusted operating expenses increased 7%
to £98.5 million (2018: £92.4 million), and the
expense/income ratio increased to 82%
(2018: 80%). Growth in expenses was driven
by continued investment in people and our
research capability and technology to further
enhance our operating efficiency. Headcount
increased 5% in the period, reflecting hiring
of advisers and portfolio managers, in line
with our growth strategy. However, the
compensation ratio reduced to 54% (2018:
55%), reflecting lower variable compensation.
GOOD MOMENTUM IN NET INFLOWS
ACROSS ALL CHANNELS
Notwithstanding the subdued investor
sentiment over the year, we achieved strong
net inflows of £894 million, an annualised net
inflow rate of 9%. This reflects continued
good demand for both our investment
management and integrated wealth services,
with strong flows from our own advisers and
third party independent financial advisers as
well as recent portfolio manager hires.
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
35
KEY PERFORMANCE INDICATORS
KEY FINANCIALS
NE T INFLOWS
P E R C E N T O F O P E N I N G A U M
2019
2018
2017
9
9
12
RE VENUE MARGIN
BPS
2019
2018
2017
OPER ATING MARGIN
PER CENT
2019
2018
2017
93
98
96
18
20
17
RE TURN ON OPENING EQUIT Y
PER CENT
2019
2018
2017
32
34
26
AD JUSTED OPER ATING PROFIT
£21.8m
2018: £23.1M
Investment management
Advice and other services1
Other income2
Operating income
Adjusted operating expenses
Impairment losses on financial assets3
Adjusted operating profit
Revenue margin (bps)
Operating margin
Return on opening equity
2019
£ million
2018
£ million
Change
%
9
(6)
114
4
7
(6)
81.7
37.2
1.5
120.4
(98.5)
(0.1)
21.8
93
18%
32.1%
75.2
39.6
0.7
115.5
(92.4)
–
23.1
98
20%
33.7%
1 Income from advice and self-directed services, excluding investment management income.
2 Includes a £1.4 million gain on disposal of non-core assets, net interest income and expense, income on principal
investments and other income.
3 Impairment loss on financial assets reflects an increase in the expected credit loss provision related to cash balances.
MOVEMENT IN CLIENT ASSETS
Opening managed assets
Inflows
Outflows
Net inflows
Market movements
Total managed assets
Advised only assets
Total client assets1
Net flows as % of opening managed assets
31 July
2019
£ million
10,378
2,107
(1,213)
894
401
11,673
1,651
13,324
9%
31 July
2018
£ million
8,900
1,961
(878)
1,083
395
10,378
1,841
12,219
12%
1 Total client assets include £5.0 billion of assets (31 July 2018: £4.2 billion) that are both advised and managed. Total
client assets will reduce by c.£360 million in the first half of 2020, reflecting the agreed disposal of non-core assets.
Positive market movements contributed a
further £401 million to managed assets in the
year. As a result, managed assets increased
12% overall to £11.7 billion (31 July 2018:
£10.4 billion).
Advised assets under third party management
decreased by 10% following continued
transfers of assets into our management. Total
client assets increased 9% overall, to £13.3
billion (31 July 2018: £12.2 billion).
In July 2019, we agreed the sale of a small
portfolio of self-directed clients, whose assets
are held either on third party platforms or
directly with fund managers. The sale is
expected to reduce total client assets by
c.£360 million in the next financial year. We
continue to provide self-directed services to
clients via our own platform.
STRONG FUND PERFORMANCE
OVER THE YEAR
Our funds and segregated bespoke portfolios
are designed to provide attractive long-term
risk-adjusted returns for our clients, in line with
their individual goals. Over the 12-month period
to 31 July 2019 and the three-year period to
31 July 2019, nine out of our 12 multi-asset
funds outperformed their relevant peer group
average. All of our bespoke strategy
composites outperformed their relevant peer
group average over the year to 31 July 2019,
and over a three and a five-year period, in line
with our strong long-term outperformance
track record for our bespoke strategies.
“We continue to see good
long-term growth potential in our
Asset Management business.”
PREBEN PREBENSEN | CHIEF EXECUTIVE
REMAIN WELL POSITIONED FOR
FUTURE GROWTH
Notwithstanding the challenging external
factors impacting global markets, our focus
remains on providing excellent service to our
clients, while looking at ways to optimise our
adviser and investment manager productivity
and to improve operational leverage, revenue
growth and net inflows. We continue to make
significant progress implementing strategic
technology enhancements to improve
operating efficiency, and to enhance our
propositions and service to clients.
Our vertically-integrated, multi-channel
business model leaves us well positioned to
benefit from ongoing demand for our
integrated advice and investment management
services and continued industry change. We
continue to see significant long-term growth
potential for our business and we remain
committed to growing our client base both
organically and through selective hiring of
advisers and investment managers or
incremental acquisitions.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
36
Securities
SOLID TR ADING
PERFORMANCE
IN DIFFICULT
CONDITIONS
WINTERFLOOD IS A LEADING UK MARKET MAKER,
FOCUSED ON DELIVERING HIGH QUALITY EXECUTION
SERVICES TO STOCKBROKERS, WEALTH MANAGERS
AND INSTITUTIONAL INVESTORS.
KEY PERFORMANCE INDICATORS
INCOME
£M
2019
2018
2017
BARG AINS PER DAY
’0 0 0
2019
2018
2017
OPER ATING MARGINS
PER CENT
2019
2018
2017
RE TURN ON OPENING EQUIT Y
PER CENT
2019
2018
2017
21
93.4
109.1
106.7
56
68
65
21
26
26
29
29
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
37
2019
£ million
93.4
(73.4)
20.0
56
21%
20.7%
2018
£ million
109.1
(81.0)
28.1
68
26%
29.1%
Change
%
(14)
(9)
(29)
(18)
Winterflood remains an established leader in
market-making, providing continuous liquidity
and high quality execution to its clients. The
business has made good progress over the
year developing wider relationships with
institutional clients, as unbundling of execution
and research post MiFID II continues to create
opportunities for Winterflood. In August 2019,
an affiliate licensed broker dealer was
established in the US, allowing Winterflood to
trade directly with the US counterparties. We
also continue to develop Winterflood
Business Services, which achieved monthly
break-even in the final quarter. This business
provides outsourced dealing and custody
services for asset managers and platforms in
the UK and now has £3.7 billion of assets
under administration.
Winterflood has a long track record of
trading profitably in a range of conditions, but
due to the nature of the business, it remains
sensitive to changes in the market
environment.
OPER ATING PROFIT
£20.0m
2018: £28.1M
RE TURN ON OPENING EQUIT Y
20.7%
2018: 29.1%
“Despite the difficult market environment,
trading remained profitable, with only
two loss days.”
PREBEN PREBENSEN | CHIEF EXECUTIVE
KEY FINANCIALS
Operating income
Operating expenses
Operating profit
Bargains per day (‘000)
Operating margin
Return on opening equity
W interflood delivered
solid trading
profitability whilst
navigating difficult and
volatile equity market
conditions and low
levels of investor risk
appetite throughout
the year. Operating profit decreased 29% to
£20.0 million (2018: £28.1 million), and return
on opening equity remained strong at 20.7%
(2018: 29.1%), demonstrating the resilience of
our model.
Operating income reduced 14% to £93.4
million (2018: £109.1 million), reflecting lower
trading income in the period. Average daily
bargains decreased 18% year-on-year to
55,518 (2018: 67,520), reflecting low trading
activity across all segments. Market
conditions were difficult throughout the year
and particularly in the fourth quarter of 2018,
with a significant drop in UK market levels
which impacted investor trading activity both
on the retail and institutional sides.
Despite the difficult market environment,
trading remained profitable, with only two
loss days (2018: no loss days). This reflects
the expertise of our traders and our
continued focus on the risk management of
our trading positions.
Operating expenses decreased 9% as a
result of Winterflood’s largely variable cost
base. The expense/income ratio increased to
79% (2018: 74%) reflecting lower income in
the period, with lower variable costs not fully
offsetting the reduction in income. The
compensation ratio remained broadly stable
at 48% (2018: 47%).
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Close Brothers Group plc
38
38
Annual Report 2019
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Non-Financial Information Statement
In line with the non-financial reporting requirements contained in Sections 414CA and 414CB of the Companies Act 2006, the below table
contains references to non-financial information intended to help our stakeholders understand the impact of our policies and activities.
Reporting requirement
Policies and standards
E N V I R O N M E N TA L M AT T E R S
• Bank Credit Policy underwriting standards
E M P L OY E E S
• Health and Safety Policy
• Whistle-blowing Policy
• Key Customer Principles
• Equal Opportunity and Dignity at
Work Policy
Information necessary to understand
our impact and outcomes
• Sustainability Report, pages 42 to 51
• Supporting our environment, pages 50
and 51
• Our employees, page 7
• Business model, pages 14 and 15
• Sustainability Report, pages 42 to 51
• Supporting our employees, pages 44
and 45
• Supporting our customers, pages 46 and 47
• Gender pay gap, page 45
S O C I A L M AT T E R S
• Key Customer Principles
• Bank Credit Policy underwriting standards
• Sustainability Report, pages 42 to 51
• Supporting our customers, pages 46 and 47
R E S P E C T F O R H U M A N R I G H T S
• Human Rights and Modern Slavery Act
• Privacy and Data Protection Policy
• Cyber Security Policy
• Responsible finance, page 47
• Social responsibility, page 49
A N T I - C O R R U P T I O N A N D
A N T I - B R I B E R Y
• Anti-money Laundering Policy
• Anti-bribery and Corruption Policy
• Cyber Security Policy
• Responsible finance, page 47
• Social responsibility, page 49
D E S C R I P T I O N O F P R I N C I PA L
R I S K S A N D I M PA C T O F
B U S I N E S S A C T I V I T Y
D E S C R I P T I O N O F T H E
B U S I N E S S M O D E L
N O N - F I N A N C I A L K E Y
P E R F O R M A N C E I N D I C AT O R S
• Principal risks and uncertainties, pages 18
to 22
• Risk Committee Report, pages 70 and 71
• Chairman’s Statement, pages 6 and 7
• Business model, pages 14 and 15
• Strategy and key performance indicators,
pages 16 and 17
• Sustainability Report, pages 42 to 51
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
Close Brothers Group plc
39
39
WHEN YOU ARE THRIVING…
YOU WALK TALLER AND EVERYONE
AROUND YOU CAN SEE IT.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
40
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Case Study | Nicholas King Homes
WHEN NICHOLAS KING HOMES IDENTIFY A PIECE OF LAND TO BUILD ON,
IT CAN VERY OFTEN BE AN EXTREMELY SHORT PERIOD OF TIME THEY
HAVE IN WHICH TO CAPITALISE ON IT AND STRUCTURE A DEAL.
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“It’s not a relationship with a
company, it’s a relationship with
people. Close Brothers has
helped us to thrive by making
quick decisions and being
consistent over the years.”
Close Brothers’ specialist knowledge
and ability to make fast, firm lending
decisions has helped Nicholas King
Homes take advantage of opportunities
where speed is a priority, therefore
helping the business to thrive.
This has been the cornerstone of
building a strong relationships with
Close Brothers, which Nicholas King
describes as being built on traditional
values of trust and personal
relationships.
HELPING
C O M M UNITIES
THRIVE
W W W.C LO S E B R OT H E R S .C O M / T H R I V E
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
41
HELPING
C O M M UNITIES
THRIVE
Close Brothers Group plc
Annual Report 2019
42
Sustainability Report
SUSTAINABILITY IS FUNDAMENTAL
TO OUR PURPOSE, STRATEGY
AND CULTURE
AS A BUSINESS THAT
OPERATES WITH THE
LONG TERM IN MIND,
SUSTAINABILITY IS CENTRAL
TO OUR THINKING, AND
WE’RE COMMITTED TO
MAKING A POSITIVE IMPACT.
It’s an ambition that is key to our strategy, our
culture, and our purpose: to help the people
and businesses of Britain thrive – now, and
for the long term.
This guides our approach and our decision-
making today, as we recognise that our
actions have lasting impacts and
consequences for tomorrow. And we know
that doing the right thing now means helping
to do the right thing for the future.
It’s about using our expertise to offer people
and businesses tailored solutions and
specialist advice, helping them to achieve their
short-term goals and long-term aspirations.
It’s about building a culture with strong
values that encourage and support diversity
at all levels – broadening our perspective,
and so improving our decision-making and
productivity.
And it’s about appreciating the importance
of our environment and the communities we
operate in.
Because it’s only by taking active steps, to
protect and nurture what really matters, that
we’ll all be able to thrive long into the future.
F O U R F O C U S A R E A S
F O R A S U S TA I N A B L E A P P R O A C H
A G R O W I N G N U M B E R O F I N I T I AT I V E S
TARGETS TO ME ASURE OUR PROGRESS
EMPLOYEES
Our culture, values and strong client
focus support an engaged, diverse
and motivated workforce
CUSTOMERS
Long-term lasting relationships and
continuous feedback enabling us to
provide reliable quality of service,
expertise and personal approach
COMMUNITIES
Creating long-term value and a
lasting positive impact in the
communities where we operate
• Annual measurement of employee
• 30% female senior managers by
engagement
• A series of talent development
programmes
• UpReach internship programme
supporting social mobility
• Voice of the Customer and Partner
programme to listen and act on
client feedback
• Insight, experience and design
team to measure and improve
customer journeys and experiences
• SME apprentice programme
now in its fifth phase
• Trustee leadership programme
• Matched giving to charities
through employee payroll and
volunteering schemes
2020
• Maintain or improve strong
customer satisfaction scores
across our businesses
• Maintain our Payroll Giving Quality
Mark Gold Award status
ENVIRONMENT
Acting responsibly and taking steps
to reduce our impact, protect our
surroundings and recognise the risks
and opportunities of climate change
• Five-year environmental strategy
• Low emission car leases in
company fleet
• Cycle to work scheme
• Achieve zero waste to landfill
by 2021
• Achieve a 20% improvement in
fleet vehicle emissions by 2021
Governance ReportFinancial StatementsStrategic Report
SUSTAINABILITY IS FUNDAMENTAL
TO OUR PURPOSE, STRATEGY
AND CULTURE
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
43
F O U R F O C U S A R E A S
F O R A S U S TA I N A B L E A P P R O A C H
A G R O W I N G N U M B E R O F I N I T I AT I V E S
TARGETS TO ME ASURE OUR PROGRESS
EMPLOYEES
Our culture, values and strong client
• Annual measurement of employee
• 30% female senior managers by
focus support an engaged, diverse
engagement
and motivated workforce
• A series of talent development
2020
CUSTOMERS
Long-term lasting relationships and
• Voice of the Customer and Partner
continuous feedback enabling us to
programme to listen and act on
provide reliable quality of service,
expertise and personal approach
COMMUNITIES
Creating long-term value and a
lasting positive impact in the
communities where we operate
programmes
• UpReach internship programme
supporting social mobility
client feedback
• Insight, experience and design
team to measure and improve
customer journeys and experiences
• SME apprentice programme
now in its fifth phase
• Trustee leadership programme
• Matched giving to charities
through employee payroll and
volunteering schemes
• Maintain or improve strong
customer satisfaction scores
across our businesses
• Maintain our Payroll Giving Quality
Mark Gold Award status
ENVIRONMENT
Acting responsibly and taking steps
• Five-year environmental strategy
to reduce our impact, protect our
• Low emission car leases in
surroundings and recognise the risks
company fleet
and opportunities of climate change
• Cycle to work scheme
• Achieve zero waste to landfill
by 2021
• Achieve a 20% improvement in
fleet vehicle emissions by 2021
OUR SUSTAINABLE APPROACH
We take a long-term approach to managing
our business, and are committed to
delivering long-term value for all our
stakeholders and the communities and
environment in which we operate.
Sustainability matters appear regularly on the
senior management agenda, and we now
have a dedicated working group for
sustainability chaired by our group finance
director, with representatives from across our
businesses and functions. The working
group reports regularly to the board of
directors and Executive Committee on key
developments and initiatives across a range
of sustainable themes. In addition, we have a
series of employee teams dedicated to
championing and implementing initiatives for
charities, communities and the environment.
We participate in and engage with a number
of external sustainability rating agencies and
indices, including the CDP, Manifest, DJSI,
Fitch and MSCI. Our Asset Management
business offers several dedicated Socially
Responsible Investment (“SRI”) funds and
includes environmental, social and
governance (“ESG”) considerations in its
formal stewardship code.
A commitment to acting sustainably is
embedded within our corporate culture and
supported by a range of policies and
procedures. We always strive to act
responsibly, ethically and with integrity, and are
developing meaningful and achievable targets
to help measure and track the good progress
we are making towards our sustainable goals.
In this report we set out how our sustainable
approach is reflected across four key focus
areas: our employees, customers,
communities and the environment.
SUSTAINABLE DEVELOPMENT GOALS
We recognise the growing influence of the
United Nations Sustainable Development
Goals (“SDGs”) as a global framework
promoting action to address worldwide
challenges related to poverty, inequality,
climate and prosperity.
This framework helps us to better understand
our impact and contribution towards global
goals for a more sustainable future, and this
year we began an assessment of how our
business and operational activities relate to
the SDGs. Going forward we will continue to
engage with a range of stakeholders to
enhance our alignment with the SDGs and
further develop our sustainability priorities.
Close Brothers Group plc
Annual Report 2019
44
Sustainability Report
continued
SUPPORTING OUR
EMPLOYEES
WE PLACE A GREAT AMOUNT OF VALUE ON THE
CONTRIBUTION OF OUR PEOPLE, WHO CONTINUE TO
DELIVER THE HIGHEST LEVELS OF SERVICE FOR OUR
CUSTOMERS AND CLIENTS, AND WHO UPHOLD THE
EXPERTISE AND LONGSTANDING RELATIONSHIPS THAT
POSITION US WELL FOR THE FUTURE.
DEVELOPING OUR PEOPLE
During the year we continued to build our
range of programmes designed to attract
and retain talent, with a series of initiatives
promoting development across the group.
All our employees have access to our learning
portal, which offers a wide range of practical
tools, workshops and e-learning across a
range of topics. The average number of
training hours across the group has remained
good, at 7.7 hours per employee.
We require all staff to complete relevant
regulatory training on an annual basis with
further training offered when required, and
continue to maintain a 100% completion
rate of mandatory training for eligible
employees in the year.
Internal career mobility and the need to
identify and support up-and-coming talent
remain important focus areas for our
leadership teams, with regular talent forums
built into our performance management and
succession planning processes. We continue
to run talent development programmes
throughout the group through a series of
structured learning opportunities and
exposure to different teams and networks.
EMPLOYEE ENGAGEMENT
Building a deep and diverse talent pool, and
maintaining the engagement of our people,
remains a core strategic priority for the
group. We are committed to engaging with
our staff to ensure they remain enthusiastic
about their work and their organisation, and
we regularly listen to their feedback to ensure
they feel valued with their views recognised
and acted upon. We engage with our staff
through a regular externally run group-wide
Employee Opinion Survey, which we last
conducted in December 2018.
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. Our latest survey results
showed the group-wide engagement scores
remained high, with an overall score of 88%
consistent with the previous survey. We had
a very strong overall response rate of 89%
which lends credibility to these results.
This comprehensive Employee Opinion
Survey runs on a two-year cycle, allowing our
businesses the opportunity to analyse the
results in detail and formulate meaningful and
effective action plans to take forward. We also
run a shorter pulse survey between cycles to
review progress against our action plans.
Our aim is to maintain those areas of strength
that our employees value the most while
continuing to enhance those areas we
could improve on.
EMPLOYEE ENG AGEMENT
PARTICIPATION IN LONG -TERM
88%
2018: 89%
OWNERSHIP SCHEMES
46%
2018: 45%
Our Sales Academy, launched in 2015,
continues to demonstrate our commitment
to developing entry-level sales talent. The
most recent cohort commenced in
September 2018, comprising a mix of
internal and external candidates with a
strong gender balance. The Sales Academy
remains successful in supporting junior staff
progress into front-office roles through
structured support and on-the-job
development.
The Asset Management division’s Advice
Academy remains a successful programme
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 focuses
on individual leadership development,
management and coaching skills to develop
our pool of future leaders. Over 115
individuals have completed the programme
so far, with the majority progressing
throughout the organisation. Our seventh
cohort will be commencing on the
programme in 2020.
REMUNERATION AND BENEFITS
We believe in rewarding our staff fairly and
transparently, and we therefore work hard to
ensure that remuneration across the group is
linked to clear and transparent objectives.
We are confident that our enhanced benefits
package remains fit for purpose and satisfies
employee expectations.
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 with
our staff. Participation rates in our long-term
ownership schemes remain strong at 46% of
eligible employees.
This year the group has enhanced its
pension auto-enrolment contribution by
more than requirements to 6%. This ensures
a minimum of 9% in total, without requiring
our employees to contribute any more than
their existing level of 3%. The group
continues to pay all staff at or above the
national living wage, which is in excess of the
national minimum wage.
INCLUSION AND EQUALITY
We are an equal opportunities employer and
are committed to ensuring that all our
employees can feel proud to work for us,
regardless of their gender, age, race, ethnicity,
disability, sexual orientation or background.
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Close Brothers Group plc
45
We continue to partner with leading diversity
organisations, including Stonewall, Europe’s
largest LGBTQ+ charity, to help inform our
thinking and activities. This year we have also
commenced our partnership with the
Business Disability Forum.
Training has been delivered on inclusive
leadership for over 400 managers and senior
managers, including our group Executives,
highlighting how behaviours and decisions
drive our culture and enable an environment
where everyone can thrive. All training has
been delivered face-to-face to make it as
impactful as possible.
Flexible working is promoted across the
group wherever possible, and we continue to
review our benefits offering and provide a
variety of family-friendly benefits for our
colleagues to utilise, including enhanced
parental leave and emergency backup care
for children and elderly relations.
Our workforce remains diverse, with 43%
female employees, and we have a broad
age range of employees, with 25% of our
employees being under 30 years old and
19% over 50.
GENDER DIVERSITY
As a diverse and inclusive employer, we are
confident that men and women are paid
equally for performing equivalent roles across
our business. As part of our commitment to
taking all steps possible to see a long-term
change, we are focused on continuing our
efforts 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 40.5% at
5 April 2018, and the overwhelming majority
of our gender pay gap exists because
women hold fewer senior positions within the
group. If we adjust for the fact that we have
more men in senior positions by instead
looking at the differences in average pay
between males and females in the same
salary band, the gap drops to 2.8%.
Further details of our gender pay gap can be
found on our website.
Through a variety of initiatives, we are taking
steps to promote gender balance at all levels.
All our entry-level and formal training
programmes aim for a 50:50 gender split.
This includes our Asset Finance Sales
Academy and our Aspire school leaver and
graduate programmes.
GENDER DIVERSIT Y
Number of board directors1
Number of directors of subsidiaries2
Number of senior managers, other than board directors3
Number of employees, other than board directors and
senior employees
31 July 2019
Male
7
56
161
Female
3
8
94
1,646
1,457
1 Includes non-executive directors, excluded from group headcount calculations. Figures at 31 July 2019.
2 Includes subsidiary directors who are excluded from group headcount calculations.
3 Senior managers defined as those managers with line management responsibility for a line manager, in accordance with
the representation identified in our gender pay gap report. They are generally heads of departments, functions or larger
teams. This figure excludes 19 male and 2 female employees who are reported under directors or subsidiary directors.
A range of development and mentoring
programmes are offered across our different
businesses, which are designed to foster
and enable talented females to thrive and
progress across the group. We partner with
the 30% Club, an institution focused on
developing diverse pools of talent and
promoting better gender balance, and
participate in their leading cross-company
mentoring scheme.
We are a signatory of the Women in Finance
Charter, a government-backed initiative
dedicated to improving gender balance in
senior positions across financial services,
and this year Close Brothers Asset
Management became founding partners of
the WealthiHer Network, an important
industry body that is working to better serve
the needs of women and their wealth.
At the end of the financial year we exceeded
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. We
were pleased to have already reached our
2020 target of over 30% female senior
managers as at 31 July 2019, and will be
working towards implementing a more
ambitious target for 2025.
PROTECTING OUR EMPLOYEES
We have a range of group-wide policies in
place to protect and maintain a safe and
healthy working environment, which include:
DIGNITY AT WORK POLICY
Our Dignity at Work Policy outlines the type
of behaviour that the company considers to
be unacceptable and to explain what
solutions there are if any employee has
experienced or believes someone else has
experienced any discrimination,
harassment or bullying at work.
We encourage our employees to speak up if
they experience any behaviour that does not
embody our cultural attributes, further
described by the principles and values within
our businesses.
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.
EMPLOYEE HEALTH AND
SAFETY POLICY
Our Health and Safety Policy ensures that we
continue to provide 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 ongoing progress in
successfully raising the profile of health and
safety across the business. This year we
recorded 30 incidents across all of our sites,
of which only two were reportable.
We continue to use an online risk
assessment tool to manage site-specific
risks as appropriate and our Display Screen
Equipment risk assessment programme.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
46
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Sustainability Report
continued
SUPPORTING OUR
CUSTOMERS
WE BELIEVE IN PUTTING OUR CUSTOMERS AND CLIENTS
FIRST, AND REMAIN FOCUSED ON UPHOLDING OUR
RELIABLE, HIGH QUALITY SERVICE AND PERSONAL
APPROACH. WE RECOGNISE THAT PUTTING CUSTOMERS’
INTERESTS AT THE HEART OF OUR BUSINESS IS CENTRAL
TO OUR SUCCESS.
Our commitment to
maintaining high standards
of service, delivering
specialist expertise and
building long-lasting
relationships with our
customers and partners
allows us to add value over
and above providing finance to them,
helping them to grow and thrive.
We are committed to behaving ethically and
responsibly in all our dealings with our
customers and partners, and continue to be
proud of the long-term relationships we build
with them, and the consistently high levels of
repeat business that they entrust us with.
A CLEAR CUSTOMER VISION
Our group-wide purpose to help the people
and businesses of Britain thrive over the long
term underlines our commitment to our
customers and clients, and to the people
who serve them. We work with businesses
of many sizes to help support their growth,
improve their infrastructure or invest in new
assets, and assist individuals with a variety of
products and services to help manage their
finances, execute trades, protect their money
and plan for the future.
With a wide variety of customers and clients,
it is essential that we have a deep
understanding of their needs and can
respond to rapid changes in technology and
to the markets they operate in. This
understanding allows us to shape a
customer vision for each of our businesses
to ensure that the products, services and
expertise we provide continue to deliver on
our purpose.
UNDERSTANDING CUSTOMER NEEDS
We are dedicated to improving the experience
and satisfaction of all our customers and
partners, and we firmly believe that customer
feedback and insight is essential to maintain
the strong relationships across our businesses.
We have a dedicated Customer Insight,
Experience and Design team who work with
our businesses to conduct in-depth qualitative
research, define customer and partner
journeys and identify opportunities for
improvement. This year the team completed
in-depth experience design projects with our
Asset Finance, Premium Finance, Invoice
Finance and Asset Management businesses,
and visited over 250 clients for research
purposes. Building on work from previous
years, they also supported experience
improvements in our Motor Finance, Novitas
and savings businesses.
Our maturing “Voice of the Customer and
Partner” programme enables us to capture
feedback at key moments of truth in the
customer journey and use this to prioritise our
strategic and continuous improvement
programmes. This also allows us to follow up
with customers on any occasions where our
high minimum standards have not been met.
BESPOKE ASSE T MANAGEMENT NPS
+56
2018: +61
PREMIUM FINANCE NPS
+51
2018: +50
RE TAIL DEPOSITS BR AND NPS
+73
2018: +73
PROPERT Y REPE AT BUSINESS
78%
2018: 77%
Annual Report 2019
Strategic Report
Governance Report
Financial Statements
Close Brothers Group plc
47
This year we have begun to establish
customer and client councils in several of our
businesses to collect feedback and deepen
our understanding of 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.
FOCUS ON CUSTOMER SATISFACTION
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 reflect 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 continue to achieve strong NPS scores
across our businesses, and this year we were
pleased to achieve a strong +79 NPS for our
Asset Finance business and +73 from our
retail savings customers. Furthermore,
amongst our intermediaries our Motor
Finance business achieved a strong +72 NPS
from our dealer partners. Considered
alongside our high levels of repeat business,
these evidence the strength of our
relationships and the trust our customers
place in us.
DIGITAL SERVICES WITH A PERSONAL
TOUCH
Our research and customer feedback shows
that our customers and partners value the
service, expertise and personal touch that
we provide. It also indicates that customers
want the choice of how and when to engage
and do business with us. We therefore aim to
maintain a personal human touch for our
customers, augmented with digital
experiences where the customer desires it.
This year we have continued to improve and
expand the digital services we offer to our
customers and partners, and have focused
on delivering simple, consistent and
accessible experiences through our digital
channels. We have also invested in a digital
design system to empower our businesses
to be more agile in the delivery of new and
improved services.
RESPONSIBLE FINANCE
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. These include:
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.
PRIVACY POLICY
Our Privacy Policy ensures the protection and
correct treatment of client data in accordance
with the Data Protection Act 1998 and the
General Data Protection Regulation (“GDPR”).
We have a strong 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.
TREATING CUSTOMERS FAIRLY
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.
During the last year we implemented an
operational improvements programme
around our complaints handling to drive
deeper insight and enable continuous
improvement to our customer experience.
This involved system upgrades, enhanced
staff training, improved processes and root
cause analysis to help us optimise the
customer journey, reduce complaints and
engage constructively with regulatory bodies.
We recognise that our suppliers are a key part
of the service we provide to our customers,
and are committed to treating them fairly. We
are therefore pleased to maintain our
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.
MEASURING AND MONITORING
CUSTOMER EXPERIENCE
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.
These principles are underpinned by our
experience measures and our conduct risk
framework, which are available to the people
who run our businesses, senior management
and the board.
Fundamental to ensuring we treat customers
fairly and deliver on our promises are our
customer forums, conducted across the
Banking division and at business unit level,
which have now been in place for over five
years and continue to evolve. These forums
allow us to provide a level of assurance
against our five customer principles, examine
feedback from our customers and partners
and decide on the best course of action to
take, while also inspiring possibilities for
improved service and value for our
customers and partners.
Senior management regularly visit our
customers and partners to obtain direct
feedback, which we also gather by inviting our
customers to present at our customer forums.
Close Brothers Group plc
Annual Report 2019
48
Sustainability Report
continued
SUPPORTING OUR
COMMUNITIES
WE ARE COMMITTED TO CONTRIBUTING LONG-TERM
VALUE AND MAKING A LASTING, POSITIVE IMPACT ON THE
SOCIETY IN WHICH WE OPERATE. WE DO THIS BY
ENGAGING WITH OUR COMMUNITY AND OUR CLIENTS’
COMMUNITIES ACROSS ALL OUR BUSINESSES AND
MAINTAINING A RANGE OF PROGRAMMES TO SUPPORT
THE CAUSES THAT BENEFIT THOSE AROUND US.
SME APPRENTICES
100
2018: 80
TRUSTEE APPOINTMENTS
181
2018: 55
SUPPORTING SMEs
We pride ourselves on understanding the
needs of SMEs and on helping them to
achieve their ambitions. Our specialist
expertise and deep industry knowledge
allow us to support our customers’ unique
commercial ambitions, and by better
understanding businesses and their
communities our local teams can make
fast, reliable lending decisions when they
need them the most.
The Close Brothers SME Apprentice
Programme is part of our long-established
commitment to supporting small and medium
sized enterprises within our local communities.
We believe the SME sector is the lifeblood of
the UK economy and strongly encourage the
role of apprentices in helping SMEs grow. Our
SME Apprentice Programme is now entering
its fifth phase and continues to contribute to
the funding of new apprentices in the
manufacturing and transport sectors, helping
SMEs secure the skills they need for the future.
To date we have funded 100 of these
apprentices in the manufacturing sector in and
around the Sheffield and Birmingham areas.
SUPPORTING SOCIAL MOBILITY
We are supportive of social mobility and
creating an organisation with equal
opportunities for all, regardless of
background. Our established programmes
for school leavers and graduates contribute
to the development of our new talent
pipeline, providing on-the-job learning and
supporting study towards professional
qualifications. Our Aspire programme
provides school leavers with the opportunity
to start their careers in a professional,
challenging and fast-paced business.
This year we signed up to the Social Mobility
Pledge, a campaign to improve social
mobility in the UK. By signing up we have
committed to working towards the three
steps outlined in the Pledge, consisting of
partnership with local schools to provide
coaching, advice and mentoring to students
from disadvantaged backgrounds, providing
access through structured work experience
or apprenticeship opportunities, and
adopting open recruitment practices which
promote a level playing field.
In line with our commitments as part of the
Pledge, we continue to work with the charity
UpReach on our internship programme for
undergraduates from less-advantaged
backgrounds. The programme is currently in
its second year.
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
49
SOCIAL RESPONSIBILITY
We are committed to acting responsibly
throughout all our activities, and have a
number of group-wide policies and
regulations in place to ensure we continue to
operate in a socially responsible and
compliant manner, including:
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.
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.
TAX STRATEGY
We are committed to complying with our tax
obligations and doing so in a manner
consistent with the spirit as well as the letter of
tax laws. This includes a transparent and
cooperative relationship with the tax authorities.
Our tax obligations arise mainly in the UK
where our operations and customers are
predominantly based. Our straightforward
business model reduces the complexity of our
tax affairs and helps us maintain a lower risk
tax profile. Further details of our approach to
tax can be found on our website.
OUR EMPLOYEES IN THE COMMUNITY
Employee volunteers are key contributors to
the planning and running of community and
charitable events, and we actively encourage
our staff to fundraise and volunteer for the
charities they support. The Close Brothers
Matched Giving Scheme donates £8 per
hour of voluntary time given by employees.
This year we also launched our Employee
Volunteering Policy, which allows all employees
to take one paid volunteering day each year.
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, and since inception, over 1,100
professionals have taken part. This year we
launched further programmes in The Midlands
and Scotland in addition to our programmes in
London, Manchester and Bristol.
Our Emerging Chairs programme is an
evolution of the Trustee Leadership
programme and is aimed at existing Trustees
who wish to become Chairs. Further
Emerging Chairs programmes are scheduled
in London and our first in Manchester over
the coming months.
CHARITABLE ACTIVITIES
We have a dedicated committee for
charitable and community activities chaired
by our group head of human resources and
supported by employees from across the
group. This committee meets regularly to
discuss and propose new initiatives with
input from our control functions when
required. We also have several local
committees which plan and run initiatives to
raise funds for local charities.
As part of our regular employee opinion
survey, we ask our employees to choose their
preferred community and health charity
partners. This year, Make-A-Wish Foundation,
who grant wishes for children with life-
threatening illnesses, was selected as our
community charity partner and Cancer
Research UK as our health charity partner,
the latter now for seven consecutive years.
Funds raised from group-wide activities are
equally split between these two charities.
The success of our annual group-wide
charity week, consisting of a wide range of
locally organised events for staff as well as
group-wide initiatives, continues to build
each year. During this year’s 2019 charity
week we collectively raised over £140,000,
an 11% increase on the amount raised in
2018’s edition.
The Close Brothers Matched Giving
Scheme matches 50% of funds raised for
charity 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 13% of employees
across the group are signed up to Payroll
Giving, achieving us a ninth consecutive year
of the Payroll Giving Quality Mark Gold Award,
which is a standard we now target ourselves
on maintaining. Significantly, over 180 different
charities are now supported on an ongoing
basis through the generosity of our staff.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
50
Sustainability Report
continued
SUPPORTING OUR
ENVIRONMENT
IT IS NOW WIDELY RECOGNISED THAT FINANCIAL SERVICES
COMPANIES HAVE AN IMPORTANT PART TO PLAY IN
SUPPORTING THE TRANSITION TO A CARBON NEUTRAL
ECONOMY AND ADDRESSING THE RISKS POSED BY
CLIMATE CHANGE. CLOSE BROTHERS TAKES THESE
CHALLENGES VERY SERIOUSLY, AND WE WORK TO LIMIT
THE IMPACT OF OUR OPERATIONS ON THE ENVIRONMENT
AND TO TAKE ACTIONS THAT MAKE A POSITIVE
CONTRIBUTION TO THE WORLD AROUND US.
GHG SCOPE 1 AND 2 EMISSIONS BY
DIVISION (tCO2e)
Group
Banking
Asset
Management
Securities
686
658
2,412
2,861
761
555
849
636
2019
2018
REDUCTION IN SCOPE 2 ELECTRICITY
17%
2018: 23%
REDUCTION IN SCOPE 1 FUEL (OWNED
VEHICLES)
14%
2018: 28%
Our green energy lending
business has been a leading
provider of finance to the
renewable energy sector for a
number of years, supporting
schemes for wind, solar and
hydro power developments.
We are also aware of our
responsibility to protect natural resources
and act sustainably, and continue to monitor
ways to lower our energy consumption,
reduce emissions and increase recycling.
You can read more about our approach to
managing the risks and uncertainties
presented by climate change on
pages 18 to 22.
OUR ENVIRONMENTAL STRATEGY
During the year we implemented a
comprehensive five-year environmental
strategy, developed in partnership with our
third-party environmental consultants.
As part of this process we also formalised
an internal Environmental Policy outlining our
approach and commitments to managing
our environmental sustainability. Our
commitments under this policy include:
• Compliance with all environmental
legislation and codes of practice
throughout the different areas we operate
in and, where possible, demonstrate best
practice in environmental stewardship;
• Continue to monitor and report on our
environmental footprint both internally
and externally;
• Reduce our direct environmental impact
from our operations through the
introduction of various initiatives related to
waste reduction and management, and
our use of transport, energy and water;
• Minimise unnecessary consumption,
improve rates of recycling and promote the
use of recycled materials wherever possible;
• In particular, we will focus on energy
efficiency, the purchase of renewable
energy and the reduction of emissions
from our fleet vehicles;
• Over the longer term aim to reduce our
indirect environmental impact by working
with our value chain and promoting
efficient and responsible behaviour from
both our customers and suppliers; and
• Raise awareness of environmental issues
and promote responsible behaviour
amongst our employees by engaging them
through our “Green Team” of employee
representatives, undertaking group wide
initiatives and activities, and regularly
conducting staff environmental surveys.
To help focus our efforts on achieving a
positive impact, we have now set ourselves
targets of achieving zero waste to landfill and
a 20% improvement in fleet vehicle
emissions by 2021. We are also examining
the energy efficiency of our head office plant,
with plans to invest to enable a significant
improvement in its performance.
OUR ENVIRONMENTAL IMPACT
We direct each of our businesses to manage
their resources and recycling locally and
work closely with all of the locations we
operate in to identify new and additional
ways to reduce energy use. Waste recycling
is encouraged in all our offices, and our head
office uses a waste contractor that ensures
zero waste goes to landfill.
As in prior years, we monitor our energy
consumption and greenhouse gas emissions
across the business via a third-party
provider. We also continue to participate in
the CDP (formerly the “Carbon Disclosure
Project”), which allows us to disclose our
greenhouse gas emissions and our
approach to managing climate related
impact on a voluntary basis.
We recognise that most of the impact we
have on our environment is a result of staff
travel, our supply chain and our office
network. We encourage our employees to
reduce their own environmental impact on an
individual basis by leasing low emission cars
and participating in the cycle to work scheme.
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 2019, our total GHG emissions were 4,414
tonnes of carbon dioxide equivalent
(“tCO2e”), equating to 1.29 tCO2e per
employee, down 12% overall and 16% per
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
51
employee since 2018. Our continued efforts
towards our environmental impact are
reflected by this reduction in our total
emissions in 2019.
Our Scope 1 fuel emissions from company
vehicles continue to fall, benefiting from a
combination of lower overall mileage in the
year and a reduction in the average CO2
emissions from our vehicles to 89.5 gCO2/
km (2018: 99.0 gCO2/km). This reflects a
significant and sustained improvement from
an increase in the number of more fuel
efficient and alternative fuel vehicles such as
plug in hybrids, which have been added to
our vehicle fleet.
Our Scope 2 electricity consumption is our
largest source of GHG emissions but
continues to reduce on previous years,
which demonstrates our ongoing
commitment to improving the energy
efficiency of 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
10% in the period.
Due to its relative size, the Banking division
continues to account for the majority of our
GHG emissions.
GHG EMISSIONS SUMMARY (tCO 2e)
Scope
Scope 1
Scope 2
Total GHG emissions
Average number of employees
Total per employee
GHG emissions source
Fuel (Buildings)1
Fuel (Owned vehicles)
Electricity
2019
337
1,970
2,107
4,414
3,416
20182
191
2,288
2,525
5,004
3,234
1.29
1.55
1 2019 figures for Scope 1 Fuel (Buildings) now reflect improved data collection for non-head office locations.
2 2018 figures for Fuel (Owned vehicles) and Electricity re-presented to reflect updated figures.
A full breakdown of our 2019 GHG
emissions, together with corresponding data
for 2018, is shown in the table above.
as an intensity metric to enable a
comparable analysis in future disclosures.
CALCULATION
We continue to gather increasing levels of
data with the assistance of an independent
third-party environmental analytics and
reporting company. This enables us to verify
the accuracy of our data and helps us
monitor our performance and develop
strategic insights with plans of action.
We continue to monitor and report our GHG
emissions on an ongoing basis and
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.
This Strategic Report was approved by the
board and signed on its behalf by:
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 also disclose the emissions per employee
PREBEN PREBENSEN
CHIEF EXECUTIVE
24 September 2019
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
52
Board of Directors
M I K E B I G G S
C H A I R M A N
P R E B E N P R E B E N S E N
C H I E F E X E C U T I V E
M I K E M O R G A N
G R O U P F I N A N C E D I R E C T O R
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
Mike was appointed to the
board as group finance
director in November 2018.
L E S L E Y J O N E S
I N D E P E N D E N T N O N -
E X E C U T I V E D I R E C T O R
Board appointment
Lesley was appointed a director
in December 2013.
Background and experience
Mike has over 40 years’
experience of the financial
services industry. Mike was
previously chairman of Resolution
Limited, then a 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. Mike is an Associate of the
Institute of Chartered Accountants
in England and Wales.
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 and a member of its
Nomination Committee.
Background and experience
From 2010 to 2018 Mike was chief
financial officer of Close Brothers’
Banking division, and since 2010
he has been a director of Close
Brothers Limited, the group’s
banking subsidiary. Mike is a
chartered accountant and chair
of the ICAEW Financial Services
Faculty Board and ICAEW Council
member. Prior to joining Close
Brothers, Mike held a number of
senior roles at Scottish Provident
and RBS, most recently as
finance director of the Wealth
Management Division of RBS.
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
Moody’s Investors Service
Limited, N Brown Group plc and
ReAssure Group plc (where she
also chairs the Risk Committee).
Lesley is also a non-executive
director of Northern Bank
Limited but will stand down from
that role on 25 September 2019.
G E O F F R E Y H O W E
S E N I O R I N D E P E N D E N T
D I R E C T O R
B R I D G E T M A C A S K I L L
I N D E P E N D E N T N O N -
E X E C U T I V E D I R E C T O R
O L I V E R C O R B E T T
I N D E P E N D E N T N O N -
E X E C U T I V E D I R E C T O R
P E T E R D U F F Y
I N D E P E N D E N T N O N -
E X E C U T I V E D I R E C T O R
Board appointment
Geoffrey was appointed a
director in January 2011
and is the company’s senior
independent director.
Board appointment
Bridget was appointed a
director in November 2013.
Board appointment
Oliver was appointed a
director in June 2014.
Board appointment
Peter was appointed a
director in January 2019.
Background and experience
Background and experience
Background and experience
Background and experience
Geoffrey was previously chairman
Bridget is a non-executive director
Oliver is chief financial officer of
Peter is chief customer officer
of Jardine Lloyd Thompson
Group plc, Railtrack plc and
Nationwide Building Society, a
of Jupiter Fund Management
plc and of Jones Lang LaSalle
Incorporated, and chairman of
McGill & Partners Ltd. He was
of Just Eat plc and in January
formerly chief financial officer
of Hyperion Insurance Group
2019 was appointed as interim
chief executive officer and a
non-executive director of Investec
Cambridge Associates LLC.
Limited and finance director of
director of Just Eat plc. Between
plc and JP Morgan Overseas
Bridget was formerly chairman
LCH. Clearnet Group Limited
Investment Trust plc, a director
of First Eagle Holdings LLC and
and of Novae Group plc. Oliver
2011 and 2018, Peter held
a number of senior roles at
of Robert Fleming Holdings
a senior adviser to First Eagle
is a chartered accountant and
easyJet plc, including as chief
Limited and managing partner
Investment Management LLC,
previously worked for KPMG, SG
commercial officer and group
of law firm Clifford Chance.
of which she was president and
Warburg, Phoenix Securities (later
commercial director. Prior to that,
chief executive officer. Bridget was
Donaldson Lufkin Jenrette) and
Peter held roles at Audi UK Ltd
also a trustee of the TIAA-CREF
Dresdner Kleinwort Wasserstein,
and Barclays Bank plc over a
funds and a non-executive
where he was managing director
period of more than 15 years.
director of Prudential plc, Scottish
of investment banking. Oliver
& Newcastle plc, J Sainsbury
was also a non-executive director
of Rathbone Brothers plc.
plc, Hillsdown Holdings plc
and of the Federal National
Mortgage Association in the US.
Committee membership
Mike is chairman of
the Nomination and
Governance Committee.
Committee membership
Lesley is chairman of the Risk
Committee and a member of the
Audit, Remuneration, and
Nomination and Governance
Committees.
Committee membership
Committee membership
Committee membership
Committee membership
Geoffrey is a member of
the Audit, Remuneration,
Risk, and Nomination and
Governance Committees.
Bridget is chairman of the
Remuneration Committee
and a member of the Audit,
Risk, and Nomination and
Governance Committees.
Oliver is chairman of the
Audit Committee and a
member of the Remuneration,
Risk, and Nomination and
Governance Committees.
Peter is a member of the
Risk Committee.
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
53
M I K E B I G G S
C H A I R M A N
P R E B E N P R E B E N S E N
C H I E F E X E C U T I V E
M I K E M O R G A N
L E S L E Y J O N E S
G R O U P F I N A N C E D I R E C T O R
I N D E P E N D E N T N O N -
G E O F F R E Y H O W E
S E N I O R I N D E P E N D E N T
D I R E C T O R
B R I D G E T M A C A S K I L L
I N D E P E N D E N T N O N -
E X E C U T I V E D I R E C T O R
O L I V E R C O R B E T T
I N D E P E N D E N T N O N -
E X E C U T I V E D I R E C T O R
P E T E R D U F F Y
I N D E P E N D E N T N O N -
E X E C U T I V E D I R E C T O R
Board appointment
Geoffrey was appointed a
director in January 2011
and is the company’s senior
independent director.
Background and experience
Geoffrey was previously chairman
of Jardine Lloyd Thompson
Group plc, Railtrack plc and
Nationwide Building Society, a
non-executive director of Investec
plc and JP Morgan Overseas
Investment Trust plc, a director
of Robert Fleming Holdings
Limited and managing partner
of law firm Clifford Chance.
Board appointment
Bridget was appointed a
director in November 2013.
Board appointment
Oliver was appointed a
director in June 2014.
Board appointment
Peter was appointed a
director in January 2019.
Background and experience
Bridget is a non-executive director
of Jupiter Fund Management
plc and of Jones Lang LaSalle
Incorporated, and chairman of
Cambridge Associates LLC.
Bridget was formerly 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. Bridget was
also 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.
Background and experience
Oliver is chief financial officer of
McGill & Partners Ltd. He was
formerly chief financial officer
of Hyperion Insurance Group
Limited and finance director of
LCH. Clearnet Group Limited
and of Novae Group plc. Oliver
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
Peter is chief customer officer
of Just Eat plc and in January
2019 was appointed as interim
chief executive officer and a
director of Just Eat plc. Between
2011 and 2018, Peter held
a number of senior roles at
easyJet plc, including as chief
commercial officer and group
commercial director. Prior to that,
Peter held roles at Audi UK Ltd
and Barclays Bank plc over a
period of more than 15 years.
Committee membership
Geoffrey is a member of
the Audit, Remuneration,
Risk, 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.
Committee membership
Peter is a member of the
Risk Committee.
Board appointment
Board appointment
Mike was appointed a director
Preben was appointed to
in March 2017 and chairman of
the board as chief executive
the board from 1 May 2017.
in April 2009 when he
joined Close Brothers.
Board appointment
Mike was appointed to the
board as group finance
director in November 2018.
E X E C U T I V E D I R E C T O R
Board appointment
Lesley was appointed a director
in December 2013.
Background and experience
Background and experience
Background and experience
Background and experience
Mike has over 40 years’
experience of the financial
services industry. Mike was
Preben previously spent his career
From 2010 to 2018 Mike was chief
Lesley has extensive banking
in a number of senior positions
financial officer of Close Brothers’
experience, having previously
at JP Morgan over 23 years, as
Banking division, and since 2010
held several line management
previously chairman of Resolution
well as being chief executive of
he has been a director of Close
positions within Citigroup and
Limited, then a FTSE 100 UK life
Wellington Underwriting plc from
Brothers Limited, the group’s
2004 to 2006, and then chief
banking subsidiary. Mike is a
was group chief credit officer of
Royal Bank of Scotland plc from
investment officer and a member
chartered accountant and chair
2008 to 2014. Lesley is also a
assurance business, and has
acted as both chief executive
officer and group finance director
of the group executive committee
of the ICAEW Financial Services
non-executive director of
of Resolution plc. Prior to that
at Catlin Group Limited. Preben
Faculty Board and ICAEW Council
Moody’s Investors Service
he was group finance director of
is also a non-executive director
member. Prior to joining Close
Limited, N Brown Group plc and
Aviva plc. Mike is also chairman
of The British Land Company
Brothers, Mike held a number of
ReAssure Group plc (where she
of Direct Line Insurance Group
PLC and a member of its
senior roles at Scottish Provident
also chairs the Risk Committee).
plc. Mike is an Associate of the
Nomination Committee.
Institute of Chartered Accountants
in England and Wales.
and RBS, most recently as
finance director of the Wealth
Management Division of RBS.
Lesley is also a non-executive
director of Northern Bank
Limited but will stand down from
that role on 25 September 2019.
Committee membership
Lesley is chairman of the Risk
Committee and a member of the
Audit, Remuneration, and
Nomination and Governance
Committees.
Committee membership
Mike is chairman of
the Nomination and
Governance Committee.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
54
Executive Committee
P R E B E N P R E B E N S E N
C H I E F E X E C U T I V E
A N G E L A Y O T O V
G R O U P G E N E R A L C O U N S E L
M I K E M O R G A N
G R O U P F I N A N C E D I R E C T O R
M A R T I N A N D R E W
A S S E T M A N A G E M E N T
C H I E F E X E C U T I V E
R E B E K A H E T H E R I N G T O N
G R O U P H E A D O F H U M A N
R E S O U R C E S
A D R I A N S A I N S B U R Y
B A N K I N G D I V I S I O N
M A N A G I N G D I R E C T O R
R O B E R T S A C K
G R O U P C H I E F R I S K O F F I C E R
P H I L I P YA R R O W
W I N T E R F L O O D C H I E F E X E C U T I V E
M A R T Y N AT K I N S O N
G R O U P C H I E F O P E R AT I N G O F F I C E R
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Close Brothers Group plc
55
Directors’ Report
The directors of the company present their report for the year ended
31 July 2019.
The Strategic Report set out on pages 1 to 51 of this Annual Report,
and the Corporate Governance Report, the committee reports and the
Directors’ Remuneration Report set out on pages 59 to 96 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 163 of this Annual Report.
RESULTS AND DIVIDENDS
The consolidated results for the year are shown on page 104 of the
financial statements. The directors recommend a final dividend for the
year of 44p (2018: 42p) on each ordinary share which, together with
the interim dividend of 22p (2018: 21p) paid in April 2019, makes an
ordinary distribution for the year of 66p (2018: 63p) per share. The final
dividend, if approved by shareholders at the 2019 Annual General
Meeting (“AGM”), will be paid on 26 November 2019 to shareholders
on the register at 11 October 2019.
DIRECTORS
The names of the directors of the company at the date of this report,
together with biographical details, are given on pages 52 and 53
of this Annual Report. All the directors listed on those pages were
directors of the company throughout the year, apart from Mike
Morgan and Peter Duffy, who were appointed as directors on
15 November 2018 and 1 January 2019, respectively. In addition,
Elizabeth Lee served as a director throughout the year, retiring on
31 July 2019, and Jonathan Howell served as a director for part of the
year, standing down from the board at the conclusion of the last AGM
on 15 November 2018.
In accordance with the UK Corporate Governance Code, each of the
current directors will retire at the 2019 AGM and offer themselves for
reappointment at that meeting.
Mike Morgan’s appointment as a director and group finance director
took effect at the 2018 AGM on 15 November 2018, having been
announced by the company on 27 June 2018. Further details on the
robust search process that resulted in Mike’s appointment can be
found in the company’s 2018 Annual Report.
Jonathan Howell did not submit himself for reappointment at the
company’s 2018 AGM, having informed the board of his decision to
leave the company to pursue the next stage of his career.
On 19 October 2018, the company announced that Elizabeth Lee
would be retiring as an executive director and group head of legal and
regulatory affairs on 31 July 2019.
On 15 November 2018, the company announced that, following a
search process overseen by the Nomination and Governance
Committee, the board had decided to appoint Peter Duffy as an
independent non-executive director with effect from 1 January 2019.
Peter is a member of the board’s Risk Committee and, like each of
the company’s other directors, is also a director of the group’s
Banking subsidiary, Close Brothers Limited. More information on the
process that resulted in Peter’s appointment can be found in the
Report of the Nomination and Governance Committee on page 74 of
this Annual Report.
On 24 September 2019, the company announced that Preben
Prebensen had decided to step down after ten years as chief
executive and a member of the board. Preben will remain with the
group for the next 12 months to ensure a smooth handover and will
stand for reappointment as a director at the company’s AGM on
21 November 2019. The board will commence a thorough
search for a successor, and will announce further details in due
course and in next year’s 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 80 and 81 of this Annual Report.
DIRECTORS’ INTERESTS
The directors’ interests in the share capital and listed debt instruments of
the company at 31 July and 19 September 2019 are set out on pages
94 and 96 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 64 and 65 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 2019, 152,060,290
ordinary shares were in issue, of which 664,109 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 2018 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 £12,620,574;
• allot shares up to an aggregate nominal amount of £25,241,148, for
the purposes of a rights issue;
• allot shares having a nominal amount not exceeding in aggregate
£1,893,086 for cash without offering the shares first to existing
shareholders in proportion to their holdings;
• allot shares having a nominal amount not exceeding an additional
£1,893,086, for the purpose of financing a transaction determined
by the directors to be an acquisition or other capital investment as
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
56
defined by the Statement of Principles on Disapplying Pre-Emption
Rights published by the Pre-Emption Group;
• allot shares having a nominal amount not exceeding in aggregate
£4,732,715 in relation to any issue by the company of any Additional
Tier 1 instruments, where the directors consider this desirable,
including for the purpose of complying or maintaining compliance
with regulatory targets or requirements; and
• make market purchases of up to 15,144,688 of the company’s
ordinary shares, equivalent to 10% of the company’s issued share
capital at the time.
Since the date of the company’s 2018 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 142 of the financial statements.
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
21 November 2019, 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
shares purchased in the market (and held either in treasury or in
the employee share trust).
During the year the company made market purchases of 325,000
Treasury Shares with an aggregate nominal value of £81,250,
representing 0.21% of its issued share capital, for an aggregate
consideration of £4.96 million. It transferred 275,802 shares out of
treasury, to satisfy share option awards, for a total consideration of
£3.1 million.
At 31 July 2019, the company held 664,109 Treasury Shares with a
nominal value of £0.17 million. The maximum number of Treasury
Shares held at any time during the year was 937,213 with a nominal
value of £0.23 million.
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 will only vote on those shares in accordance with the
instructions given to the trustee and in accordance with the terms of the
trust deed. 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
142 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
384,347 ordinary shares.
SUBSTANTIAL SHAREHOLDINGS
Details of substantial shareholdings in the company are set out in the
Corporate Governance Report on page 68 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/investor-relations/investor-
information/corporate-governance.
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
relevant requirements can be found in this Directors’ Report and the
Corporate Governance Report, committee reports and Directors’
Governance ReportFinancial StatementsStrategic ReportDirectors’ Reportcontinued Annual Report 2019
Close Brothers Group plc
57
Remuneration Report on pages 59 to 96 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 1 to 51 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 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 42 to 51 of the Strategic Report.
APPROACH TO DIVERSITY
The group is committed to promoting diversity and inclusion across
its businesses. Information on the group’s approach to diversity can
be found on pages 44 and 45 of the Strategic Report. More
information on diversity at board level and the board’s oversight of
diversity initiatives can be found on page 60 of the Corporate
Governance Report.
SIGNIFICANT AGREEMENTS AFFECTED BY A CHANGE
OF CONTROL
A change of control of the company, following a takeover bid, may
cause a number of agreements to which the company is a party to
take effect, alter or terminate. These include certain insurance
policies, bank facility agreements and employee share plans.
The group had committed facilities totalling £1.7 billion at 31 July 2019
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 10
to 14, 17 to 20 and 28 to the financial statements. The notes begin
on page 111.
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 66 and 67, and the risks
associated with the group’s financial instruments are analysed in
note 28 on pages 145 to 156 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 (2018: £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 49 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 56
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.
RESOLUTIONS AT THE 2019 AGM
The company’s AGM will be held on 21 November 2019. 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 including
in relation to any issue of any Additional Tier 1 instruments, 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 2019
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.
GOING CONCERN
The group has a strong, proven and conservative business model
and has traded profitably during the year. It is well positioned in each
of its core businesses, well capitalised, soundly funded and has
adequate access to liquidity.
After making enquiries, the directors have a reasonable expectation
that the company and the group have adequate resources to
continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in
preparing the Annual Report.
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 2022.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
58
The board considers three years to be an appropriate period for the
assessment to be made. A period of three years has been chosen
because it is the period covered by the group’s strategic planning
cycle. Accordingly, we adopt the same three-year period for our
regulatory and internal stress testing processes, including: (i) the
Internal Capital Adequacy Assessment Process (“ICAAP”), which
forecasts key capital requirements; (ii) the Internal Liquidity Adequacy
Assessment Process (“ILAAP”), which identifies liquidity
requirements; and (iii) other group-wide internal stress testing.
The directors review and approve the group’s strategy and three-year
plan 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 annual strategy and planning process includes:
• the board reviewing the group’s strategy, risk appetite and
objectives in the context of the operating environment and macro
economy;
• the development of plans and budgets in line with the group
objectives, strategy and risk appetite, with rigorous review and
challenge taking place from both divisional and group executives; and
• scenario analysis to test capital and funding resources.
In making this assessment, the directors have considered a wide
range of information, including:
• the principal and emerging risks which could impact the
performance of the group – please see the Principal Risks and
Uncertainties on pages 18 to 22;
• the group’s current financial position and prospects – please see
the Financial Overview on pages 26 to 37;
• the group’s business model and strategy – please see Business
Model, and Strategy and Key Performance Indicators on pages 14
to 17; 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 the Risk and Control Framework on pages
66 and 67.
The directors have also considered the results from the following:
• the ICAAP, which includes both stress testing and scenario analysis.
At a group level two scenarios are run, one based on the latest PRA
scenarios, the other representing an alternative severe, but plausible,
scenario. Both take account of the availability and likely effectiveness
of mitigating actions that could be taken by management to avoid or
reduce the impact or occurrence of underlying risks;
• the annual review of the Recovery Plan where reverse stress testing
is employed to support the identification of potential adverse
circumstances and events, and test the efficiency and
effectiveness of recovery actions and planning; and
• the ILAAP, which is undertaken to assess the group’s liquidity
across a range of market-wide and idiosyncratic scenarios
demonstrating the ongoing strength of the group’s funding and
liquidity model.
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.
DIRECTORS’ RESPONSIBILITY STATEMENT
The directors, whose names and functions are listed on pages 52
and 53, are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulation.
By order of the board
ALEX DUNN
COMPANY SECRETARY
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
24 September 2019
Governance ReportFinancial StatementsStrategic ReportDirectors’ Reportcontinued Corporate Governance Report
MICHAEL N. BIGGS
CHAIRMAN
ON BEHALF OF THE BOARD, I AM PLEASED
TO INTRODUCE THE CORPORATE
GOVERNANCE REPORT FOR THE YEAR
ENDED 31 JULY 2019. THE PAGES THAT
FOLLOW PROVIDE DETAIL ON THE GROUP’S
GOVERNANCE STRUCTURE, ITS RISK AND
CONTROL FRAMEWORK, AND KEY
ACTIVITIES UNDERTAKEN BY THE BOARD
AND ITS COMMITTEES DURING THE YEAR TO
ENSURE EFFECTIVE DECISION-MAKING AND
OVERSIGHT OF THE GROUP’S STRATEGY,
BUSINESS MODEL AND PERFORMANCE.
CHAIRMAN’S INTRODUCTION
At Close Brothers we firmly believe in the important role that
strong corporate governance and effective board oversight play
in supporting long-term, sustainable success for shareholders
and other stakeholders, and delivery of the group’s strategy.
The board is committed to maintaining a robust and effective
corporate governance and risk management framework, and
I am pleased to report that, once again, the company has
complied with the principles and provisions of the 2016 UK
Corporate Governance Code throughout the year. Further
detail on how we complied appears later in this report.
During the year, the board and its committees have spent time
considering recent corporate governance reforms, and making
further enhancements to the company’s governance framework
in line with the new Code which applies to the financial year
ending 31 July 2020. The company will report on compliance
against the new Code in next year’s Annual Report.
The board was refreshed during the year with the appointments
of Mike Morgan, who succeeded Jonathan Howell as group
Annual Report 2019
Close Brothers Group plc
59
finance director at the 2018 AGM, and Peter Duffy, who became
an independent non-executive director on 1 January 2019.
Further detail on the search process led by the Nomination and
Governance Committee that culminated in Peter’s appointment can
be found on page 74. On 31 July 2019, following an announcement
in October 2018, Elizabeth Lee retired as an executive director
and group head of legal and regulatory affairs. On behalf of
the board, I would like to thank Elizabeth for her wise counsel
and substantial contribution to the group over many years.
On 24 September 2019, we announced that Preben Prebensen
had decided to step down after ten years as chief executive and
a member of the board. Preben will remain with the group for
the next 12 months to ensure a smooth handover. The board will
commence a thorough search for a successor, and we will announce
further details in due course and in next year’s annual report.
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. This included consideration of
key stakeholders and their interests, as well as risks arising from
the wider regulatory, economic and political environment.
In my own engagement with employees and visits around the
group’s businesses, I have been pleased to see the group’s strong
and distinctive culture in action. The board recognises the important
role it plays in establishing and monitoring the group’s purpose,
culture and values, and setting the right tone from the top. The
ongoing assessment of the contribution of culture and values to
the group’s long-term success remains a key focus for the board.
This year, diversity has been an important topic of discussion for the
board and the Nomination and Governance Committee, including as
part of ongoing board succession planning. The directors approved
a new board diversity policy, which recognises the importance of
having a diversity of backgrounds and experience on the board,
bringing different perspectives and challenge. Further detail on
the board’s approach to diversity can be found on page 60.
During the year, the board carried out an internal evaluation of its
effectiveness and performance. The results found that the board and
its committees continue to function effectively. Further details of this
evaluation can be found on pages 65 and 66.
In this section of the Annual Report you will also find the Directors’
Remuneration Report, setting out disclosures required by statute,
regulation and best practice in relation to remuneration matters. I was
pleased that last year’s AGM resolution approving the 2018 Directors’
Remuneration Report was passed with nearly 99% of votes cast in
favour. Executive remuneration remains an important area of focus
and reform, and the board continues to monitor developments on this
topic closely.
Ongoing engagement with shareholders continues to be very
important to the board and I have been pleased to meet with a
number of our shareholders again during the year to discuss a range
of topics. This ongoing dialogue plays a vital role in ensuring that the
board is aware of our shareholders’ views. The company’s AGM this
year will take place on 21 November 2019. The board considers this a
valuable opportunity for shareholders to raise questions about the
performance of the group and for me and my fellow directors to meet
with shareholders. I look forward to discussing the group’s progress
and the work of the board with shareholders at that meeting.
MICHAEL N. BIGGS
CHAIRMAN
24 September 2019
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
60
UK CORPORATE GOVERNANCE CODE
The UK Corporate Governance Code, as published by the Financial
Reporting Council (“FRC”) in April 2016 (the “Code”), applied to 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 updated the Code, publishing a revised UK
Corporate Governance Code (the “Revised Code”), which first applies
to the company in the financial year which started on 1 August 2019.
Accordingly, the company will report on its compliance with the
Revised Code in next year’s Annual Report. A copy of the Revised
Code can be found on the FRC’s website: www.frc.org.uk.
During the year, the board and its committees have continued to
monitor corporate governance reforms applicable to the company,
together with the company’s plans for the application of the Revised
Code from 1 August 2019. Information on preparatory actions taken
during the 2019 financial year is included in relevant sections below
and further detail will be provided next year in line with the reporting
requirements of the Revised Code.
THE BOARD
LEADERSHIP OF THE BOARD
The board’s primary role is to provide effective leadership, to ensure
that the company is appropriately managed, and to promote its
long-term sustainable success, thereby generating shareholder value
and making a contribution to wider society. The board establishes the
company’s values, strategy and purpose in alignment with its culture
and provides direction for the group as a whole. It also ensures that
the company has adequate resources to meet its strategic objectives
and monitors management’s performance against those objectives.
A key responsibility of the board is to define, promote and monitor the
company’s culture, setting the “tone from the top”. It also ensures
effective engagement with, and participation from, shareholders and
other stakeholders. The directors supervise the group’s operations,
with the aim of ensuring that the company maintains a framework of
prudent and effective controls which enables risks, including
emerging risks, to be properly assessed and appropriately managed.
BOARD SIZE AND COMPOSITION
The board has eight members: the chairman, two executive
directors and five independent non-executive directors. The board’s
members come from a range of backgrounds and the board 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.
Following Elizabeth Lee’s decision to retire as a director on
31 July 2019, consideration has been given to the overall size of the
board and the balance between its executive and non-executive
membership. On the recommendation of the Nomination and
Governance Committee, the board decided not to appoint an
additional executive director following Elizabeth’s retirement,
concluding that two executive directors were appropriate given the
overall size of the board and the company’s operations.
Details of the individual directors and their biographies are set out on
pages 52 and 53.
BOARD AND SENIOR MANAGEMENT DIVERSITY
The board acknowledges the benefits that diversity can bring to the
board and to all levels of the group’s operations. The board’s diversity
policy, which was approved by the board during the year, recognises
the importance of having directors with a range of skills, knowledge
and experience, and 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.
The board supports the aim of promoting greater diversity in the
boardroom and seeks to maintain a diverse and balanced board.
The Nomination and Governance Committee regularly reviews and
evaluates the structure, size and composition of the board and is
responsible for identifying and recommending new directors for
appointment. Board appointments are made on merit against objective
and defined criteria, following consideration by the Nomination and
Governance Committee of the balance of skills, experience, knowledge
and diversity required for the board to operate effectively as a whole.
The board regularly considers diversity and actions to encourage a
diverse pipeline as part of discussions around succession planning
and talent management throughout the year. The Nomination and
Governance Committee also 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 line with the Code, further commentary on the diversity of the
board, and future plans in this regard, is set out in the Nomination and
Governance Committee Report on page 75. The board’s diversity
policy is available on the Corporate Governance section of the
company’s website. The policy is subject to periodic review by the
Nomination and Governance Committee.
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61
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 44 and 45 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. During the year, the board
updated the schedule of matters reserved to the board, among other
things, to reflect the requirements of the Revised Code and other
applicable corporate governance reforms.
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 and monitoring of risk management, regulatory
compliance and internal control systems and processes, and
assessing the effectiveness of material controls;
• assessing the group’s emerging and principal risks, the procedures in
place to identify those risks and how they are managed and mitigated;
• 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 evaluation
of the performance of the board and its committees;
• undertaking appropriate engagement to understand the views of other
stakeholders and reviewing stakeholder engagement mechanisms;
• leading the development, adoption, assessment and monitoring of
the group’s culture framework; and
• approval and oversight of the group’s policy framework and
ensuring that the group’s policies, practices and behaviour are
consistent with the company’s values and support long-term,
sustainable success.
When carrying out its duties, the board acts in accordance with relevant
legislative and regulatory requirements and, in particular, takes into
account the directors’ duties contained in the Companies Act 2006 (the
“Act”), including section 172 of the Act and any other relevant factors.
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BOARD AND COMMITTEE MEETING ATTENDANCE IN 2018/2019
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 meetings of the board and the committees 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.
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 Howell1
Mike Morgan2
Elizabeth Lee3
Non-executive directors
Mike Biggs
Oliver Corbett
Geoffrey Howe
Lesley Jones
Bridget Macaskill
Peter Duffy4
7
2
5
7
7
7
7
7
7
5
7
2
5
7
7
7
7
7
7
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
6
6
6
6
4
6
6
6
6
4
5
5
5
5
5
5
5
5
5
5
1 Jonathan Howell ceased to be an executive director at the conclusion of the 2018 AGM on 15 November 2018 when he left the company to pursue the next stage of his career, as
announced by the company on 25 January 2018.
2 Mike Morgan was appointed as an executive director at the 2018 AGM on 15 November 2018.
3 Elizabeth Lee retired as an executive director on 31 July 2019, as announced by the company on 19 October 2018.
4 Peter Duffy was appointed as an independent non-executive director and a member of the Risk Committee with effect from 1 January 2019.
The board held one additional ad hoc meeting in the year to consider a number of matters, including the appointment of Peter Duffy to the
board and the ICAAP. The Nomination and Governance Committee held one additional ad hoc meeting during the year to consider, and
recommend to the board, the appointment of Peter Duffy. These additional meetings are not reflected in the table above.
At the end of each of the seven scheduled 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.
In addition to the calendar of formal board and committee meetings, there are other opportunities for all the directors to meet, both with and
without senior management, to discuss the group, its operations, strategy and performance. These opportunities include informal dinners as
well as working sessions at which the board considers a particular part of the company’s business, performance or strategy in depth. These
sessions are valued by the board and provide an additional chance to explore discrete issues in detail and to engage with employees from
different levels across the group.
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63
GOVERNANCE FRAMEWORK
BOARD GOVERNANCE STRUCTURE
The board has delegated responsibility for certain matters to its committees. The committee structure is shown in the diagram below. Each
committee has 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. This year, each committee’s terms of reference were updated, among other
things, to reflect relevant changes arising from the application of the Revised Code to the company from 1 August 2019. The chairman of each
committee reports regularly to the board on matters discussed at committee meetings.
Reports for 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 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. The group chief risk
officer and the group general counsel have a standing invitation and provide updates on their respective functions. The board also receives
regular reports from the group human resources, operations, corporate development, 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.
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, as well as for the group as a whole;
• customer matters, including the group’s customer experience programme;
• the development of the group’s operational risk framework and new requirements in relation to operational resilience;
• strategic projects affecting the group and individual businesses, including the Motor Finance transformation programme, the new deposit
platform implemented by the Treasury function and the project to develop the models, systems and processes required to use the Internal
Ratings Based approach;
• updates on the progress of discrete workstreams arising out of the board’s annual strategy days;
• IT, cyber and disaster recovery planning, and associated projects;
• the group’s culture framework and a quarterly review of the group’s culture dashboard which sets out information and key metrics in relation
to culture across the group and each of its divisions;
• discussing the results of the group’s biennial employee opinion survey and follow-up actions proposed by management;
• reviewing the competitive landscape;
• engagement with regulators and regulatory developments during the year, including Brexit and the implications of the FCA’s final report
published in March 2019 on the motor finance market;
• the review and approval of the group’s Recovery and Resolution Plans;
• capital planning and considering and approving the ICAAP and the Internal Liquidity Adequacy Assessment Process;
• the annual review of group risk appetite statements; and
• the internal board and committee effectiveness evaluation.
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CHAIRMAN AND CHIEF EXECUTIVE
In line with the Corporate Governance Code, the role of chairman is
distinct and separate from that of the chief executive and there is a
clear division of responsibilities between the two roles. A description
of the responsibilities of the chairman and chief executive, as
approved by the board, can be found on the company’s website at
www.closebrothers.com/investor-relations/investor-information/
corporate-governance.
The chairman is Mike Biggs. His other significant commitments are
set out in his biography on page 52. 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 that it is able to operate effectively and efficiently. The
chairman’s role is to promote effective decision-making, challenge of
executive management and constructive debate, including by
facilitating contributions and engagement from all members of the
board. His other responsibilities include setting the agenda for board
meetings, making sure that the directors receive information in an
accurate, clear and timely manner, and ensuring that adequate time is
available for discussion of relevant items by the board. The chairman
is 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”. As chairman, he is required to ensure that the
board as a whole has a clear understanding of the views of
shareholders and, to that end, he regularly engages with the
company’s major institutional shareholders on a range of topics
including strategy, governance and succession planning.
The chief executive is Preben Prebensen, who is primarily responsible
for all aspects of the performance and the day-to-day management of
the group’s business in accordance with the objectives and limits
defined by the board. 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 stakeholders 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 54.
The chairman and chief executive have various prescribed
responsibilities under the Senior Managers regime overseen by the PRA.
INDEPENDENT NON-EXECUTIVE DIRECTORS
The company’s independent non-executive directors are Geoffrey
Howe, Oliver Corbett, Peter Duffy, Lesley Jones and Bridget
Macaskill. Peter joined the board on 1 January 2019.
Within the board’s overall risk and governance structure, 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
serves as an intermediary for the other directors and shareholders. In
addition to the existing channels for shareholder communications,
shareholders may discuss any issues or concerns they have with the
senior independent director. At least annually, the senior independent
director leads meetings of the non-executive directors, without the
chairman present, to appraise the chairman’s performance and then
communicates the results of that appraisal to the chairman.
A description of the responsibilities of the senior independent director,
as approved by the board, can be found on the company’s website at
www.closebrothers.com/investor-relations/investor-information/
corporate-governance.
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 board has given particularly rigorous consideration to the
independence of Geoffrey Howe who will, subject to his reappointment
at the 2019 AGM, have been a non-executive director for more than
nine years if he continues on the board beyond 4 January 2020. The
board has determined that, notwithstanding his term of office, Geoffrey
is independent in character, judgement and in his valuable contributions
to the board and its committees, including in his challenge of
management. Geoffrey also demonstrates independence in the
effective discharge of his duties as the company’s senior independent
director. As described in more detail in the Nomination and Governance
Committee Report on page 74, the Committee has initiated a search to
identify a successor for Geoffrey as senior independent director.
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, following consideration of each non-executive director’s other
time commitments. The letters of appointment for each of the
company’s non-executive directors set out a minimum time
commitment in discharging their duties as a director, and requires
them to seek prior approval from the chairman (on behalf of the
board) before they take on additional commitments.
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 2018 AGM. Further
detail regarding these authorisations is set out on pages 55 and 56.
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65
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.
duties and responsibilities of a listed company director, the group’s
governance framework and the wider UK corporate governance, listing
and disclosure regime from the company secretary.
There is a central training programme in place for the directors, which is
reviewed and considered by the Nomination and Governance
Committee. 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 meetings with senior management within
the businesses and control functions, in-depth business reviews,
lunches with emerging leaders and other employees from across the
group, attendance at external seminars and dedicated briefings from
management and external advisers covering topics such as corporate
governance updates, directors’ duties and new reporting requirements
in relation to section 172 of the Act, regulatory developments, changes
in remuneration regulation and practice, accounting changes, the
Internal Ratings Based approach, open banking, robotics and cyber
security. 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.
REAPPOINTMENT OF DIRECTORS AT THE 2019 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
2019 AGM be reappointed by shareholders.
INDUCTION AND PROFESSIONAL DEVELOPMENT
On appointment, all new directors receive a comprehensive and
personalised induction programme to familiarise them with the group
and the regulatory framework within which it operates, and to meet
their specific development 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, together with a range of relevant current and historical
information about the group and its business.
Peter Duffy’s induction programme included detailed meetings and
briefings with members of the board and the Executive Committee,
the chief executives of each of the individual Banking businesses, the
head of compliance, the director of investor relations and the group’s
external auditor. Specific topics covered in these sessions included
the regulatory framework applicable to the group, capital and other
prudential requirements, the group’s risk management framework,
strategy and purpose, culture and values, and financial performance.
In addition, Peter received briefings on the duties and responsibilities
of a listed company director, the group’s governance framework and
the wider UK corporate governance, listing and disclosure regime
from the company secretary and the group’s external legal advisers.
Mike Morgan has also undertaken a tailored induction following his
appointment to the board. The induction provided to Mike reflected his
existing extensive knowledge and understanding of the group
developed since he joined the group as chief financial officer of the
Banking division (and became a director of its Banking subsidiary,
Close Brothers Limited) in 2010. Mike’s induction activities included
meetings with other board members and senior management across
the group, and sessions with the group’s external auditors, corporate
brokers and external legal advisers. Mike also received a briefing on the
Training and development records are maintained by the company
secretary and reviewed annually by the chairman and each
individual director.
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
The board undertakes an evaluation of its effectiveness and the
performance of the whole board, its individual directors and its
committees annually. In accordance with the Code, at least every
third year, an external evaluation is carried out. The last externally
facilitated review was conducted in 2018 as described in last year’s
Annual Report.
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66
During the 2019 financial year, the Nomination and Governance
Committee recommended that the evaluation for the year be
undertaken internally by the company secretary, as permitted by the
Code. The evaluation took the form of questionnaires completed by
each director assessing the performance and effectiveness of the
board and each of its committees in a broad range of areas, together
with an assessment of progress against the recommendations made
in the 2018 external evaluation.
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, and include consideration of the director’s performance and
contribution to the board and its committees, their time commitment
and the board’s overall composition.
The questions in the assessment were set to develop the themes
explored in prior years’ evaluations in order to assess the progress of
the board and its committees compared with previous years, and
also to evaluate recent developments and areas of focus in the 2019
financial year. In each part of the assessment, directors were invited
to provide general comments and observations in addition to
responding to specific questions.
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.
The evaluation of the board focused on a range of different areas
relevant to board effectiveness and corporate governance, including:
• the role and composition of the board;
• strategy, purpose and values;
• culture;
• the business of the board;
• stakeholder engagement; and
• board behaviours.
A separate questionnaire was completed by each member of the
board’s four committees, covering a variety of subjects relating to
composition, performance, effectiveness and the particular
responsibilities of the committee concerned.
The responses to the questionnaires were collated and reviewed by
the company secretary, and discussed with the chairman. The
company secretary subsequently prepared a report setting out the
results of the evaluation, including key themes and recommendations
arising from the questionnaires, which was presented to the board for
discussion in July 2019.
The overall conclusion of the evaluation was that the board and its
committees continue to operate effectively and that good progress
has been made against each of the recommendations made in the
external evaluation undertaken in the previous year. The evaluation
also confirmed that the positive features and attributes of the board
identified in the 2018 evaluation had remained present in the workings
of the board in the 2019 financial year.
Among other things, the evaluation demonstrated the ongoing value
and effectiveness of the dedicated annual sessions focusing on the
company’s strategy (alongside opportunities to discuss strategic
issues as part of the regular cycle of board meetings throughout the
year), and the role played by the board in recent years in the
oversight of the company’s culture, values and purpose. The
evaluation noted the overall quality of information provided to the
board about key stakeholders and the regard that directors have to
stakeholder issues when making significant decisions, but has
identified some helpful areas for incremental enhancement during
the current financial year ahead of new reporting on stakeholder
engagement in next year’s Annual Report.
The board welcomes the positive conclusions of the evaluation and
will focus during the next financial year on a small number of areas to
further improve the effectiveness of the board and its committees.
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 may 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.
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 risks which the
group chooses to take are managed, controlled and, where necessary,
mitigated, so that the group is not subject to material unexpected loss.
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Close Brothers Group plc
67
The group closely monitors its risk profile to ensure that it continues to align with its strategic objectives as documented on page 16.
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 and emerging 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
assessment of the principal risks and emerging risks facing the group was carried out by the board, including those risks that would threaten its
business model, future performance, solvency or liquidity. A summary of the group’s principal risks and emerging risks is provided on pages 18 to 22.
In addition, throughout the year, the board, assisted by the Risk Committee and the Audit Committee, monitors the group’s risk management
and internal control systems and reviews their effectiveness. This covers all material controls, including financial, operational and compliance
controls. The board reviews the effectiveness of both committees on an annual basis. Based on its assessment throughout the year, and its
review of the committees’ effectiveness, the board considers that, overall, the group has in place adequate systems and controls with regard to
its profile and strategy.
The risk management framework is based on the concept of “three lines of defence”, as set out 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
The Businesses
Group Risk and Compliance Committee
(Reports to the Risk Committee)
Second line of defence
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 and
Key Features
• Overarching “risk oversight unit” takes an
integrated view of risk (qualitative and
quantitative).
• Supports through developing and advising
managing risk exposures.
on risk strategies.
• Promotes a culture of customer focus and
• Facilitates constructive check and challenge
appropriate behaviours.
• Ongoing monitoring of positions and
management and control of risks.
• Portfolio optimisation.
• Self-assessment.
– “critical friend”/“trusted adviser”.
• Oversight of business conduct.
Internal audit provides independent assurance
on:
• first and second lines of defence;
• appropriateness/effectiveness of internal
controls; and
• effectiveness of policy implementation.
Key Features
• Draws on deep knowledge of the group and
its businesses.
• Provides independent assurance on the
activities of the firm, including the risk
management framework.
• Assesses the appropriateness and
effectiveness of internal controls.
• Incorporates review of culture and conduct.
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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
M&G Investment Management
Royal London Asset Management
19 September 2019
Voting rights
14.99%
5.28%
5.03%
31 July 2019
Voting rights
14.99%
5.28%
5.03%
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 and for the board to understand the
views of key stakeholders. When taking decisions, the board
considers the interests of, and impact on, key stakeholders, including
its relationships with shareholders, customers, regulators, employees
and suppliers.
During the year, the directors have received updates on new reporting
requirements that will first apply in next year’s Annual Report in relation
to the board’s consideration of section 172 of the Act and stakeholder
engagement. In June, directors were provided with refresher training on
section 172 and the board has considered preparations to ensure
compliance with next year’s reporting requirements.
On behalf of the board, the Nomination and Governance Committee
considered an assessment of who the company’s key stakeholders
are and how the company and the board engage with them. The
Committee also discussed incremental enhancements proposed in
relation to stakeholder engagement in the coming months.
The sections below describe the board’s approach to engagement
with employees and shareholders. Further detail on the company’s
stakeholders and examples of how the company engages with them
can also be found in the Strategic Report on pages 42 to 51.
ENGAGEMENT WITH EMPLOYEES
As part of its consideration of the Revised Code, the board discussed
workforce engagement mechanisms and, as permitted by the Revised
Code, has decided to put in place its own arrangements to engage with
employees across the group rather than using one of the specific
methods set out in the Revised Code. The board noted the value to be
derived from all directors participating in meaningful employee
engagement activities and, following discussion by the Nomination and
Governance Committee, a framework for board engagement with
employees has been developed by the group head of HR and the
company secretary. This framework builds on existing employee
engagement activities that have been in place for some time, and
presents a range of different opportunities for board members to
engage directly with employees and also to receive feedback on
relevant issues from management. The framework takes account of
guidance and suggestions published by the FRC in this area.
Engagement activities undertaken by the board in the 2019 financial
year included:
• detailed discussion of the results, themes and next steps arising
out of the group’s biennial employee opinion survey;
• reviewing the quarterly culture dashboard;
• site visits by non-executive directors to meet employees at different
levels of the group’s operations;
• participation by directors in the various programmes and initiatives
operated for different groups of employees;
• participation by executive and non-executive directors in Q&A
sessions with employees; and
• regular communications from executive directors to employees on
the performance and operations of the group, including in relation
to the half-year and full-year results.
Further detail of the employee engagement framework, and why the
board considers it to be effective, will be set out in next year’s Annual
Report as part of broader stakeholder reporting, in line with the
Revised Code and other regulatory requirements.
ENGAGEMENT WITH SHAREHOLDERS
INVESTOR RELATIONS
The group has a comprehensive investor relations (“IR”) programme
to ensure that current and potential shareholders, as well as financial
analysts, are kept informed of the group’s performance and have
appropriate access to management to understand the company’s
business and strategy.
The board believes it is important to maintain open and constructive
relationships with shareholders and for them to have opportunities to
share their views with the board. The group’s IR team, reporting to the
group finance director, has primary responsibility for managing the
group’s relationship with shareholders. The IR team runs a structured
programme of meetings, calls and presentations around the financial
reporting calendar, as well as throughout the year. The team also
regularly seeks investor feedback, both 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. In addition, periodic specific
“deep dives” on IR matters are provided to the board.
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. Feedback on these meetings is provided to the
board during the course of the year. Separately, the senior
independent director is available to meet with shareholders.
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).
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The group also engages with leading institutional shareholder bodies
and proxy advisers during 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
have the opportunity 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 2018 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.
The board hopes that as many shareholders as possible will be able
to attend this year’s AGM, which will be held on 21 November 2019.
By order of the board
ALEX DUNN
COMPANY SECRETARY
24 September 2019
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Risk Committee Report
LESLEY JONES
CHAIRMAN OF THE RISK COMMIT TEE
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.
CHAIRMAN’S OVERVIEW
The evolution of the macroeconomic environment and political
landscape, together with consideration of new and emerging risks
and a demanding regulatory agenda aimed at reinforcing the strength
and conduct of the banking industry, have again kept the Risk
Committee fully occupied during the year.
I am pleased to report that further 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 with the skills and talent of the teams that we have built 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 Peter Duffy, our newest independent
director, Geoffrey Howe, the senior independent director, Oliver
Corbett and Bridget Macaskill who chair the Audit and Remuneration
Committees respectively, and myself as chairman.
Six scheduled meetings were held during the year and full details of
attendance by the non-executive directors at these meetings are set
out on page 62.
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 continue to 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.
As described in more detail on pages 65 and 66, an internal
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.
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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 2019 FINANCIAL YEAR
The risk function has continued to evolve in 2019. The three lines of
defence model is now well established and the governance structure
facilitates effective oversight of risk, both at a group and business
level. The risk design has been further strengthened through the
recruitment and reorganisation of additional specialist skills and
resource, in particular with regard to operational resilience oversight.
In addition, we have enhanced our credit risk resource structure to
allow us to leverage existing capabilities more broadly across the
group whilst retaining our core operating model. 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.
The risk appetite framework continues to evolve, as does the
quantitative analysis which supports the group’s risk management
capabilities. 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
Motor, Premium, Novitas and Energy portfolios, which have all
benefited from deep dives by the Risk Committee.
Management of emerging risks has been a Committee focus, facilitating
organisational readiness for external volatility. In addition, the Committee
has devoted time to a “preparing for a downturn” workstream through
which the group is preparing playbooks, running simulations and
ensuring our overall readiness for a stress event. We continue to test our
application of previous experience on our current portfolios.
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, we remain of the view that these are
likely to be secondary in nature. Nevertheless, until we have a clearer
idea of the outcome, 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 further refinement of our IFRS 9 model suite and the
development of credit scorecards and quantitative grading models in
support of the IRB application. In addition, we have seen the
embedding 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. New risk infrastructure
is also in place or being developed to support this, including a data
warehouse, model hosting platform and RWA calculator.
Across the market, operational risk continues to develop in its
complexity and we have again responded by investing further in
systems and process enhancements to support the early
identification of negative trends. Our operational resilience remains
the subject of much debate at the Committee as we continually
review the ability of our people, processes, systems and third party
relationships to reliably and securely deliver key business services.
We also continue to test our preparedness for the unexpected.
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 further accelerated during the year, with an
increasing number of industry attacks reinforcing the importance of
strong cyber defences to protect our systems and customer data.
The addition of a new group chief operating officer further increased
our bench strength. Our cyber detection and monitoring capabilities
have also 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. Our third party risk assessment also received
further focus and we have continued to improve our risk frameworks
and oversight in this area.
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 are appropriately
reflected in decisions taken about performance and reward.
LOOKING AHEAD TO 2019
Key priorities for the coming year include:
• Effective management of emerging risks, specifically key impacts of
the UK’s anticipated exit from the EU, as well as any other material
developing concerns.
• Development of an effective and regulatory-compliant climate
risk framework.
• As part of the IRB programme, continued review and assessment of
the group’s modelling capabilities, including the further development
of the models strategy.
• Continued enhancement and evolution of our “preparing for a
downturn” workstream.
• Refinement and advancement of the group’s operational
resilience framework.
• Enhancement of the affordability assessment processes across
the lending businesses.
• Implementation of the Senior Managers and Certification
Regime (“SMCR”).
• Evolution of the group’s culture framework and further refinement
of the conduct risk reporting framework.
LESLEY JONES
CHAIRMAN OF THE RISK COMMITTEE
24 September 2019
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Audit Committee Report
OLIVER CORBETT
CHAIRMAN OF THE AUDIT COMMIT TEE
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.
CHAIRMAN’S OVERVIEW
It has again been an active year for the Committee, with a particular
focus on the transition to IFRS 9. Alongside this, the Committee’s time
has been spent on its principal roles and responsibilities, which are 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.
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 comprises solely of independent non-executive
directors being Geoffrey Howe, the senior independent director,
Lesley Jones and Bridget Macaskill who chair the Risk and
Remuneration Committees respectively, and me as Chairman. 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 62.
The qualifications of each of the members are outlined in the
biographies on pages 52 and 53. 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.
Invitations to attend are extended to other members of management
to brief the Committee on specific issues as necessary. The external
auditor attends each meeting and I had regular contact with the lead
audit partner during the year. The Committee held private sessions
with internal and external audit following each meeting of the
Committee, without members of management.
COMMITTEE EFFECTIVENESS
As described in more detail on pages 65 and 66, a formal and
rigorous internal evaluation of the Committee’s effectiveness was
undertaken during the year as part of the broader evaluation of the
effectiveness of the board and its committees.
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 2019 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. Except for IFRS 9, the key
judgements were unchanged from the prior year reflecting the
group’s adherence to its business model and consistency of its
approach to financial reporting.
IFRS 9
Throughout the year, the Committee received detailed presentations
and updates from management on the Group’s implementation of IFRS
9. Particular focus was given to the forward-looking macroeconomic
assumptions and new external disclosures required for IFRS 9. The
Committee will continue to pay close attention to how the underlying
models and macroeconomic scenarios perform over time.
REVENUE RECOGNITION
The Committee reviewed management’s approach to revenue
recognition, highlighting the key areas where judgement is required
across interest, fee and commission income. The Committee noted the
consistency of approach with prior years and concluded that revenue
recognition for each of the group’s key businesses is appropriate.
FUTURE ACCOUNTING CHANGES
The Committee discussed the group’s approach to IFRS 16: Leases,
a new leasing standard, and considered the impact of adoption,
which applies from 1 August 2019, and related disclosure.
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 pages
57 and 58.
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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, finance policy, 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, challenged 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. The Committee also reviewed internal
audit operational performance during each meeting. During the
year 27 audits were completed, of which one review was requested
by the group’s regulator.
The Committee reviews annually the effectiveness of the internal audit
function. The review for the year under review was completed both
internally and via an external independent review. The internal review
was supported by feedback from stakeholders across the group.
It is the Committee’s policy that an external independent effectiveness
review be carried out at least every five years. During the year a
comprehensive tender process was undertaken to appoint an
external reviewer followed by a thorough examination of internal audit
activities including its adherence to relevant standards and industry
best practice. The external assessment did not highlight any material
concerns and concluded that internal audit generally conforms to the
standards set by the Institute of Internal Auditors.
The Committee continued to keep both the level and independence
of the internal audit resource under review during the year. The
Committee also received ongoing feedback on the performance of
the internal audit co-source provider.
EXTERNAL AUDIT
The Committee oversees the relationship with PricewaterhouseCoopers
LLP (“PwC”), its external auditor, and during the year has reviewed the
external audit plan and findings. PwC has been auditor to the group
since 1 August 2017. Mark Hannam has been the group’s lead audit
partner since the transition from Deloitte LLP in 2017 and attends all
meetings of the Committee. Principal matters discussed with PwC are
set out in their report on pages 97 to 103.
The FRC’s Audit Quality Review team routinely monitors the quality of
the audit work of certain UK audit firms through inspections of sample
audits. During the year the Audit Quality Review team conducted a
review of the audit performed by PwC of the group’s 2018 financial
statements. I and the other members of the Committee received a
copy of the findings and discussed them with PwC and, whilst there
were no significant findings, some of PwC’s procedures were
identified as needing limited improvements only.
The Committee assesses the independence and objectivity,
qualifications and effectiveness of the external auditor on an annual
basis as well as making a recommendation on the reappointment of the
auditor to the board.
This year our evaluation focused on the following key areas:
• the quality of audit expertise, judgement and dialogue with the
Committee and senior management;
• the independence and objectivity demonstrated by the audit team;
and
• the quality of service including consistency of approach and
responsiveness.
The process was facilitated by a group-wide survey of finance, a
survey of the PwC senior audit team’s view on the group and a review
of audit and non-audit fees. Overall, the Committee has concluded
that PwC remain independent and that their audit is effective.
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 £0.6 million and
represented 43% of the audit fee. Non-audit fees related to:
Assurance work on:
Systems and controls
£ million
0.6
The corresponding amounts for the prior year were £0.5 million
and 29%.
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
24 September 2019
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Nomination and Governance Committee Report
CHAIRMAN’S OVERVIEW
This report sets out an overview of the Committee’s roles and
responsibilities, and its key activities during the year.
• assessing the non-executive directors’ skill sets, knowledge,
suitability and experience to ensure that an appropriate balance of
skills, knowledge and experience has been maintained.
The Committee has spent considerable time this year considering the
composition of the board, with a particular focus on non-executive
succession planning. The board was refreshed during the year with
the appointments of Mike Morgan and Peter Duffy. A description of
the process that resulted in Mike’s appointment can be found in the
company’s 2018 Annual Report and further information on the search
process led by the Committee for Peter’s appointment is set out
below. As part of the Committee’s proactive approach to non-
executive succession planning, it has also begun a search to identify
a successor, at a future point, for our senior independent director,
Geoffrey Howe, who, in January 2020, will have served on the board
for nine years. For all searches undertaken this year, the Committee
has put in place arrangements to ensure that changes to the board
are well managed, with consideration of candidates from a diversity of
backgrounds and experiences.
Talent management and succession planning for roles below board
level has been an important topic of discussion, and the Committee
has continued to monitor activities and initiatives to develop the
group’s talent pipeline. The Committee also reviewed a new board
diversity policy and, once again this year, it has taken account of the
benefits of promoting diversity at all levels of the group’s operations.
As in prior years, the Committee has monitored changes to the
corporate governance and reporting framework in the UK, including
the group’s preparation for new stakeholder reporting requirements in
next year’s Annual Report. More broadly, the Committee has followed
environmental, social and governance developments in the year and
the implications for the group.
COMMITTEE ROLES AND RESPONSIBILITIES
The Committee’s key roles and responsibilities are:
• regularly reviewing the structure, size and composition of the board
and its committees, 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 to facilitate the search for suitable candidates; and
• assessing the contribution of the non-executive directors.
The Committee’s roles and responsibilities are set out in written terms
of reference and are available at www.closebrothers.com.
KEY ACTIVITIES IN THE 2019 FINANCIAL YEAR
During the year the Committee’s activities included:
• considering board composition and succession, including the
process for the appointment of Peter Duffy;
• reviewing talent and executive management succession planning;
• reviewing and recommending to the board a new board
diversity policy;
• oversight of the internal board and committee evaluation
undertaken during the year;
• monitoring environmental, social and governance developments
and considering the implications for the group;
• receiving updates on the group’s response to changes in the UK’s
corporate governance and reporting framework; and
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 searches for board-level and other appointments.
Five scheduled meetings of the Committee were held during the year
and details of members’ attendance are set out on page 62. In
addition, one ad hoc meeting was held to consider the nomination of
Peter Duffy as a non-executive member of the board.
SUCCESSION PLANNING AND BOARD COMPOSITION
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, diversity and potential of incumbents in key roles, and
the succession pipeline, emergency cover arrangements and external
market for those roles.
During the first part of the financial year, the Committee oversaw the
formal and rigorous process that resulted in the appointment of Peter
Duffy as an independent non-executive director on 1 January 2019.
The Committee approved a detailed description for the role, including
experience of customer behaviour and technological change
alongside the capability and skill to contribute to the full range of
board activities. The search was undertaken in conjunction with
external search firm Heidrick & Struggles, who were instructed to
consider candidates from a diversity of backgrounds and
experiences. The firm is not connected to the company in any way.
A shortlist of potential candidates was selected and interviews were
held with the involvement of both non-executive and executive
members of the board. Following the process, the Committee
recommended Peter’s appointment to the board.
As part of its ongoing consideration of non-executive succession
planning, the Committee has also initiated a search to appoint a new
member of the board to succeed Geoffrey Howe as senior
independent director. Heidrick & Struggles are assisting the
Committee with the search and have, in line with the board diversity
policy, been instructed to consider candidates from a diverse range of
backgrounds and experience. 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.
Following Elizabeth Lee’s decision to retire on 31 July 2019, the
Committee considered the balance between executive and non-
executive membership on the board. It decided to recommend that,
following Elizabeth’s retirement, the board continue with only two
executive directors (the chief executive and group finance director),
which it felt was appropriate for the group’s operations and the overall
size of the board.
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DIVERSITY
Diversity continues to be a key focus of the Committee. The
Committee recognises the importance of having directors with a
range of skills, knowledge and experience, and embraces the
advantages to be derived from having a diversity of gender and social
and ethnic backgrounds represented on the board, bringing different
perspectives and the challenge needed to ensure effective decision-
making. Diversity has been a topic of discussion throughout the year,
including in the context of succession planning at both board and
senior management level and in the consideration of particular
appointments. In addition, the Committee spent time reviewing and
recommending to the board for approval a new board diversity policy.
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. At all
times in the financial year ending 31 July 2019, three of the company’s
directors were women, meaning that the representation of women on
the board exceeded the minimum percentage set out in the
recommendations of the Hampton-Alexander Review. However,
following the retirement of Elizabeth Lee as a director at the end of the
financial year, two of the company’s eight directors are women. As
noted by the Committee in previous Annual Reports, the relatively
small size of the board means that 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.
It remains the Committee’s aim for the board to have female
representation of at least 30% and this aim has been reaffirmed in the
ongoing non-executive search referred to above. The Committee is
seeking to ensure that female representation on the board will, once
again, exceed this percentage in the coming months.
More detail on the group’s approach to diversity and the board’s
diversity policy can be found in the Sustainability Report on pages 44
and 45 and the Corporate Governance Report on page 60.
NON-EXECUTIVE DIRECTORS’ SKILL SETS
The Committee has considered and reaffirmed the skill sets and
experience of the company’s five 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 of
listed and regulated companies. Oliver Corbett has very strong
financial skills and broad experience of accounting and internal
control matters, including as a finance director and audit committee
member. Lesley Jones has familiarity with FCA/PRA and EU risk
regulations, and wide experience of risk management and the wider
financial services sector at executive and non-executive level,
including as a committee chairman. Bridget Macaskill has significant
remuneration committee credentials and familiarity with FCA/PRA
and EU remuneration regulations as well as wide experience of
engaging with shareholders and other stakeholders on remuneration
matters. Peter Duffy has considerable knowledge of customer
behaviour, marketing and technological change, and brings insight
and perspectives to the board from his current and former roles
across a range of sectors, including financial services. Further
information on the background and experience of each of the
non-executive directors can be found in their biographies on pages
52 and 53.
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, time
commitment and ability to continue to contribute to the board.
Following this year’s review in advance of the 2019 AGM, the
Committee has recommended to the board that all serving directors
be reappointed at the AGM.
Geoffrey Howe has served as a non-executive director for more than
six years and, during the coming year, Oliver Corbett, Lesley Jones
and Bridget Macaskill will, if their reappointment is approved at the
AGM, also have served as directors for more than six years. The
extension of each of their terms of office has been subject to
particularly rigorous review by the Committee, including with respect
to each director’s performance, contribution and independence. No
individual participated in the discussion on the proposed extension of
his or her own term of office. The Committee has noted the valuable
contribution that each of the directors makes, including with respect
to the particular responsibilities they undertake whether as senior
independent director or as a committee chairman. The Committee
values the knowledge, experience and continuity that their continued
appointments would bring.
CORPORATE GOVERNANCE REFORM
The Committee has monitored the group’s planning for, and response
to, the various corporate governance reforms that began to apply to
the group in the financial year that started on 1 August 2019 and on
which the group will report in next year’s Annual Report. These
reforms include the new Corporate Governance Code and the
requirement to publish reports on the board’s consideration of its duty
under section 172 of the Companies Act 2006 and engagement with
stakeholders. The Committee will continue to monitor developments
in the coming year.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ISSUES
During the year, the Committee received and considered dedicated
updates on environmental, social and governance (“ESG”) issues
relevant to the group. These updates covered items across a broad
spectrum of areas and were informed by, among other things,
engagement with shareholders and other stakeholders, legislative and
regulatory initiatives and wider market developments. The Committee
will continue to consider ESG matters in the year ahead and make such
recommendations as it considers necessary to the board.
COMMITTEE EFFECTIVENESS
As described in more detail on page 65, an internal evaluation of the
effectiveness of the board and its committees was undertaken during
the year by the company secretary in line with the requirements of the
UK Corporate Governance Code. The Committee was involved in
determining the format, scope and timing of the evaluation.
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
24 September 2019
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Directors’ Remuneration Report
BRIDGET MACASKILL
CHAIRMAN OF THE
REMUNERATION COMMIT TEE
THIS REPORT SETS OUT OUR APPROACH
TO REMUNERATION FOR THE GROUP’S
EMPLOYEES AND DIRECTORS FOR THE
2019 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 2019 financial year.
Our Directors’ Remuneration Policy was approved by shareholders at the
2017 AGM, with over 97% of the shareholders’ votes cast in favour, and
there have been no changes to the structure of remuneration for
executive directors since the Policy was approved. The Directors’
Remuneration Policy will be due for renewal by shareholders at the 2020
AGM and the Committee will shortly undertake a detailed review of the
Policy, to ensure that it continues to meet the needs of the business and
its stakeholders. As part of this review process, we will be considering
the recent changes to the UK Corporate Governance Code and other
disclosure requirements, as well as the views expressed by our
shareholders, to ensure that the new Policy remains fit for purpose.
HOW THE GROUP PERFORMED
Close Brothers has a well-established business model which
supports its long track record of consistent profitability. 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.
Continuing to apply this disciplined approach, the group achieved
another solid performance, maintaining strong returns and profitability.
Adjusted operating profit decreased 3% to £270.5 million (2018: £278.6
million), reflecting a challenging environment for our market-facing
divisions and our continued investment in our businesses.
Return on opening equity remained strong at 15.7% (2018: 17.0%)
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.
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
2019
15.7%
270.5
2018
17.0%
278.6
6.5%
16.3%
10.4%
98.5
3.3%
94.0
1 For the three-year periods ended 31 July 2019 and 31 July 2018.
2 For the three-year periods ended 31 July 2019 and 31 July 2018 based on the average
three-month share price prior to that date.
3 For the 2019 financial year, interim dividend paid and proposed final dividend.
The Banking division continued to perform well, delivering an
adjusted operating profit of £253.7 million (2018: £251.8 million), with
good income growth and continued low bad debt ratios across the
businesses, offset by higher adjusted operating expenses as we
continue to invest in our business.
Asset Management continued to achieve strong net inflows, although
adjusted operating profit of £21.8 million (2018: £23.1 million) was down
6% on the prior year. This reduction was driven by lower average
market levels throughout the year and ongoing investment to support
the long-term growth of the business.
Securities delivered solid trading profitability despite difficult market
conditions, with operating profit of £20.0 million (2018: £28.1 million),
down 29% reflecting significantly lower market volumes.
Adjusted operating income was broadly in line with the prior year at
£816.4 million (2018: £805.8 million), as good income growth in the
Banking businesses and Asset Management was offset by reduced
trading income in Securities. Income in the Banking division increased
4%, reflecting good loan book growth across all businesses and a
broadly stable net interest margin of 7.9% (2018: 8.0%). Income in
Asset Management was up 4%, reflecting higher client assets and a
£1.4 million gain on disposal of a portfolio of self-directed intermediated
clients in the second half of the financial year. Securities income
declined 14% as a result of lower trading volumes.
Adjusted operating expenses increased 4% to £497.4 million (2018:
£480.5 million), with most of the uplift seen in Banking, where we
continued to invest in a number of business initiatives and
infrastructure projects. Costs also increased in Asset Management,
driven by investments in people, technology and research capability.
Expenses in Securities reduced, reflecting lower variable costs. Overall,
both the group’s expense/income and compensation ratios were
broadly stable at 61% (2018: 60%) and 36% (2018: 37%), respectively.
EXECUTIVE DIRECTOR REMUNERATION OUTCOMES
As a result of the sustained solid performance, the last year saw the
financial element of the executive directors’ bonus, which is linked to
return on opening equity, pay out at 71.3% of maximum. The
executive directors also achieved strong performance against their
group-wide balanced scorecard, with payouts ranging from 65% to
98.5%. 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 85 and against the
balanced scorecard on pages 86 to 88.
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The financial targets within the Long-Term Incentive Plan (“LTIP”)
grants awarded in 2016 have proven highly demanding given the
current market conditions, continued investment in the businesses
and the stage of the business cycle. Despite positive adjusted EPS
growth of 6.5% over the three-year period, performance of this
element remained under the minimum threshold and did not vest.
Total shareholder return over the performance period was 10.4% per
annum, meeting the threshold target. The overall level of vesting of the
LTIP has increased from the previous year’s award (30% compared to
19%) and, as a result, the single total remuneration figures for the
executive directors have marginally increased from the previous year.
The vesting outcomes are set out on pages 89 and 90.
CHANGES TO THE BOARD OF DIRECTORS DURING THE YEAR
On 24 September 2019, the group announced that after ten years,
Preben Prebensen had decided to step down as chief executive. The
board will now commence a formal search for a successor, considering
both internal and external candidates, in line with our established
succession process. Preben will remain with the group for the next 12
months to ensure a smooth handover. The termination arrangements in
relation to his remuneration will be agreed in due course. These will be
disclosed on our website in accordance with Section 430(2B) of the
Companies Act 2006 and in the 2020 Directors’ Remuneration Report.
As announced earlier in the year, Elizabeth Lee decided to retire from
the company at the end of the financial year. Elizabeth will receive a
bonus for the full year’s contribution she made during the 2019
financial year and she will keep her unvested LTIP awards, time
pro-rated and subject to performance conditions.
Jonathan Howell, our former group finance director, left the company at
the end of the Annual General Meeting in November 2018. In
recognition of his strong contribution during the period before he left,
Jonathan has been awarded a time pro-rated bonus for the period of
the 2019 financial year for which he was group finance director.
However, previously granted LTIP and matching Share Match Plan
(“SMP”) awards have all lapsed.
Mike Morgan, formerly the chief financial officer of the Banking division,
has succeeded Jonathan. His annual bonus relating to the proportion
of the year before his appointment as group finance director has been
determined in line with other group Executive Committee members,
and his annual bonus for the proportion of the year as an executive
director has been determined in line with the executive director policy.
As disclosed last year, Mike’s annual maximum bonus and LTIP
opportunity for the group finance director role have both been set
initially at 175% of salary, well within the 300% and 350% maximums
respectively permitted within our approved policy. We are pleased to
see Mike making a good start in his new role.
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.
As in previous years, we continue to direct effort into reviewing and
approving the overall remuneration for all levels of employees across
the group. For further details, please see the Remuneration
Committee activity table on page 83.
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
decreased by 6%; predominantly driven by the reduction in bonus
awards in the Securities division. The group continues to pay all staff
at or above the national living wage, which is in excess of the national
minimum wage.
GENDER PAY DISCLOSURE
This year the Remuneration Committee has overseen the publication of
our second 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 primarily 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 at
the end of the financial year exceeded 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. We are
also on track to meet our commitment as part of the Women in Finance
Charter to have 30% of senior management population identify as female.
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. We also continue to focus
on our broader ambitions around inclusion and are committed to
fairness and equality, regardless of how our colleagues identify. We
are pleased that our employees continue to feel that we are inclusive,
as demonstrated by responses in the employee opinion survey, and
we continue to push forward and implement activities and initiatives in
this sphere to ensure we are building an inclusive environment where
all our colleagues feel proud to work for us.
KEY EXTERNAL DEVELOPMENTS
The 2018 UK Corporate Governance Code includes new provisions on
executive pay, against which we are already well positioned. The LTIP
performance period plus post-vesting holding period totals five years.
The Committee has overriding discretion for vesting awards to be
reduced, to the extent to which it judges that the unadjusted outcome
from the performance conditions does not reflect underlying
performance. Our pension benefits provision for new executive directors
within our remuneration policy is on the same basis as those of other UK
employees and we applied this approach when Mike Morgan was
appointed to the Board in 2018. We intend to be compliant with the
updated Code and will include appropriate changes during our detailed
review of the Directors’ Remuneration Policy over the coming year.
Although there is still some uncertainty, draft legislation in Europe has
the potential to result in new regulatory requirements on the structure
of our remuneration, in particular the latest iteration of the Capital
Requirements Directive and the new Investment Firms Directive. We
will continue to monitor developments closely and any impact of the
regulatory changes will be incorporated in the remuneration policy
review to be conducted during 2020.
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
24 September 2019
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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.
A summary of the Policy is provided in the tables below. 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.
Information on how the remuneration policy will be applied in 2020 is included in the Annual Report on Remuneration section, on pages 90
and 91.
REMUNERATION POLICY – EXECUTIVE DIRECTORS
Element
Operation
BASE SAL ARY
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 executive directors 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.
• Other benefits provided to individuals in certain circumstances, such
as relocation.
PENSION
Provides appropriate and competitive level of personal and dependant
retirement benefits.
• Existing executive directors may receive cash in lieu of a pension up
to 22.5% of base salary.
• New executive directors promoted to the Board will receive pension
contributions in line with the general employee population.
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 PL AN
Motivates executives to achieve the group’s longer-term strategic
objectives and aligns their interests with those of key stakeholders.
• Maximum opportunity:
– Chief executive and group finance director: up to 300% of base
salary (60% deferred into shares).
– Group head of legal and regulatory affairs1: 120% of base salary
(40% deferred into shares).
• Deferred shares vest in equal tranches over three years.
• Awards based 40% to 60% on financial performance with the
remainder based on performance against a balanced scorecard.
– Chief executive and group finance director: 60%.
– Group head of legal and regulatory affairs1: 40%.
• Subject to malus and clawback provisions.
• Maximum award level at grant:
– Chief executive and group finance director: 350% of base salary.
– Group head of legal and regulatory affairs1: 275% of base salary.
• Awards vest after three years with subsequent two-year holding
Aids the attraction and retention of key staff.
period.
• Awards vest 70% based on financial performance and 30% based
on non-financial performance.
• Subject to malus and clawback provisions.
SHAREHOLDING REQUIREMENT
Aligns the interests of executives with those of shareholders.
• Shareholding requirements are:
– Chief executive and group finance director: minimum 200%
OTHER
LEGACY ARRANGEMENTS
of base salary.
– Group head of legal and regulatory affairs1: minimum 100% of
base salary.
• The group will pay legal, training and other reasonable and
appropriate fees, including any relevant tax liabilities, incurred by the
executive directors as a result of performing their duties.
• The executive directors 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.
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Element
Operation
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.
CL AWBACK
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 award.
The LTIP is subject to clawback for four years from date of award.
• The circumstances where it may apply:
– The executive director’s employment is terminated for misconduct
or the executive director is issued with a formal disciplinary warning
for misconduct under the firm’s disciplinary policy.
– The firm suffers a material loss where the executive director 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 mis-statement 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 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.
1 At the end of the 2019 financial year, the group head of legal and regulatory affairs stepped down from the board. For the 2020 financial year Close Brothers will only have two
executive directors: the chief executive and group finance director.
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Directors’ Remuneration Report
continued
SERVICE CONTRACTS AND POLICY FOR PAYMENT ON LOSS OF OFFICE
Standard provision
Notice period
Policy
Details
12 months’ notice from the company.
12 months’ notice from the executive
director.
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.
• Executive directors 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 executive directors 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 executive director.
• The Committee may award a pro-rated bonus to executive
directors 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
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 a
Treatment of the LTIP and any
previous Matched SMP Shares
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.
change in control.
• Awards lapse in the event the employee is declared
bankrupt, joins another financial services company within
12 months of termination (unless this condition is waived
under “good leaver” status), or leaves and is not designated
a “good leaver”.
• These are also subject to the clawback conditions.
• For “good leavers”, vesting is pro-rated for the period of
employment during the performance period.
• Vesting is subject to the achievement over the original
performance period against the performance targets and is
on the original schedule.
• Awards remain subject to the malus and clawback conditions.
• In the event of a change in control, the awards will vest
subject to the service factor and the achievement against
the performance targets at that point.
• However, the Committee retains the discretion to increase
the amount vesting depending on the circumstances of the
change in control.
Outside appointments
Chairman and non-executive
directors
Executive directors may accept external
appointments.
• Board approval must be sought before accepting the
appointment.
• The fees may be retained by the director.
• 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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81
DATES OF SERVICE CONTRACTS – EXECUTIVE DIRECTORS
Name
Preben Prebensen
Elizabeth Lee
Mike Morgan
Date of service contract
9 February 2009
1 August 20121
15 November 2018
1 No longer in force as Elizabeth Lee retired from the company on 31 July 2019.
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
Peter Duffy
Date of appointment
3 June 2014
4 January 2011
23 December 2013
21 November 2013
14 March 2017
1 January 2019
Current letter of appointment start date
17 November 2016
17 November 2016
17 November 2016
17 November 2016
14 March 2017
1 January 2019
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Annual Report 2019
82
Directors’ Remuneration Report
continued
ANNUAL REPORT ON REMUNERATION
REMUNERATION COMMITTEE
COMMITTEE ROLES AND RESPONSIBILITIES
The Committee’s key objectives are to:
The Committee’s main responsibilities are to:
• determine the overarching principles and
parameters of the Remuneration Policy on
a group-wide basis;
• review and determine the total remuneration packages of executive directors 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 of any performance-related pay schemes operated by the group;
remuneration package to attract, motivate
and retain high calibre executive directors
and senior management across 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 other than Peter
Duffy. A record of the Committee members’ attendance at the five meetings held during the year is set out on page 62.
The chairman of the board, chief executive, group head of human resources and the head of reward and HR operations also
attend meetings by invitation.
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83
MEMBERSHIP ACTIVITY IN THE 2019 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 addressed during the year were as follows:
September
2018
January
2019
April
2019
June
2019
July
2019
Remuneration policy and disclosures
Review and approval of Remuneration Policy Statement for 2018
Review and approval of Directors’ Remuneration Report for 2018
Review and approval of the remuneration section of the Pillar 3 disclosure for 2018
Annual remuneration governance review
Annual review of Total Reward Principles
Risk and reward
Review and approve risk-adjustment process/outcomes
Annual review whether to apply malus and clawback to remuneration
Annual remuneration discussions
Approval of LTIP performance targets for 2018 awards
Final review and approval of EDs’ annual bonus targets and objectives
Review of performance testing results for vesting 2015 LTIP and SMP awards
Year-end all-employee group-wide salary and bonus analysis/proposals
Thematic review of effectiveness of sales incentive schemes
Review and approval of the risk management objectives for the 2016 LTIP vesting
Review proposed 2019 compensation for Material Risk Takers
Review and approval of EDs’ 2019 compensation proposals
Review and approval of proposed 2019 LTIP awards
Initial review of LTIP performance targets for 2019 awards
Initial review of EDs’ annual bonus targets and objectives for 2020
Review of sales incentive schemes and approval of schemes for 2020
Regulatory and external developments
Review of Corporate Governance Code
Material Risk Takers identification
Gender pay gap review
Special business
Review and approval of Divisional Incentive Plans
Review and approval of EDs’ retirement arrangements
Omnibus plan rules change
Committee remit and effectiveness
Review terms of reference
Self-evaluation
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
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.
The Committee’s remuneration advisers are Deloitte LLP (a member of the Remuneration Consultants Group). 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. Fees paid to Deloitte in their role as remuneration advisers were £151,200 during
the 2019 financial year.
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 £32,450.
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Annual Report 2019
84
Directors’ Remuneration Report
continued
STATEMENT OF VOTING ON THE REMUNERATION POLICY AT THE 2017 AGM
Director’s Remuneration Policy
For
97.1%
Against
2.9%
Number of abstentions
11,022
STATEMENT OF VOTING ON THE DIRECTORS’ REMUNERATION REPORT AT THE 2018 AGM
Annual Report on Remuneration
For
98.6%
Against
1.4%
Number of abstentions
14,746
IMPLEMENTATION OF THE POLICY IN 2019
SINGLE TOTAL FIGURE OF REMUNERATION FOR EXECUTIVE DIRECTORS 2019 (AUDITED)
Name
Preben Prebensen
Jonathan Howell4
Elizabeth Lee
Mike Morgan5,6
Salary
Benefits
Annual bonus1
Performance awards2, 3
Pension
Total
2019
£’000
550
123
338
285
2018
£’000
550
415
338
–
2019
£’000
20
4
14
1
2018
£’000
20
14
14
–
2019
£’000
1,356
293
340
341
2018
£’000
1,419
1,058
348
–
2019
£’000
758
–
281
344
2018
£’000
429
323
167
–
2019
£’000
124
28
75
29
2018
£’000
123
93
75
–
2019
£’000
2,808
448
1,048
1,000
2018
£’000
2,541
1,903
942
–
1 60% of Preben Prebensen’s, Mike Morgan’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 2018 have been re-calculated using the actual share price on the dates of vesting for the LTIP and Matched SMP Shares of £15.02. The
three-month average to 31 July 2018 was used for the 2018 report given that the awards were vesting after publication of the report.
3 The figures for the performance award for 2019 have been calculated using the three-month average to 31 July 2019.
4 Jonathan Howell left the company in November 2018 and his remuneration including salary, benefits, bonus and pension has been time pro-rated accordingly.
5 Mike Morgan joined the board in November 2018. His salary, benefits, bonus and pension in the table above relate to the period that he was an Executive Director.
6 Mike Morgan’s performance awards were granted before he was appointed to the board. £170,316 of the above value relates to 10,520 vested LTIP and SMP Shares that were
subject to the performance criteria outlined on page 88 and £173,589 of the above relates to 10,373 vested shares that were conditional on continued employment and positive EPS
growth between grant and vesting.
LINK BETWEEN REWARD AND PERFORMANCE
The group’s financial results have been solid and reflect a challenging environment for our market-facing divisions and continued investment in
our businesses. Adjusted operating profit has decreased 3% in the year to £270.5 million, whilst it has grown 5% per annum compounded over
the last three financial years on a reported basis. RoE remains strong at 15.7% and dividend growth was 5% this year, with dividend cover
remaining solid at 2.1 times.
The strong RoE has been reflected in the executive directors’ bonuses, with the element of the bonus determined by RoE being 71.3% of the
potential maximum. The executive directors also achieved strong performance against their group-wide balanced scorecard, with payouts
ranging from 65% to 98.5%.
For the 2016 Long-Term Incentive Plan vesting this year, 80% of the vesting is based on financial goals and 20% is based on risk, compliance
and control objectives. For the financial goals, the AEPS growth of 6.5% over the last three years was below the threshold performance target
of 18.9% and consequently the AEPS element of the LTIP has not vested. The compounded TSR of 10.4% per annum has met the threshold
target of 10.0% per annum under the LTIP, meaning the TSR element will vest at 11.1%. 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 93.8%. As a result, the LTIP will vest at 29.9% overall this year (see page 88 for further details).
The LTIP vesting levels have marginally increased the single total remuneration figures as the overall level of vesting of the LTIP has increased
from the previous year’s award (30% compared to 19%), primarily driven by total shareholder return over the performance period meeting the
threshold target. Average LTIP vesting levels are 53% over the last five and 10-year periods, and the lower current levels of vesting reflect the
stretching targets set by the Committee which are difficult to achieve at the current stage of the business cycle.
ADDITIONAL DISCLOSURES ON THE SINGLE TOTAL REMUNERATION FIGURE FOR EXECUTIVE DIRECTORS TABLE (AUDITED)
SALARY
The per annum salaries paid during the year are as shown in the single total remuneration figure table above. When reviewing salary levels, the
Committee takes into account the individual’s role and experience, pay for the broader employee population, market and external factors, where
applicable. No salary increases have been awarded to the current executive directors for the 2020 financial year, whilst the average increase for
the general employee population is 3%.
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85
BENEFITS
Preben Prebensen, Jonathan Howell and Elizabeth Lee each received an allowance in lieu of a company car. Preben Prebensen received
£18,000 while Jonathan Howell and Elizabeth Lee received £12,000. Mike Morgan does not receive an allowance in lieu of a company car.
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
Preben Prebensen, Jonathan Howell and Elizabeth Lee received a monthly cash pension allowance equivalent to 22.5% of base salary. Mike
Morgan received a pension allowance equivalent to 10% of base salary, the same percentage as the general employee population. They do not
receive any additional pension provision.
ANNUAL BONUS
Maximum bonus potential for the 2019 financial year was 300% of salary for Preben Prebensen and Jonathan Howell (time pro-rated for period
as executive director), 175% of salary for Mike Morgan (time pro-rated for period in executive director role) and 120% of salary for Elizabeth Lee.
The bonuses for executive directors 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 ACHIEVEMENT
Name
Preben Prebensen
Jonathan Howell1
Elizabeth Lee
Mike Morgan1
Financial target (RoE)
Group-wide balanced scorecard
Potential
maximum
£’000s
990
747
162
420
Actual
per cent of
maximum
71.3%
71.3%
71.3%
71.3%
Actual
amount
awarded
£’000s
706
159
115
212
Weighting
40%
40%
60%
40%
Potential
maximum
£’000s
660
498
243
280
Actual
per cent
awarded
98.5%
90.0%
92.5%
65.0%
Actual
amount
awarded
£’000s
650
134
225
129
Total
bonus
awarded
£’000s
1,356
293
340
341
Weighting
60%
60%
40%
60%
1 Jonathan Howell’s and Mike Morgan’s annual bonus is time pro-rated for their periods as executive directors.
The RoE for the 2019 financial year was 15.7% against a maximum target of 20%, warranting an award of 71.3% of the potential maximum
bonus for this element.
FINANCIAL MEASURES – 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
15.7%
Percentage
of RoE element paid
71.3%
For Preben Prebensen, Jonathan Howell and Mike Morgan, 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.
GROUP-WIDE EXECUTIVE DIRECTORS’ OBJECTIVES FOR THE 2019 FINANCIAL YEAR
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 86 to 88 sets out examples of the key balanced scorecard objectives which were in place in 2019, performance metrics
against these objectives where appropriate, 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. Mike Morgan has made a good start to his
executive director role, and the lower percentage awarded to him under the group-wide balance scorecard reflects his recent appointment and
relative contribution in the 2019 financial year. The resultant awards ranged between 65% and 98.5% 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.
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86
Directors’ Remuneration Report
continued
PERFORMANCE AGAINST GROUP-WIDE EXECUTIVE DIRECTORS’ 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.
PRINCIPAL RISKS AND UNCERTAINTIES
K E Y:
P E R F O R M A N C E O B J E C T I V E H A S B E E N F U L LY A C H I E V E D
S AT I S FA C T O R Y O U T C O M E , F U R T H E R P R O G R E S S T O
O R E XC E E D E D
B E M A D E
P E R F O R M A N C E O B J E C T I V E H A S N O T B E E N M E T
Objective
Assessment of performance against objectives including performance metrics
STRATEGIC – PROTECT
Maintain the discipline of the business
model
Performance metrics
• Net interest margin 7.9% (2018: 8.0%)
• Bad debt ratio 0.6% (2018: 0.6%)
• Return on net loan book 3.3% (2018: 3.5%)
• Average loan book maturity 14 months (31 July 2018: 14 months)
• Moderate loan growth of 5.7% (2018: underlying growth of 6.6%)
• Winterflood only two loss days (2018: no loss days)
Maintain prudent levels of capital,
funding and liquidity
Monitor and mitigate external threats,
including competition from both
established and emerging players
and the UK’s departure from the EU
Assessment
• Firm adherence to lending model with continued underwriting and pricing discipline
• Core financial metrics remain consistent with the group’s lending model
• Credit risk metrics including security cover, tenor, pricing, credit quality and
concentration risk remain within risk appetite
• Continued loan book growth moderation reflects margin and underwriting discipline
consistent with the business model
• Maintained solid trading profitability for Winterflood in challenging conditions
Performance metrics
• CET1 capital ratio 13.0% (regulatory minimum requirement: 9.0%)
• Total capital ratio 15.2% (regulatory minimum requirement: 13.4%)
• Leverage ratio 11.0% (minimum requirement: 3.0%)
• Total funding 129% of loan book (31 July 2018: 132%)
• Average maturity of allocated funding 20 months vs loan book at 14 months
• £1,395 million of liquid assets (31 July 2018: £1,435 million)
• Average 12-month liquidity coverage ratio 823% (regulatory minimum: 100%)
Assessment
• Maintained strong capital ratios, diverse funding and conservative maturity profile
• Maintained significant CET1 capital headroom above minimum requirement, with very
strong leverage ratio
• Maintained prudent funding relative to loan book, with average maturity of allocated
funding significantly longer than loan book
• Successful renewal and extension of secured funding facilities
• Prudent liquidity position and very strong liquidity coverage ratio, substantially in
excess of regulatory requirements
Assessment
• Completed thematic reviews of key industry themes to identify potential risks and
opportunities
• Ongoing review and monitoring of Brexit-related risks through dedicated Brexit Forum
• Appropriate preparations now made for a potential “no deal” exit, including the
establishment of a new Irish subsidiary with associated regulatory approvals
• Extensive work on preparing to manage the business in a downturn, including
scenario analysis, playbooks and simulations
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87
Objective
Assessment of performance against objectives including performance metrics
STRATEGIC – IMPROVE
Progress key investment initiatives
Assessment
• Premium transformation project benefits delivered materially in excess of original
business case, with 34% growth in loan book since 2016
• Delivered new customer deposit platform and successfully transitioned 37,000 customer
accounts and £3.8 billion of deposits, with launch of online offering on track for the 2020
financial year
• IRB project on track and progressing towards formal application
• Motor transformation materially progressing, with rollout of new sales competencies and
process resulting in improved new business performance
• Technology transformation in Close Brothers Asset Management fully mobilised, planned
and resourced
Maintain cost discipline
Performance metrics
• Group expense/income ratio 61% (2018: 60%)
• Banking expense/income ratio 50% (2018: 49%)
STRATEGIC – EXTEND
Progress current new business initiatives
Further develop distribution opportunities
and networks
PEOPLE
Maintain strong engagement and
reinforce position as employer of
choice
Succession planning for key senior
management team
Assessment
• Overall cost growth of 4% vs income at 1% reflects continued strategic investment, as
well as pressure on income in market-facing businesses
• Banking costs held broadly flat in H2 reducing Banking full-year operating leverage to
-3% (H1 -5%)
• Banking division staff costs remained flat on prior year
Assessment
• Executed sale of unsecured retail point of sale finance business, realising a small profit
• Continued strong growth of Novitas’ litigation finance product
• Good momentum in personal contract hire product in Asset Finance
• Maintained good growth momentum in Close Brothers Asset Management with net
inflow rate of 9% and recruitment of additional bespoke portfolio managers
• Good progress in extension of Winterflood’s institutional franchise and development of
Winterflood Business Services
Assessment
• Winterflood received FINRA approval to enable direct dealing with US institutions
• Signed up significant new intermediary relationships in Premium Finance
• Extensive review of partner journeys to support investment decisions in Motor Finance
• Extension of Property Finance activities to Manchester and Northern Ireland
• Effective use of data analytics to increase value add to brokers in Premium Finance
Performance metrics
• 88% employee engagement (external benchmark 83%/2018: 89%)
Assessment
• Employee opinion survey confirms continued strong employee engagement
• Full interview-based review to confirm Close Brothers is an employer of choice for front
office staff, and identify key strengths and areas of potential improvement
Assessment
• Successful transition of Mike Morgan to group finance director
• Ongoing development of internal succession options for key executive roles
• Successful transition to new group head of compliance and group general counsel
• Successful hiring of new group chief operating officer
• Successful recruitment of key leadership roles in Close Brothers Asset Management
• Embedding of Winterflood leadership team, which is performing well in a
challenging market
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
88
Directors’ Remuneration Report
continued
Objective
Assessment of performance against objectives including performance metrics
CUSTOMERS
Maintain focus on the end customer
RISK CONDUCT AND COMPLIANCE
Operate within risk appetite, preserve
compliance with legal and regulatory
obligations, maintain strong control
framework and overall operational
resilience
Performance metrics
• +51 customer NPS in Premium Finance (2018: +50), +56 bespoke NPS in Asset
Management (2018: +61), +79 customer NPS in Asset Finance, and 78% repeat
business in Property
Assessment
• Key customer metrics for all Banking businesses defined and reported through
Banking division customer forum and board
• Strong key customer metrics maintained across the Banking businesses
• Customer research and analysis completed across multiple Banking businesses,
forming basis of strategic decisions and future investment plans
• Asset Management NPSs well established
• Client personas being used to guide technology investment in Close Brothers Asset
Management
• Multiple enhancements at Winterflood, including corporate and retail web applications,
improved response times, and clearer presentation of information
Performance metrics
• 2018 employer opinion survey scores on values and principles; Banking division 95%,
Close Brothers Asset Management 98% and Winterflood 95%
• 100% completion of mandatory compliance training for eligible staff
Assessment
• Continued strengthening of the risk framework, including policy and standards for risk
acceptance and building out the operational risk framework
• Internal audit reviews confirm businesses continue to operate within established and
embedded risk appetite, with appropriate control framework in place and satisfactory
employee behaviours
• Continued to evolve strategy and framework for disaster recovery including completion
of significant data centre disaster recovery test
• Maintained regular and constructive dialogue with the group’s regulators
• Culture and core values communicated across the group and embedded in staff
induction and recognition programmes; culture dashboard reviewed quarterly at
RCCs, GRCC and the board
LONG-TERM PERFORMANCE AWARDS
The performance awards in the single total figure of remuneration include the 2016 LTIP grant and the 2016 Matched SMP Shares. Both of
these will vest on 4 October 2019, 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)
Risk management objectives (20% weighting)
Overall vesting
1 25% of the awards vest for satisfying the threshold target.
Threshold target1
RPI +3% p.a.
+10% p.a.
Maximum target
RPI +10% p.a.
+20% p.a.
n/a
n/a
Actual achieved
2.1% p.a.
10.4% p.a.
As per the table
on page 90
Overall vesting
0.0%
11.1%
18.8%
29.9%
The share price during the relevant performance period for the LTIP and Matched SMP shares (legacy awards issued under previous
Remuneration Policy) increased by 4.2% 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 2019 was 1,435.9p (from 1 May 2019 to 31 July 2019, which was the performance
measurement period). The 2016 LTIP and SMP awards were originally granted at 1,378.6p. While the increase in share price is positive over the
performance period, the single total figures of remuneration for the executive directors have increased from the previous year primarily due to
the higher 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.
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89
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 executive
directors 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.
Year one and year two assessments were set out in the 2017 and 2018 Directors’ Remuneration Reports respectively. The year three
performance assessment is detailed below.
YEAR THREE PERFORMANCE ASSESSMENT
K E Y:
P E R F O R M A N C E O B J E C T I V E H A S B E E N F U L LY A C H I E V E D
S AT I S FA C T O R Y O U T C O M E , F U R T H E R P R O G R E S S T O
O R E XC E E D E D
B E M A D E
P E R F O R M A N C E O B J E C T I V E H A S N O T B E E N M E T
Element
Measure
Extent to which the Committee determined the target has been met
Capital and balance sheet
management
Capital requirements
• CET1 capital ratio increased from 12.7% to 13.0% and provides a
significant buffer above both the current CET1 and Tier 1 regulatory
minima of 9.0% and 10.9% respectively
Dividend
• Full-year dividend increased 5%, maintaining strong dividend cover at
2.1 times
Funding
Liquidity
• Total funding of £9.9 billion of which £5.5 billion is term funding. Average
maturity of funding allocated to loan book is 20 months, well in excess of
the loan book at 14 months
• Continue to comfortably meet the liquidity coverage ratio requirements
with an average annual ratio of 823% vs minimum requirement of 100%
Risk, compliance and
controls
Regulatory relationship
• Positive relationship with the PRA maintained
• Continuing close engagement with the FCA on key focus areas
Culture
• Group culture dashboard launched with outputs shared on a quarterly
basis with the Group Risk and Compliance Committee and board.
• Code of Conduct implemented group-wide, outlining expected
behaviours, values and attributes of the organisation
Internal Ratings Based
approach
• Good progress towards IRB application and constructive engagement
with PRA
• Ongoing development of credit scorecards and quantitative grading
models in support of application
• Embedding and use of model risk framework and governance structure
• New risk infrastructure design completed, with initial data warehouse
launched
Operational risk/resilience • Continued enhancement and alignment of overall approach in line with
evolving regulatory standards
• Operational resilience skillset strengthened with enhanced operational key
risk indicators
• Data centre failover test successfully completed, with follow-up actions
implemented
• Crisis response approach enhanced through simulations with relevant
group executives and business teams
Governance ReportFinancial StatementsStrategic Report
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Annual Report 2019
90
Directors’ Remuneration Report
continued
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
Capital and balance sheet management
Risk, compliance and controls
Overall vesting
IMPLEMENTATION OF THE POLICY IN 2020
BASE SALARY
Chief executive – Preben Prebensen
Group finance director – Mike Morgan
Year one assessment
100%
87.5%
Year two assessment Year three assessment
100%
90%
100%
85%
Overall vesting
100%
87.5%
93.75%
Salary effective from
1 August 2019
£550,000
£400,000
Increase
0.0%
0.0%
Base salaries were determined with reference to the executive director’s role and experience, increases for the broader population and external
factors. The Committee determined that it was appropriate for the executive directors’ salaries not to be increased, in line with the salary
guidance for the majority of senior employees. The average salary increase across the wider employee population was 3%.
The executive directors will receive benefits in line with those outlined in the remuneration policy table on page 78. There will be no increases to
the allowances for benefits other than any potential increase in the cost of providing them.
Preben Prebensen will continue to receive a cash allowance in lieu of a pension equivalent to 22.5% of base salary. Mike Morgan will receive a
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.
2020 ANNUAL BONUS (I.E. BONUS AWARDED IN RESPECT OF THE 2020 PERFORMANCE YEAR)
Nature of measures
Financial
Non-financial
Choice of measures
RoE
Targets
12 to 20%
Percentage of bonus
60%
Balanced scorecard:
• Strategic objectives
• People and customers
• Risk, conduct and compliance
Discretionary assessment1
40%
Vesting ranges
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 2020 Annual Report on Remuneration.
2 Performance below threshold on the RoE measure would result in zero vesting of the financial measure.
The maximum bonus potential for Preben Prebensen will remain at 300% of salary in line with previous years. As highlighted last year, Mike
Morgan will initially have a maximum bonus potential of 175% of salary following his appointment to the board.
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.
2019 LTIP (I.E. LTIP AWARDED IN RESPECT OF THE 2019 TO 2021 CYCLE)
The 2019 LTIP awards due to be granted in October 2019 are shown in the table below.
2019 LTIP award
Percentage change in LTIP award from 2018
2019 LTIP award as a percentage of 2019 salary
Chief executive
Preben Prebensen
£1,890,0001
0%
344%
Group finance director
Mike Morgan
£700,000
0%2
175%
Group head of legal and
regulatory affairs
Elizabeth Lee
–
–
–
1 Following the announcement regarding the departure of Preben Prebensen in 12 months time, the termination arrangements in relation to his remuneration will be agreed
in due course. These will be disclosed on our website in accordance with Section 430(2B) of the Companies Act 2006 and in the 2020 Directors’ Remuneration Report.
2 In October 2018 Mike Morgan was granted a time pro-rated LTIP award equivalent to £700,000 from the date he became an executive director.
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91
The 2019 LTIP targets are detailed in the table below.
Nature of measures
Financial
Choice of measures
Adjusted EPS growth
Targets
10 to 30% over 3 years
Weightings
35%
RoE
12 to 20%1
Non-financial
Risk management objectives
Discretionary assessment
against specific goals
35%
30%
Vesting ranges
Threshold – 25%
Maximum – 100%
Threshold – 25%
Maximum – 100%
Threshold – 25%
Maximum – 100%
1 Average over three-year performance period.
The Committee believes these targets are appropriately stretching and effectively align the executive directors’ interests with those of
shareholders.
In order to provide greater alignment of executive directors’ compensation to the key long-term risk measures, last year the Committee
introduced a more focused approach to concentrate on a smaller number of key risk, conduct and compliance objectives, typically with a
multi-year time horizon. Three of the four objectives to be included for the 2020 financial year are the same as for the 2019 financial year. A focus
on sustainability as a key risk management objective replaces the objective of improving regulatory relationships as an LTIP performance
measure. Whilst these relationships are naturally still very important to the organisation, they will remain as a key objective in the executive
directors’ annual bonus scorecard, rather than being duplicated in both the LTIP and the bonus scorecard.
The four risk management objectives for the 2020 financial year are detailed in the following table.
Measure
Further progress our plans towards an Internal Ratings-Based (“IRB”) approach
Evolve the oversight of the culture framework of the organisation
Increase our focus and further develop the group’s approach to sustainability
Continue to enhance our resilience to operational risks
Due to commercial sensitivity, the full details of the milestones for the risk objectives will be outlined in the Directors’ Remuneration Report
throughout the performance period rather than prospectively.
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.
2019
£ million
292.4
98.5
2018
£ million
300.1
94.0
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 2019
financial year. The Committee deemed it appropriate for Preben Prebensen to receive no salary increase while the average increase across the
general employee population was 2%. The change in bonus for Preben Prebensen primarily reflects the achievement against the RoE outlined
on page 85. The average bonus for the general employee population broadly moved in line with AOP of the division which employs them, as
shown on pages 2 and 3. The average decrease in bonus for the general employee population is 14.6%; if Winterflood is excluded the average
decrease is 6.3%.
Preben Prebensen
All employee population
Average change
in salary for 2019
(from 1 August 2018)1
0%
2%
Average change
in benefits for 2019
(from 1 August 2018)2
0%
2%
Average change
in annual bonus
for 20193
(4.4)%
(14.6)%
1 Calculated as the average percentage increase in salary for those eligible for an increase at 1 August 2018.
2 Calculated as the average percentage increase in benefits for those eligible for a salary increase at 1 August 2018.
3 The percentage increase in the average bonus calculated as the total bonus spend divided by the average headcount for financial years 2018 and 2019.
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Annual Report 2019
92
Directors’ Remuneration Report
continued
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
20152
2016
2017
20181
2019
£1,890
£2,187
£2,496
£5,748
£7,411
£5,962
£3,995
£3,337
£2,541
£2,808
90%
95%
90%
100%
100%
98%
95%
91%
86%
82%
33%
33%
25%
79%
95%
97%
68%
51%
19%
30%
1 The figures for the performance awards for 2018 have been recalculated using the actual share price on the dates of vesting for the LTIP and Matched SMP Shares of £15.02. In the
2018 report, the three-month average to 31 July 2018 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 10 years.
Adjusted EPS and TSR growth
LTIP vesting %
100
350
300
250
200
150
100
50
0
97%
95%
79%
68%
51%
33%
33%
25%
30%
19%
2007
award
vested
20101
2008
award
vested
20111
2009
award
vested
20121
TSR
2010
award
vested
20132
2011
award
vested
20142
2012
award
vested
20153
2013
award
vested
20163
2014
award
vested
20173
2015
award
vested
20183
2016
award
vested
20193
AEPS
LTIP vesting
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 2016 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 SIX YEARS
Year awarded
20111
20122
20132
20142
20152
20162
Year vested
2014
2015
2016
2017
2018
2019
Adjusted EPS
100%
100%
100%
56%
0%
0%
Vesting percentage
TSR
100%
100%
25%
26%
0%
28%
Goals
85%
87%
89%
92%
93%
94%
Total
95%
97%
68%
51%
19%
30%
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 2016 awards.
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93
PERFORMANCE GRAPH
The graph below shows a comparison of TSR for the company’s shares for the 10 years ended 31 July 2019 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
July 2019
Source: Thomson Reuters Datastream
Close Brothers
FTSE 250 Index
Note:
This graph shows the value, by 31 July 2019, 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 2019 was 1,331p and the range during the
year was 1,331 to 1,660p.
SCHEME INTERESTS AWARDED DURING THE YEAR (AUDITED)
The face value and key details of the share awards granted in the 2019 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 £15.89, the average mid-market closing price for the five days prior to grant (2 October 2018).
Name
Preben Prebensen
Jonathan Howell
Mike Morgan
Elizabeth Lee
Award type1
DSA2
LTIP3,4
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
1–3 years
3 years
Performance
conditions
No
Yes
Face value
’000
£852
£1,890
Percentage
vesting at
threshold
n/a
25%
Number of
shares
53,588
118,958
Vesting/
performance
period end date
02-Oct-21
02-Oct-21
No
Yes
No
Yes
No
Yes
£635
–
£15
£608
£139
£700
n/a
25%
n/a
25%
n/a
25%
39,965
–
945
38,268
8,769
44,059
02-Oct-21
02-Oct-21
02-Oct-21
02-Oct-21
02-Oct-21
02-Oct-21
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 2019 LTIP targets, detailed on page 91.
4 LTIPs granted in 2018 have an additional two-year holding period.
EXTERNAL APPOINTMENTS
Preben Prebensen received £70,875 in non-executive director fees (2018: £63,750) from The British Land Company plc and, whilst in the
employment of Close Brothers Group, Jonathan Howell received £22,804 in non-executive director fees (2018: £77,000) from The Sage Group plc.
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Annual Report 2019
94
Directors’ Remuneration Report
continued
PAYMENTS TO DEPARTING DIRECTORS (AUDITED)
Jonathan Howell left the company following the November 2018 AGM and, in recognition of his strong contribution prior to departure, has been
awarded a time pro-rated bonus for the period of the 2019 financial year he was group finance director, which has been included in the single
figure table. The Committee carefully considered the treatment of Jonathan’s outstanding share incentive awards taking into account the nature
of his departure, his subsequent employment status and the share plan rules. It was consequently agreed by the Committee that Jonathan’s
outstanding deferred bonus shares and his Invested 2016 SMP award should be permitted to vest on their original vesting schedules and that
his outstanding LTIP and Matched 2016 SMP awards should be forfeited upon cessation of employment.
Elizabeth Lee decided to retire from her executive career at the end of the financial year. The Committee determined that Elizabeth will keep
previous bonus deferrals and her unvested LTIP awards, subject to time pro-rata and performance conditions. All awards will vest on their
original vesting schedule with no acceleration.
Jonathan Howell and Elizabeth Lee both received holiday pay for holiday accrued but not taken during the year amounting to £3,687 and
£15,000, respectively.
PAYMENTS TO PAST DIRECTORS (AUDITED)
There were no payments made to past directors during the year other than vesting of outstanding share awards as disclosed in previous
remuneration reports.
EXECUTIVE DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS (AUDITED)
The interests of the directors in the ordinary shares of the group at 31 July 2019 are set out below:
Name
Preben Prebensen
Mike Morgan
Jonathan Howell6,7
Elizabeth Lee
Shareholding
requirement
at 31 July
20191
82,645
60,106
55,371
25,357
Number of
shares
owned
outright2
2019
503,101
24,572
60,000
30,948
Outstanding share awards
not subject to performance
conditions3
Outstanding share awards
subject to performance
conditions4
2019
140,171
21,619
–
23,277
2018
153,190
–
111,729
27,901
2019
405,182
130,024
–
150,069
2018
423,898
–
310,739
159,581
Outstanding options5
2019
1,458
2,505
–
1,542
2018
1,458
2,505
–
1,542
1 Based on the closing mid-market share price of 1,331p on 31 July 2019.
2 This includes shares owned outright by closely associated persons.
3 This includes DSA and SMP Invested Shares.
4 This includes LTIP awards and Matched SMP Shares.
5 These are comprised of SAYE options.
6 Jonathan Howell’s shareholding is at 16 November 2018, the day he left the company.
7 As at 16 November 2018, Jonathan Howell held 500,000 of the company’s subordinated loan notes due 2027.
No executive directors held shares that were vested but unexercised at 31 July 2019. There were no changes in notifiable interests between
1 August 2019 and 19 September 2019, other than the purchase of shares by Preben Prebensen within the SIP which increased his
shareholding to 503,125 shares.
EXECUTIVE DIRECTORS’ SHAREHOLDING
The chart below compares the current executive directors’ shareholding versus shareholding policy, as a percentage of salary. Following Mike
Morgan’s appointment to group finance director, he will be expected to build up his shareholding over a reasonable timeframe to meet the
minimum requirement under the executive directors’ remuneration policy.
PREBEN PREBENSEN
200%
MIKE MORGAN
200%
82%
1,218%
0
300
600
900
1,200
1,500
Policy
Actual
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Close Brothers Group plc
95
DETAILS OF EXECUTIVE DIRECTORS’ SHARE EXERCISES DURING THE YEAR (AUDITED)
Name
Preben Prebensen
Jonathan Howell
Award type
2015 DSA
2016 DSA
2017 DSA
2015 LTIP
2015 SMP – Invested
2015 SMP – Matched
2015 DSA
2016 DSA
2017 DSA
2015 LTIP
2015 SMP – Invested
2015 SMP – Matched
Held at
1 August
2018
5,179
4,727
21,344
66,962
35,356
70,712
3,014
2,565
15,735
50,221
26,785
53,570
Called1
5,179
4,727
21,344
12,442
35,356
13,139
3,014
2,565
15,735
9,332
26,785
9,954
Market price
on award
p
1,493.4
1,378.6
1,459.0
1,493.4
1,493.4
1,493.4
1,493.4
1,378.6
1,459.0
1,493.4
1,493.4
1,493.4
Market price
on calling
p
1,553.6
1,532.2
1,532.2
1,553.6
1,553.6
1,553.6
1,553.6
1,532.2
1,532.2
1,553.6
1,553.6
1,553.6
Lapsed
–
–
–
54,520
–
57,573
–
–
–
40,889
–
43,616
Total value
on calling1
£
80,461
72,429
327,040
193,299
549,291
204,128
46,826
39,302
241,097
144,982
416,132
154,645
Dividends
paid on
vested shares
£
9,190
5,625
13,020
22,078
62,737
23,314
5,348
3,052
9,598
16,559
47,528
17,663
Mike Morgan
2015 LTIP
13,393
2,489
10,904
1,493.4
1,554.0
38,679
4,417
Elizabeth Lee
2015 LTIP
2015 SMP – Invested
2015 SMP – Matched
26,785
13,393
26,786
4,977
13,393
4,977
21,808
–
21,809
1,493.4
1,493.4
1,493.4
1,553.6
1,553.6
1,553.6
77,323
208,074
77,323
8,831
23,765
8,831
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 EXECUTIVE 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 executive directors 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 executive director 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 78.
The Matched SMP Shares are subject to the same performance criteria.
DETAILS OF EXECUTIVE DIRECTORS’ OPTION EXERCISES DURING THE YEAR (AUDITED)
No executive director exercised options during the 2019 financial year.
SINGLE TOTAL FIGURE OF REMUNERATION FOR NON-EXECUTIVE DIRECTORS (AUDITED)
2019
Basic fee1
£’000
300
67
67
67
67
39
Committee
chairman
£’000
–
30
–
30
30
–
Committee
member
£’000
–
10
15
10
10
3
Senior
independent
director
£’000
–
–
20
–
–
–
Benefits2
£’000
5
–
–
3
11
–
Total
£’000
305
107
102
110
118
42
Basic fee1
£’000
300
67
67
67
67
–
2018
Committee
chairman
£’000
–
30
–
30
30
–
Committee
member
£’000
–
10
15
10
10
–
Senior
independent
director
£’000
–
–
20
–
–
–
Benefits2
£’000
6
–
–
1
10
–
Total
£’000
306
107
102
108
117
–
Name
Mike Biggs
Oliver Corbett
Geoffrey Howe
Lesley Jones
Bridget Macaskill
Peter Duffy3
1 Non-executive director fees were last 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 non-executive directors’ tax.
3 Peter Duffy was appointed a director on 1 January 2019.
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Annual Report 2019
96
Directors’ Remuneration Report
continued
NOTES TO THE SINGLE TOTAL FIGURE OF REMUNERATION FOR NON-EXECUTIVE DIRECTORS
The fees payable to non-executive directors for the 2019 and 2020 financial years are as follows. Certain fees have been increased with effect
from 1 August 2019 for the first time since 2017.
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 non-executive directors in the ordinary shares of the company are set out below:
Name
Oliver Corbett
Geoffrey Howe
Lesley Jones
Bridget Macaskill
Mike Biggs
Peter Duffy
There were no changes in notifiable interests between 1 August 2019 and 19 September 2019.
This report was approved by the board of directors on 24 September 2019 and signed on its behalf by:
BRIDGET MACASKILL
CHAIRMAN OF THE REMUNERATION COMMITTEE
2020
£300,000
£70,000
2019
£300,000
£67,000
£20,000
£33,000
£33,000
£33,000
£5,000
£20,000
£30,000
£30,000
£30,000
£5,000
Shares held
Shares held
beneficially at
31 July
2019
–
5,000
–
2,500
500
–
beneficially at
31 July
2018
–
5,000
–
2,500
500
–
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Close Brothers Group plc
97
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 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 2019 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 and company balance sheets
as at 31 July 2019; the consolidated income statement, the consolidated statement of comprehensive income, the consolidated cash flow
statement, and the consolidated and company statements of changes in equity 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 on page 73 of the Annual Report, we have provided no non-audit services to the
group or the parent company in the period from 1 August 2018 to 31 July 2019.
OUR AUDIT APPROACH
OVERVIEW
MATERIALIT Y
• Overall group materiality: £13.2 million (2018: £13.5 million), based on 5% of profit before tax.
• Overall parent company materiality: £10 million (2018: £6.5 million), based on 1% of total assets.
AUDIT SCOPE
• 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.
KEY AUDIT MATTERS
• Determination of expected credit losses on loans and advances to customers (group).
• Application of effective interest rate (“EIR”) accounting (group).
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Annual Report 2019
98
Independent Auditors’ Report to the Members
of Close Brothers Group plc continued
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.
CAPABILITY OF THE AUDIT IN DETECTING IRREGULARITIES, INCLUDING FRAUD
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related
to breaches of banking laws and regulations such as, but not limited to, regulations relating to consumer credit and unethical and prohibited
business practices and we considered the extent to which non-compliance might have a material effect on the financial statements. We also
considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act
2006, UK tax legislation and the Listing Rules of the Financial Conduct Authority (“FCA”). We evaluated management’s incentives and
opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal
risks were related to posting inappropriate journal entries to increase revenue or reduce expenditure, and management bias in accounting
estimates. The group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit
procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors
included:
• Review of correspondence with and reports to the regulators PRA and FCA , 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;
• Assessment of matters reported on the group’s whistleblowing helpline and the results of management’s investigation of such matters;
• Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to the
determination of expected credit losses on loans and advances (see related key audit matter below); and
• Identifying and testing journal entries, in particular any journal entries posted with unusual account combinations, unusual times or posted by
senior management.
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. Also, 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.
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
Determination of expected credit losses on loans and advances to
customers (group)
The determination of expected credit loss allowances is subjective
and judgmental.
Models are used to collectively assess and determine expected
credit loss allowances on loans and advances which are not
classified as being credit impaired at the reporting date or are
individually small. Key inputs and assumptions include significant
increase in credit risk criteria, probability of default, loss given default
and the use of multiple, probability weighted, economic scenarios.
Individually large exposures to counterparties who are in default at
the reporting date are estimated on an individual basis. Judgement
is required to determine when a loan is considered to be in default,
and then to estimate the amount and timing of the expected future
cash flows related to that loan under multiple, probability weighted,
scenarios.
We understood and critically assessed the appropriateness of the
impairment policy (including management’s definitions of default and
a significant increase in credit risk) and its application in the
determination of ECL provisions.
Collectively assessed provisions
We understood management’s process and tested key controls
around the determination of expected credit loss allowances,
including controls relating to:
• Appropriateness of modelling methodologies and monitoring of
model performance;
• The integrity of data feeds from source systems into the models;
and
• The approval of key inputs and assumptions used in applying
multiple economic scenarios.
We found 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.
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99
Key audit matter
How our audit addressed the key audit matter
Refer to note 28 to the financial statements for the relevant
disclosures
We assessed the reasonableness of key inputs used in the
determination of the ECL allowances by independently reperforming
management’s model monitoring analyses (comparing actual
experience to that predicted by the models) and performing
sensitivity analyses on the results. We assessed management’s
judgement as to whether the results of these activities indicated
whether the models continued to perform appropriately or if any
post-model adjustments were required.
We used our economist experts to assess the reasonableness of
management’s selected economic scenarios and associated
probability weightings, giving specific consideration to the current
political uncertainty.
We tested the completeness and accuracy of key data inputs,
sourced from underlying systems, that are applied in the calculation
of the ECL allowances and tested the integrity of the calculations.
We used credit risk modelling specialists to support the audit team
in the performance of these audit procedures.
Individually assessed provisions
We performed the following procedures to test the completeness of
the identification of defaulted assets requiring individual assessment:
• We critically assessed the criteria for determining whether a
default event had occurred; and
• We haphazardly tested a sample of loans which management had
determined were not in default at the reporting date. For each
sampled loan, we independently assessed whether they had
indicators of a default event and therefore whether they were
appropriately categorised between performing and in default.
For a sample of individually assessed loans in default and related
ECL allowances, we:
• Evaluated the basis on which the allowances were determined,
and the evidence supporting the analysis performed by
management;
• Independently challenged whether the key assumptions used,
such as the recovery strategies, collateral rights and ranges of
potential outcomes were appropriate given the borrower’s
circumstances; and
• Re-performed management’s provision calculation, critically
assessing key inputs including expected future cash flows,
discount rates, valuations of collateral held and the weightings
applied to scenario outcomes.
Based on the evidence obtained, we concluded that the
methodologies, modelled assumptions, management judgements
and data used within the individual assessments to be appropriate
and compliant with the requirements of IFRS 9.
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100
Independent Auditors’ Report to the Members
of Close Brothers Group plc continued
Key audit matter
How our audit addressed the key audit matter
Application of effective interest rate (“EIR”) accounting (group)
Interest income on loans and advances is recognised using the
effective interest rate method and any fees, commissions or direct
transaction costs that are an integral part of the financial instrument,
are included within the effective interest rate. Judgement is required
to determine whether applicable fees and direct costs should be
included within the effective interest rate, or whether immediate
recognition should be applied. Management have to estimate the
period over which amounts are to be recognised, based on the life
of the instrument.
The judgement and manual nature applied across different
businesses throughout the group results in a higher risk of material
misstatement due to fraud or error.
Relevant references:
• note 2, critical accounting estimates and judgements on page
116;
• the key accounting judgements section of the Audit
Committee Report on page 72; and
• note 1, significant accounting policies that includes the group’s
revenue recognition policy on page 112.
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 direct costs under the
effective interest rate method; and
• the reconciliations between the models used to calculate the
effective interest rate adjustments for the respective fees and the
general ledger.
We found 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;
• we agreed a sample of loan agreements and cash receipts to
the inputs used within the respective effective interest rate
models, and assessed whether the appropriate fees and costs
had been reflected in the effective interest rate; and
• we considered the consistent application of the EIR accounting
policy across the group’s different businesses.
Based on the evidence obtained, we found that the assumptions,
models and data used were appropriate.
We determined that there were no key audit matters applicable to the parent company to communicate in our report.
HOW WE TAILORED THE AUDIT SCOPE
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. For the purpose of describing our scoping we refer to the group’s organisational units as components.
The group is structured into three primary segments being Banking, Winterflood Securities and Asset Management. Banking 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 the PwC network of firms operating under our instruction (“component auditors”).
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 that 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. 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.
Certain account balances were audited centrally by the group engagement team.
Components within the scope of our audit contributed over 95% of group total assets and operating profit before tax.
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101
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:
OVERALL MATERIALIT Y
£13.2 million (2018: £13.5 million).
£10.0 million (2018: £6.5 million).
Group financial statements
Parent company financial statements
HOW WE DETERMINED IT
5% of profit before tax.
1% of total assets.
RATIONALE FOR
BENCHMARK APPLIED
Profit before tax is a primary
measure used by the shareholders
in assessing the performance of the
group, and is a generally accepted
benchmark for determining audit
materiality.
We have selected total assets as an appropriate benchmark for parent
company materiality. Profit based benchmarks were not considered
appropriate for parent company materiality as the parent company is an
investment holding company and 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 £2,000,000 and £12,200,000. Certain components were audited to a local statutory
audit materiality that was also less than our overall group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £500,000 (group audit)
(2018: £500,000) and £500,000 (parent company audit) (2018: £500,000) as well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons.
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 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. For example,
the terms on which the United Kingdom may withdraw from the
European Union are not clear, and it is difficult to evaluate all of the
potential implications on the group’s trade, customers, suppliers and
the wider economy.
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 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 (“CA06”), 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).
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Annual Report 2019
102
Independent Auditors’ Report to the Members
of Close Brothers Group plc continued
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 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal
requirements. (CA06)
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. (CA06)
THE DIRECTORS’ ASSESSMENT OF THE PROSPECTS OF THE GROUP AND OF THE PRINCIPAL RISKS THAT WOULD THREATEN THE
SOLVENCY OR LIQUIDIT Y OF THE GROUP
We have nothing material to add or draw attention to regarding:
• The directors’ confirmation on page 58 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.
• The directors’ explanation on page 58 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 58, 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 73 describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
• 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.
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. (CA06)
RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT
RESPONSIBILITIES OF THE DIRECTORS FOR THE FINANCIAL STATEMENTS
As explained more fully in the Directors’ Responsibility Statement set out on page 58, 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.
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Close Brothers Group plc
103
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.
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, we were appointed by the directors on 17 May 2017 to audit the financial statements for
the year ended 31 July 2018 and subsequent financial periods. The period of total uninterrupted engagement is 2 years, covering the years
ended 31 July 2018 to 31 July 2019.
MARK HANNAM (SENIOR STATUTORY AUDITOR)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
24 September 2019
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Annual Report 2019
104
Consolidated Income Statement
FOR THE YEAR ENDED 31 JULY 2019
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 financial assets
Total operating expenses before amortisation of intangible assets on acquisition
Operating profit before amortisation of intangible assets on acquisition
Amortisation of intangible assets on acquisition
Operating profit before tax
Tax
Profit after tax from continuing operations
Profit/(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
Note
4
4
2019
£ million
635.6
(129.9)
2018
£ million
601.0
(114.9)
505.7
486.1
224.9
(19.2)
81.3
77.4
(53.7)
213.3
(13.7)
100.1
65.1
(45.1)
310.7
319.7
816.4
805.8
(497.4)
(48.5)
(545.9)
270.5
(5.8)
264.7
(64.4)
200.3
1.1
201.4
(0.2)
(480.5)
(46.7)
(527.2)
278.6
(7.4)
271.2
(67.0)
204.2
(2.2)
202.0
(0.3)
201.6
202.3
133.5p
132.5p
136.2p
135.3p
134.2p
133.2p
134.7p
133.8p
22.0p
44.0p
21.0p
42.0p
4
4
4
16
4
11
15
6
7
8
8
8
8
9
9
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Close Brothers Group plc
105
Consolidated Statement of Comprehensive Income
FOR THE YEAR ENDED 31 JULY 2019
Profit after tax
Other comprehensive income/(expense) that may be reclassified to income statement from
continuing operations
Currency translation gains
(Losses)/gains on cash flow hedging
Gains/(losses) on financial instruments classified as available for sale:
Sovereign and central bank debt
Contingent consideration
Losses on financial instruments classified at fair value through other comprehensive income:
Sovereign and central bank debt
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 (expense)/income, net of tax from continuing operations
Total comprehensive income
Attributable to
Non-controlling interests
Shareholders
2019
£ million
201.4
2018
£ million
202.0
0.4
(6.0)
–
–
(0.1)
1.1
(4.6)
1.9
(0.4)
1.5
(3.1)
0.3
4.4
0.6
(0.3)
–
(1.3)
3.7
1.7
(0.4)
1.3
5.0
198.3
207.0
(0.2)
198.5
(0.3)
207.3
198.3
207.0
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
106
Consolidated Balance Sheet
AT 31 JULY 2019
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
Retained earnings
Other reserves
Total shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
1 See notes 1 and 30.
31 July
2019
£ million
1 August
20181
£ million
31 July
2018
£ million
Note
10
11
12
13
14
15
16
6
17
7
18
19
19
19
19
14
17
20
7
21
1,106.4
562.9
108.9
7,649.6
314.4
36.3
42.5
30.1
219.4
248.2
52.2
190.4
–
1,140.3
512.1
140.1
7,239.3
320.4
32.1
66.4
16.6
201.3
226.1
57.1
186.8
67.5
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
10,561.3
10,206.1
10,251.0
568.1
58.0
5,638.4
519.3
1,860.1
14.3
20.6
21.2
233.3
221.6
–
543.1
55.2
5,497.2
509.8
1,773.4
22.4
15.7
17.4
249.6
217.9
0.6
543.1
55.2
5,497.2
509.8
1,773.4
22.4
15.7
17.4
249.6
217.9
0.6
9,154.9
8,902.3
8,902.3
38.0
1,392.5
(23.1)
38.0
1,282.8
(16.2)
38.0
1,327.7
(16.2)
1,407.4
1,304.6
1,349.5
(1.0)
(0.8)
(0.8)
1,406.4
1,303.8
1,348.7
10,561.3
10,206.1
10,251.0
Approved and authorised for issue by the Board of Directors on 24 September 2019 and signed on its behalf by:
MICHAEL N. BIGGS
CHAIRMAN
P. PREBENSEN
CHIEF EXECUTIVE
Registered number: 520241
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Annual Report 2019
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107
Consolidated Statement of Changes in Equity
FOR THE YEAR ENDED 31 JULY 2019
Called
up share
capital
£ million
Share
premium
account
£ million
Retained
earnings
£ million
Available
for sale
movements
reserve
£ million
Other reserves
Share-
based
payments
reserve
£ million
FVOCI
reserve
£ million
Exchange
movements
reserve
£ million
Cash flow
hedging
reserve
£ million
Total
attributable
to equity
holders
£ million
Non-
controlling
interests
£ million
Total
equity
£ million
At 1 August 2017
38.0
307.8
906.6
Profit/(loss) for the year
Other comprehensive
income
Total comprehensive
income/(expense)
for the year
Dividends paid
Shares purchased
Shares released
Other movements
Share premium
cancellation
Income tax
At 31 July 2018
IFRS 9 transition
(note 30)
At 1 August 2018
Profit/(loss) for the year
Other comprehensive
income/(expense)
Total comprehensive
income/(expense)
for the year
Dividends paid (note 9)
Shares purchased
Shares released
Other movements
Share premium
cancellation
Income tax
–
–
–
–
–
–
–
–
–
38.0
–
38.0
–
–
–
–
–
–
–
–
–
At 31 July 2019
38.0
–
–
–
–
–
–
–
202.3
1.3
203.6
(91.0)
–
–
–
(307.8)
–
307.8
0.7
0.7
–
0.1
0.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,327.7
0.8
(44.9)
(0.8)
1,282.8
201.6
1.5
203.1
(95.5)
–
–
2.8
–
(0.7)
1,392.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.8
0.8
–
(0.1)
(0.1)
–
–
–
–
–
–
(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
(15.9)
(1.2)
0.1
1,349.5
(0.8)
1,348.7
–
–
–
(44.9)
–
(44.9)
(15.9)
(1.2)
0.1
1,304.6
(0.8) 1,303.8
–
–
–
–
(11.0)
10.9
(2.2)
–
–
–
–
–
–
–
–
–
–
–
–
201.6
(0.2)
201.4
(4.5)
(3.1)
–
(3.1)
(4.5)
–
–
–
–
–
–
198.5
(95.5)
(11.0)
10.9
0.6
–
(0.7)
(0.2)
–
–
–
–
–
–
198.3
(95.5)
(11.0)
10.9
0.6
–
(0.7)
0.7
(18.2)
(1.2)
(4.4) 1,407.4
(1.0) 1,406.4
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
108
Consolidated Cash Flow Statement
FOR THE YEAR ENDED 31 JULY 2019
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:
Discontinued operations and subsidiaries
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 of group bonds, net of transaction costs
Net (decrease)/increase in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note
27(a)
2019
£ million
20.4
2018
£ million
306.0
27(b)
27(c)
(4.9)
(42.2)
(3.6)
87.6
36.9
57.3
(11.0)
(95.5)
(14.2)
–
(63.4)
1,251.7
(11.4)
(33.0)
(1.2)
0.9
(44.7)
261.3
(16.0)
(91.0)
(10.8)
248.6
392.1
859.6
27(d)
1,188.3
1,251.7
Governance ReportFinancial StatementsStrategic Report Company Balance Sheet
AT 31 JULY 2019
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
Profit and loss account
Other reserves
Shareholders’ funds
Annual Report 2019
Close Brothers Group plc
109
Note
2019
£ million
2018
£ million
15
16
31
–
–
287.0
–
–
287.0
287.0
287.0
6
19
17
19
17
21
408.5
312.2
4.0
1.4
7.8
–
0.2
415.2
312.0
3.7
2.0
7.4
0.2
0.2
734.1
740.7
1.8
2.3
0.4
8.5
1.8
2.2
0.8
9.2
13.0
14.0
721.1
726.7
1,008.1
1,013.7
248.5
174.3
2.5
247.9
174.1
3.9
582.8
587.8
38.0
563.0
(18.2)
38.0
565.7
(15.9)
582.8
587.8
The Company reported a profit for the financial year ended 31 July 2019 of £88.3 million (2018: £48.7 million).
Approved and authorised for issue by the Board of Directors on 24 September 2019 and signed on its behalf by:
MICHAEL N. BIGGS
CHAIRMAN
P. PREBENSEN
CHIEF EXECUTIVE
Governance ReportFinancial StatementsStrategic Report
Close Brothers Group plc
Annual Report 2019
110
Company Statement of Changes in Equity
FOR THE YEAR ENDED 31 JULY 2019
At 1 August 2017
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Dividends paid
Shares purchased
Shares released
Share premium cancellation
Other movements
At 31 July 2018
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Dividends paid (note 9)
Shares purchased
Shares released
Share premium cancellation
Other movements
At 31 July 2019
Share
capital
£ million
Share
premium
account
£ million
Profit
and loss
account
£ million
Other reserves
Share-
based
payments
reserve
£ million
Shareholders’
funds
£ million
38.0
307.8
298.6
(11.9)
632.5
–
–
–
–
–
–
–
–
38.0
–
–
–
–
–
–
–
–
38.0
–
–
–
–
–
–
(307.8)
–
48.7
1.3
50.0
(91.0)
–
–
307.8
0.3
–
–
–
–
(16.0)
12.5
–
(0.5)
48.7
1.3
50.0
(91.0)
(16.0)
12.5
–
(0.2)
–
–
–
–
–
–
–
–
–
–
565.7
(15.9)
587.8
88.3
1.5
89.8
(95.5)
–
–
–
3.0
–
–
–
–
(11.0)
10.9
–
(2.2)
88.3
1.5
89.8
(95.5)
(11.0)
10.9
–
0.8
563.0
(18.2)
582.8
Governance ReportFinancial StatementsStrategic Report Annual Report 2019
Close Brothers Group plc
111
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 (2018: five) operating
segments: Commercial, Retail, Property, Asset Management and
Securities, 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 Financial Instruments: Recognition and Measurement
Reports) Regulations 2008 (SI 2008/410).
As permitted by FRS 102, the company has chosen to adopt IFRS 9
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
The accounting policies applied this financial year are set out in this
note and consistent with those of the previous financial year except in
relation to the adoption of IFRS 9 Financial Instruments, which was
effective from 1 August 2018. IFRS 9 replaces IAS 39 Financial
Instruments: Recognition and Measurement. There are significant
changes in the accounting for financial instruments, particularly with
regards to impairment. The impact of the transition to IFRS 9 is set out
in note 30.
In accordance with the requirements of IFRS 9, comparative
information has not been restated and transitional adjustments have
been accounted for through retained earnings at 1 August 2018, the
date of initial application. The consolidated balance sheet and notes
11 and 22 include 1 August 2018 balances to aid comparability
following the adoption of IFRS 9.
IFRS 9 includes an accounting policy choice to continue to apply
hedge accounting under IAS 39 and the group elected to apply this
accounting policy choice for the foreseeable future.
The group also adopted IFRS 15 Revenue from Contracts with
Customers effective from 1 August 2018. IFRS 15 replaces IAS 18
Revenue and IAS 11 Construction Contracts 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’s existing accounting policies
comply with the requirements of the standard. The standard has no
material impact on the group’s financial statements.
FUTURE ACCOUNTING DEVELOPMENTS
IFRS 16 Leases is 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. At the
transition date of 1 August 2019, the group will recognise right of
use assets and lease liabilities of approximately £50 million, largely in
respect of leased properties previously accounted for as operating
leases, with no impact on shareholders’ equity. Following transition,
a finance charge will be recognised on the lease liabilities and a
depreciation charge on the right of use assets.
(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, financial
assets held at fair value through other comprehensive income (2018:
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.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
112
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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.
DIVIDENDS
Dividend income is recognised when the right to receive payment is
established.
GAINS LESS LOSSES ARISING FROM DEALING IN SECURITIES
Net realised and unrealised 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 AND MEASUREMENT
Financial assets are classified at initial recognition on the basis of the
business model within which they are managed and their contractual
cash flow characteristics. The classification categories are amortised
cost, fair value through other comprehensive income (“FVOCI”) and
fair value through profit or loss (“FVTPL”).
Financial assets that are held to collect contractual cash flows where
those cash flows represent solely payments of principal and interest
are measured at amortised cost. Initial recognition is at fair value plus
directly attributable transaction costs. Interest income is accounted
for using the effective interest rate method.
Financial assets that are held to collect contractual cash flows and for
subsequent sale, where the assets’ cash flows represent solely
payments of principal and interest, are classified at fair value through
other comprehensive income. Directly attributable transaction costs
are added to the initial fair value. Gains and losses arising from
changes in fair value except when due to credit risk are recognised in
other comprehensive income until the financial asset is either sold or
matures, at which time the cumulative gain or loss is recognised in
the income statement. Gains and losses arising from changes in fair
value due to credit risk are recognised in the income statement.
Financial assets are classified at fair value through profit or loss where
they do not meet the criteria to be measured at amortised cost or fair
value through other comprehensive income or where they are
designated at fair value through profit or loss to reduce an accounting
mismatch. Financial assets at fair value through profit or loss are
recognised at fair value. Transaction costs are not added to or
deducted from the initial fair value, they are immediately recognised in
profit or loss on initial recognition. Gains and losses that subsequently
arise on changes in fair value are recognised in the income statement.
Financial liabilities are classified at initial recognition at amortised cost
except for the following which are classified at fair value through profit
or loss: derivatives; financial liabilities held for trading; and financial
liabilities designated at fair value through profit or loss to eliminate an
accounting mismatch.
Financial liabilities at amortised cost are measured at fair value less
directly attributable transaction costs on initial recognition. Interest
expense is accounted for using the effective interest rate method.
Financial liabilities at fair value through profit or loss are measured at
fair value on initial recognition. Transaction costs are not added to or
deducted from the initial fair value, they are immediately recognised in
profit or loss on initial recognition. Subsequent changes in fair value
are recognised in the income statement except for financial liabilities
designated at fair value through profit or loss, changes in fair value
attributable to changes in credit risk are recognised in other
comprehensive income.
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.
MODIFICATIONS
The terms or cash flows of a financial asset or liability may be
modified due to renegotiation or otherwise. If the terms or cash flows
are substantially different to the original, then the financial asset or
liability is derecognised and a new financial asset or liability is
recognised at fair value. If the terms or cash flows are not substantially
different to the original, then the financial asset carrying value is
adjusted to reflect the present value of modified cash flows
discounted at the original EIR.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
113
The following was applied in the previous financial year
under IAS 39.
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
EXPECTED CREDIT LOSSES
Expected credit losses are recognised for loans and advances to
customers and banks, other financial assets held at amortised cost,
financial assets measured at fair value through other comprehensive
income, loan commitments and financial guarantee contracts. The
impairment charge in the income statement includes the change in
expected credit losses and fraud costs.
At initial recognition, a provision is recognised for 12 months of expected
credit losses. These financial assets are considered to be in Stage 1. If a
significant increase in credit risk since initial recognition occurs, with a
30-days past due backstop, a provision is made for the lifetime expected
credit losses. These financial assets are considered to be in Stage 2.
A financial asset will remain classified as Stage 2 until the credit risk
has improved such that it no longer represents a significant increase
since origination and will be returned to Stage 1.
When objective evidence exists that a financial asset is credit impaired,
such as a credit default event has occurred or an unlikeness to pay
indicator has been identified, with a 90-days past due backstop, the
financial asset is considered to be in Stage 3.
Loans and advances to customers are written off against the related
provisions when there are no reasonable expectations of further
recovery following realisation of all associated collateral and available
recovery actions against the customer. Subsequent recoveries of
amounts previously written off decrease the amount of impairment
losses recorded in the income statement.
The calculation of expected credit losses for loans and advances to
customers, either on 12-month or lifetime basis, is based on the
probability of default (“PD”), adjusted to reflect a range of forward-
looking macroeconomic scenarios, the estimated exposure at default
(“EAD”) and the estimated loss given default (“LGD”). The EAD and
LGD are adjusted to account for the impact of discounting using the
effective interest rate. Some Stage 3 assets, mainly in the Commercial
and Property segments, are subject to individual rather than collective
assessment.
The PD represents the likelihood of a borrower defaulting on its
financial obligation either over the next 12 months or over the
remaining lifetime of the obligation. EAD is based on the amounts we
expect to be owed at the time of default. LGD represents our
expectation of the extent of loss on a defaulted exposure after taking
into account cash recoveries including the value of collateral held.
The calculation of expected credit losses for receivables relating to
operating lease assets and settlement balances is based on a
simplified lifetime only expected credit loss approach.
By their nature, limitations in the Group’s impairment models or input
data may be identified through ongoing model monitoring and
validation of models. In certain circumstances, management make
appropriate adjustments to model calculated expected credit losses.
These adjustments are based on management judgements, to ensure
the expected credit loss provision adequately reflects the expected
outcome. Management adjustments are actively monitored, reviewed
and incorporated into future model development where applicable.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
114
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
The following was applied in the previous financial year
under IAS 39.
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.
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.
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115
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
(T) SHARE CAPITAL
SHARE ISSUE COSTS
Incremental costs directly attributable to the issue of new shares or
options, including those issued on the acquisition of a business, are
shown in equity as a deduction, net of tax, from the proceeds.
DIVIDENDS ON ORDINARY SHARES
Dividends on ordinary shares are recognised in equity in the period in
which they are paid or, if earlier, approved by shareholders.
TREASURY SHARES
Where the company or any member of the group purchases the
company’s share capital, the consideration paid is deducted from
shareholders’ equity as treasury shares until they are cancelled.
Where such shares are subsequently sold or reissued, any
consideration received is included in shareholders’ equity.
(U) EMPLOYEE BENEFITS
The group operates defined contribution pension schemes for eligible
employees as well as a defined benefit pension scheme which is
closed to new members and further accrual.
Under the defined contribution scheme the group pays fixed
contributions into a fund separate from the group’s assets.
Contributions are charged in the consolidated income statement
when they become payable.
The expected cost of providing pensions within the funded defined
benefit scheme, determined on the basis of annual valuations using
the projected unit method, is charged to the consolidated income
statement. Actuarial gains and losses are recognised in full in the period
in which they occur and recognised in other comprehensive income.
The retirement benefit obligation recognised in the balance sheet
represents the present value of the defined benefit obligation, as
adjusted for unrecognised past service cost, and as reduced by the
fair value of scheme assets at the balance sheet date. Both the return
on investment expected in the period and the expected financing
cost of the liability, as estimated at the beginning of the period, are
recognised in the results for the period. Any variances against these
estimates in the year form part of the actuarial gain or loss. The
assets of the scheme are held separately from those of the group in
an independently managed fund.
(V) SHARE-BASED PAYMENTS TO EMPLOYEES
At 31 July 2019, 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 of share-based awards are
determined using the Black-Scholes pricing model, with the exception
of fair values for market-based performance conditions, which are
determined using Monte Carlo simulation. Both models take into
account the exercise price of the option, the current share price, the
risk-free interest rate, the expected volatility of the company’s share
price over the life of the option award and other relevant factors. For
non-market-based performance conditions, vesting conditions are
not taken into account when measuring fair value, but are reflected
by adjusting the number of shares in each award such that the
amount recognised reflects the number that are expected to, and
then actually do, vest. The fair value is expensed in the consolidated
income statement on a straight-line basis over the vesting period, with
a corresponding credit to the share-based payments reserve. At the
end of the vesting period, or upon exercise, lapse or forfeit if earlier,
this credit is transferred to retained earnings. Further information
on the group’s schemes is provided in note 26 and in the Directors’
Remuneration Report.
(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
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Annual Report 2019
116
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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.
an assessment. Quantitative measures are changes in PD or credit
score since origination and qualitative indicators include forbearance
and watch list processes. As a backstop, all financial assets that are
30 days past due are considered to have experienced a significant
increase in credit risk.
(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.
The assessment of whether a significant increase in credit risk has
occurred requires judgement. The use of different trigger points may
have a material impact upon the size of the expected credit loss
provision. The Group monitors the effectiveness of the multifactor
approach on an ongoing basis.
(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.
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.
The critical accounting judgements below are new this
financial year following the adoption of IFRS 9.
At 31 July 2019 the group’s expected credit loss provision was
£104.3 million (1 August 2018: £97.3 million). The calculation of the
group’s expected credit loss provision under IFRS 9 requires the
group to make a number of judgements, assumptions and estimates.
The most significant are set out below.
SIGNIFICANT INCREASE IN CREDIT RISK
Assets are transferred from Stage 1 to Stage 2 when there has
been a significant increase in credit risk since initial recognition. The
assessment is unbiased, probability weighted and uses forward-
looking information. The group uses a multifactor approach based on
quantitative measures and qualitative indicators to help make such
DEFINITION OF DEFAULT
The PD of loans and advances to customers is an important
assumption to the measurement of expected credit losses and
as a result the definition of default is a key judgement. Loans and
advances to customers are considered defaulted when the borrower
is in breach of contract, is bankrupt, or experiences other significant
financial difficulties which are expected to have a detrimental impact
on their ability to pay interest or principal on the loan. This includes
events such as administration; insolvency; repossession of assets
and voluntary termination or surrender. As a backstop, all financial
assets that are 90 days past due are considered as defaulted.
The critical accounting judgement below relates to the
previous financial year under IAS 39.
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
At the balance sheet date, the directors consider that expected credit
loss provisions are a key source of estimation uncertainty which,
depending on a range of factors, could result in a material adjustment
to the carrying amounts of assets and liabilities in the next financial year.
The critical accounting estimate below is new this financial
year following the adoption of IFRS 9.
EXPECTED CREDIT LOSSES
The accuracy of the expected credit loss calculation would be
impacted by unanticipated changes to model assumptions which
differ from actual outcomes and movements in the macroeconomic
scenarios or weightings.
FORWARD-LOOKING INFORMATION
IFRS 9 requires the incorporation of forward-looking macroeconomic
information that is reasonable and supportable. To capture the effect of
changes to the economic environment, the calculation of expected
credit losses incorporates forward-looking information and assumptions
linked to economic variables that impact losses in each portfolio.
Externally sourced forecast economic data and scenarios are used to
project potential credit conditions for each portfolio. The introduction of
macroeconomic information introduces additional volatility to provisions
but through the cycle expectations remain unchanged.
Economic scenarios are assigned a probability weighting using a
combination of quantitative analysis and expert judgement. Six different
projected economic scenarios are currently considered to cover a range of
possible outcomes, reflecting upside and downside relative to the baseline
and forecast economic conditions. The economic scenarios are generated
to capture a range of possible economic outcomes to facilitate the
calculation of unbiased and probability-weighted expected credit losses.
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117
Weighted assumptions are aligned to the forward-looking outlook. The
impact varies across the group’s lending businesses because of the
sensitivity of each portfolio to specific macroeconomic variables.
A committee including the group and business chief executive officer,
group chief risk officer, chief credit risk officer, group finance director
and head of treasury meets quarterly, to review and, if appropriate,
agree changes to the economic scenarios and probability weighting
assigned to the economic scenario.
The table below shows the key UK economic assumptions within
each of the scenarios, and the weighting applied to each at 31 July
2019. The numbers shown are an average over the five-year period
from 2019 to 2023 and are not necessarily representative of peak to
trough movements. There has been no significant change to the
group’s baseline economic assumptions included in the IFRS 9
models over the course of the year. However, during the first half of
the year the group reduced the weightings to the base case from
60% to 40% and the upside strong from 15% to 5% with a
corresponding increase to the downside scenario weightings. The
range of scenarios and weightings selected and applied continues to
cover a broad range of potential outcomes, reflecting the current
political and macroeconomic uncertainty in the UK.
The expected credit loss provision is sensitive to judgement and
estimations made with regard to the selection and weighting of multiple
macroeconomic scenarios. As a result, management has assessed and
considered the sensitivity of the provision by recalculating the expected
credit loss provision under the upside strong and downside protracted
scenarios described below for selected portfolios, applying a 100%
weighting to each scenario in turn. The change in provision is driven by
the movement in PD under each scenario, and resulting impact on stage
allocation as well as the measurement of the resulting provision.
Based on this analysis, application of 100% weighting to the upside
strong scenario would decrease the expected credit loss by
£5.0 million whilst application to the downside protracted scenario
would increase the expected credit loss by £8.0 million driven by
changes in PDs and stage allocation of the selected portfolios.
This sensitivity analysis excludes expected credit loss provisions and
loans and advances to customers in Stage 3 because the
measurement of expected credit losses in this population is
considered more sensitive to credit factors specific to the borrower
than macroeconomic scenarios.
In addition to the above, the group has considered a separate LGD
sensitivity to reflect the potential impact of a fall in collateral values on
the Property Finance loan book. Increasing the LGD by 20% for
relevant loans and advances to customers in Stages 1, 2 and 3,
would result in an increase in the expected credit loss provision at
31 July 2019 of £14.9 million.
When performing sensitivity analysis there is a high degree of
estimation uncertainty. On this basis 100% weighted expected credit
loss provisions presented for the upside and downside scenarios and
the specific Property Finance LGD sensitivity should not be taken to
represent the lower or upper range of possible and actual expected
credit loss outcomes. The recalculated ECL for each of the scenarios
should be read in the context of the sensitivity analysis as a whole
and in conjunction with the narrative disclosures provided in note 28.
The modelled impact presented is based on gross loans and
advances to customers at 31 July 2019, it does not incorporate future
changes relating to performance, growth or credit risk.
At 31 July 2019
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Weighting
At 1 August 2018
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Weighting
Upside
(exceptionally
strong)
Baseline
Upside
(strong)
Downside
(mild)
Downside
(moderate)
Downside
(protracted)
1.5%
4.7%
1.8%
1.1%
40%
2.4%
3.3%
4.7%
1.7%
0%
2.1%
3.7%
3.7%
1.5%
5%
1.2%
5.3%
0.8%
0.6%
40%
0.8%
6.4%
(1.1%)
0.2%
10%
0.3%
7.2%
(3.0%)
0.1%
5%
Upside
(exceptionally
strong)
Baseline
Upside
(strong)
Downside
(mild)
Downside
(moderate)
Downside
(protracted)
1.6%
4.9%
2.1%
1.3%
60%
2.6%
3.4%
5.1%
1.7%
0%
2.3%
3.9%
4.1%
1.4%
15%
1.3%
5.6%
1.1%
0.6%
20%
0.8%
6.6%
(1.0%)
0.2%
0.3%
7.4%
(2.7%)
0.1%
5%
0%
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118
2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
CONTINUED
The critical accounting estimate below relates to the previous
financial year under IAS 39.
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 (2018: five) operating segments: Commercial, Retail, Property, Asset
Management and Securities.
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.
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.
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
against which a £39.1 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.
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group
£ million
Total
£ million
Summary income statement
for the year ended 31 July 2019
Net interest income/(expense)
Non-interest income
176.7
73.2
199.8
23.4
129.8
(0.3)
0.1
120.3
(0.7)
94.1
Operating income
249.9
223.2
129.5
120.4
93.4
–
–
–
505.7
310.7
816.4
Administrative expenses
Depreciation and amortisation
Impairment losses on financial assets
(128.6)
(11.5)
(23.3)
(113.9)
(11.6)
(25.2)
(30.2)
(4.7)
0.1
(96.6)
(1.9)
(0.1)
(71.7)
(1.7)
–
(24.9)
(0.1)
–
(465.9)
(31.5)
(48.5)
Total operating expenses
(163.4)
(150.7)
(34.8)
(98.6)
(73.4)
(25.0)
(545.9)
Adjusted operating profit/(loss)1
Amortisation of intangible assets on acquisition
86.5
(1.6)
72.5
(0.3)
94.7
–
21.8
(3.9)
20.0
–
(25.0)
–
270.5
(5.8)
Operating profit/(loss) before tax from
continuing operations
Operating profit before tax from
discontinued operations
Operating profit/(loss) before tax
External operating income/(expense)
Inter segment operating (expense)/income
84.9
72.2
94.7
17.9
20.0
(25.0)
264.7
–
84.9
0.8
73.0
–
94.7
300.8
(50.9)
264.6
(41.4)
158.1
(28.6)
–
17.9
120.5
(0.1)
–
20.0
93.4
–
93.4
–
0.8
(25.0)
265.5
(121.0)
121.0
816.4
–
–
816.4
Segment operating income
249.9
223.2
129.5
120.4
1 Adjusted operating profit/(loss) is stated before amortisation of intangible assets on acquisition, profit from discontinued operations and tax.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
119
Balance sheet information at 31 July 2019
Total assets1
Total liabilities
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group2
£ million
Total
£ million
3,211.7
–
2,810.7
–
1,847.6
–
115.9
59.1
723.8
652.6
1,851.6 10,561.3
9,154.9
8,443.2
1 Total assets for the Banking operating segments comprise the loan book and operating lease assets only.
2 Balance sheet includes £1,856.2 million assets and £8,533.6 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 £7,870.0 million, in addition to assets and liabilities of £1,856.2 million and £8,533.6 million
respectively primarily comprising treasury balances which are included within the Group column above.
Equity
Banking
£ million
1,192.6
Asset
Management
£ million
56.8
Securities
£ million
71.2
Group
£ million
85.8
Total
£ million
1,406.4
Other segmental information
for the year ended 31 July 2019
Employees (average number)1
Banking
Commercial
Retail
Property
Asset
Management
Securities
Group
Total
1,117
1,048
180
672
274
64
3,355
1 Banking segments are inclusive of a central function headcount allocation.
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group
£ million
Total
£ million
Summary income statement
for the year ended 31 July 2018
Net interest income/(expense)
Non-interest income
160.9
64.6
195.9
29.6
129.8
0.2
0.1
115.4
(0.7)
109.8
Operating income
225.5
225.5
130.0
115.5
109.1
Administrative expenses
Depreciation and amortisation
Impairment losses on loans and advances
(124.2)
(8.0)
(17.2)
(109.5)
(9.7)
(25.2)
(27.2)
(3.9)
(4.3)
(90.6)
(1.8)
–
(79.2)
(1.8)
–
0.1
0.1
0.2
(24.6)
–
–
486.1
319.7
805.8
(455.3)
(25.2)
(46.7)
Total operating expenses
(149.4)
(144.4)
(35.4)
(92.4)
(81.0)
(24.6)
(527.2)
Adjusted operating profit/(loss)1
Amortisation of intangible assets on acquisition
76.1
(1.6)
81.1
(0.3)
94.6
–
23.1
(5.5)
28.1
–
(24.4)
–
278.6
(7.4)
Operating profit/(loss) before tax from
continuing operations
Operating loss before tax from
discontinued operations
Operating profit/(loss) before tax
74.5
80.8
94.6
17.6
28.1
(24.4)
271.2
–
74.5
(3.0)
77.8
–
94.6
–
–
–
(3.0)
17.6
28.1
(24.4)
268.2
External operating income/(expense)
Inter segment operating (expense)/income
270.7
(45.2)
265.3
(39.8)
154.4
(24.4)
115.6
(0.1)
109.1
–
(109.3)
109.5
805.8
–
Segment operating income
225.5
225.5
130.0
115.5
109.1
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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120
3. SEGMENTAL ANALYSIS CONTINUED
Balance sheet information at 31 July 2018
Total assets1
Total liabilities
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group2
£ million
Total
£ million
2,982.4
–
2,686.4
–
1,827.5
–
119.4
63.9
711.4
640.3
1,923.9
8,198.1
10,251.0
8,902.3
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.
Equity1
Banking
£ million
1,132.7
Asset
Management
£ million
Securities
£ million
Group
£ million
Total
£ million
55.5
71.1
89.4
1,348.7
1 Equity of the Banking division 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 in the balance sheet information above.
Other segmental information
for the year ended 31 July 2018
Employees (average number)1
Banking
Commercial
Retail
Property
Asset
Management
Securities
Group
Total
1,046
1,079
146
647
262
61
3,241
1 Banking segments are inclusive of a central function headcount allocation.
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
Fee and commission income
Banking
Asset Management
Securities
Fee and commission expense
Net fee and commission income
2019
£ million
2018
£ million
6.2
0.5
623.1
5.8
4.0
0.3
594.4
2.3
635.6
601.0
(0.1)
(76.0)
(44.6)
(9.2)
(0.2)
(67.8)
(41.7)
(5.2)
(129.9)
(114.9)
505.7
486.1
2019
£ million
2018
£ million
93.6
120.3
11.0
87.8
116.3
9.2
224.9
213.3
(19.2)
(13.7)
205.7
199.6
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 £93.6 million (2018: £87.8 million) and £17.1 million (2018: £11.5 million) respectively.
Fee income and expense arising from trust and other fiduciary activities amounted to £120.3 million (2018: £116.3 million) and £1.6 million
(2018: £1.7 million) respectively.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued
Annual Report 2019
Close Brothers Group plc
121
2019
£ million
2018
£ million
64.4
13.0
77.4
56.3
8.8
65.1
2019
£ million
2018
£ million
241.3
34.6
3.7
12.8
292.4
31.5
173.5
247.0
35.9
6.0
11.2
300.1
25.2
155.2
497.4
480.5
2019
£ million
2018
£ million
0.2
1.2
0.5
0.1
2.0
0.2
1.5
0.3
0.2
2.2
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
5. INFORMATION REGARDING THE AUDITOR
Fees payable
Audit of the company’s annual accounts
Audit of the company’s subsidiaries pursuant to legislation
Audit related services
Other services
The auditor of the group was PricewaterhouseCoopers LLP (2018: PricewaterhouseCoopers LLP).
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122
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:
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
Acquisitions
Reconciliation to tax expense
UK corporation tax for the year at 19.0% (2018: 19.0%) on operating profit
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
2019
£ million
2018
£ million
59.4
1.3
(0.9)
59.8
3.7
0.9
64.4
(0.1)
(1.5)
0.4
–
0.8
0.4
0.2
0.2
50.3
(0.2)
0.3
14.0
–
–
64.4
64.7
1.5
(2.3)
63.9
1.1
2.0
67.0
(0.3)
1.1
0.4
0.2
(0.4)
–
–
1.0
51.5
(0.2)
1.1
15.1
(0.2)
(0.3)
67.0
The standard UK corporation tax rate for the financial year is 19.0% (2018: 19.0%). However, an additional 8% surcharge applies to banking
company profits as defined in legislation. The effective tax rate of 24.3% (2018: 24.7%) is above the UK corporation tax rate primarily due to the
surcharge applying to most of the group’s profits.
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Close Brothers Group plc
123
Movements in deferred tax assets and liabilities were as follows:
Capital
allowances
£ million
Pension
scheme
£ million
Share-based
payments
and deferred
compensation
£ million
Impairment
losses
£ million
Cash flow
hedging
£ million
Intangible
assets
£ million
Other
£ million
Total
£ million
Group
At 1 August 2017
(Charge)/credit to the income statement
Charge to other comprehensive income
Credit to equity
Acquisitions
At 31 July 2018
IFRS 9 transition
At 1 August 2018
(Charge)/credit to the income statement
(Charge)/credit to other comprehensive income
Charge to equity
Acquisitions
42.6
(4.2)
–
–
–
38.4
–
38.4
(3.3)
(0.4)
–
–
(0.8)
0.1
(0.4)
–
–
(1.1)
–
(1.1)
0.1
(0.4)
–
–
At 31 July 2019
34.7
(1.4)
9.5
(0.3)
–
0.4
–
9.6
–
9.6
(0.5)
–
(0.8)
–
8.3
Company
At 1 August 2017
Credit/(charge) to the income statement
Charge to statement of recognised gains and losses
At 31 July 2018
Credit/(charge) to the income statement
Charge to statement of recognised gains and losses
At 31 July 2019
0.5
–
–
–
–
0.5
14.1
14.6
(1.9)
–
–
–
1.1
–
(1.1)
–
–
–
–
–
–
1.5
–
–
(5.4)
1.3
–
–
–
(4.1)
–
(4.1)
1.0
–
–
(0.2)
(0.1)
–
(0.2)
–
–
(0.3)
–
(0.3)
–
–
–
–
47.4
(3.1)
(1.7)
0.4
–
43.0
14.1
57.1
(4.6)
0.7
(0.8)
(0.2)
12.7
1.5
(3.3)
(0.3)
52.2
Capital
allowances
£ million
Pension
scheme
£ million
Share-based
payments
and deferred
compensation
£ million
Total
£ million
0.2
–
–
0.2
–
–
0.2
(0.8)
0.1
(0.4)
(1.1)
0.1
(0.4)
(1.4)
3.2
(0.3)
–
2.9
(0.3)
–
2.6
2.6
(0.2)
(0.4)
2.0
(0.2)
(0.4)
1.4
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 1 January 2019, the group completed the sale of Close Brothers Retail Finance, which provides unsecured retail point of sale finance
to consumers, to Klarna Bank AB. The transaction fulfilled the requirements of IFRS 5 to be classified as “discontinued operations” in the
consolidated income statement.
The net assets of Close Brothers Retail Finance on 1 January 2019, the date of disposal, was £80.9 million, comprising largely of loans and
advances to customers. In the 31 July 2018 consolidated balance sheet, net assets of £66.9 million relating to Close Brothers Retail Finance
were presented as “held for sale”. No impairment has been recognised in relation to these net assets in the year.
RESULTS OF DISCONTINUED OPERATIONS
Operating income
Operating expenses
Impairment losses on financial assets
Operating loss before tax
Tax
Impairment of plant, property and equipment and intangible assets
Loss after tax
Profit on disposal of discontinued operations, net of tax
Profit/(loss) from discontinued operations
2019
£ million
3.7
(4.2)
(1.6)
(2.1)
0.5
–
(1.6)
2.7
1.1
2018
£ million
6.6
(7.2)
(2.3)
(2.9)
0.8
(0.1)
(2.2)
–
(2.2)
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Annual Report 2019
124
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
2019
£ million
2018
£ million
–
–
–
–
–
–
0.9
66.2
0.4
67.5
0.6
0.6
2019
£ million
(16.1)
(0.3)
2018
£ million
(31.9)
(0.4)
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 basic1
Adjusted diluted1
Continuing and discontinued operations
Basic
Diluted
1 Excludes amortisation of intangible assets on acquisition and their tax effects.
Profit attributable to shareholders
Less profit/(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
2019
2018
133.5p
132.5p
136.7p
135.7p
136.2p
135.3p
140.2p
139.3p
134.2p
133.2p
134.7p
133.8p
2019
£ million
201.6
1.1
200.5
5.8
(1.0)
2018
£ million
202.3
(2.2)
204.5
7.4
(1.3)
Adjusted profit attributable to shareholders on continuing operations
205.3
210.6
Average number of shares
Basic weighted
Effect of dilutive share options and awards
Diluted weighted
2019
million
150.2
1.1
2018
million
150.2
1.0
151.3
151.2
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Close Brothers Group plc
125
9. DIVIDENDS
For each ordinary share
Final dividend for previous financial year paid in November 2018: 42.0p (2017: 40.0p)
Interim dividend for current financial year paid in April 2019: 22.0p (2018: 21.0p)
2019
£ million
2018
£ million
62.7
32.8
95.5
59.7
31.3
91.0
A final dividend relating to the year ended 31 July 2019 of 44.0p, amounting to an estimated £65.7 million, is proposed. This final dividend, which
is due to be paid on 26 November 2019 to shareholders on the register at 11 October 2019, is not reflected in these financial statements.
10. LOANS AND ADVANCES TO BANKS
At 31 July 2019
At 31 July 2018
11. LOANS AND ADVANCES TO CUSTOMERS
Between
three months
and one
year
£ million
Within three
months
£ million
Between
one and
two years
£ million
Between
two and
five years
£ million
0.4
0.5
1.9
9.2
10.3
2.5
2.9
2.5
On demand
£ million
93.4
125.5
Total
£ million
108.9
140.2
At 31 July 2019
At 1 August 2018
At 31 July 2018
Between
three months
and one
year
£ million
2,381.0
2,301.1
2,301.1
Within three
months
£ million
2,288.8
2,135.8
2,135.8
On demand
£ million
80.7
77.3
77.3
Between
one and
two years
£ million
1,332.0
1,324.3
1,324.3
Between
two and
five years
£ million
1,556.3
1,402.3
1,402.3
After
more than
five years
£ million
115.1
95.8
95.8
Impairment
provisions
£ million
(104.3)
(97.3)
(39.1)
Total
£ million
7,649.6
7,239.3
7,297.5
Impairment provisions on loans and advances to customers
At 31 July 2018
IFRS 9 transition (note 30)
At 1 August 2018
New financial assets originated
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Net remeasurement of expected credit losses arising from transfers between stages and
repayments
Final repayments and repayments while stage remained unchanged
Changes to model methodologies
Charge to the income statement
Write offs
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
23.7
26.5
1.0
(6.4)
(2.1)
(7.5)
(17.5)
–
1.5
(0.3)
24.8
–
(4.4)
20.8
(4.7)
11.7
(7.5)
–
4.2
(1.9)
48.8
–
(0.4)
(0.2)
48.2
47.6
(11.4)
(0.3)
35.9
(32.4)
39.1
58.2
97.3
26.5
(3.8)
14.2
41.4
51.8
(36.4)
(0.3)
41.6
(34.6)
At 31 July 2019
24.9
27.1
52.3
104.3
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment provisions
Amounts written off directly to income statement, net of recoveries and other costs
Impairment losses relating to other financial assets
Impairment losses on financial assets recognised in income statement
2019
£ million
41.6
5.8
47.4
1.1
48.5
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Annual Report 2019
126
11. LOANS AND ADVANCES TO CUSTOMERS CONTINUED
The contractual amount outstanding at 31 July 2019 on financial assets that were written off during the period and are still subject to recovery
activity is £12.7 million.
Impairment provisions on loans and advances to customers
At 1 August
Charge for the year
Amounts written off net of recoveries
At 31 July
Gross loans and advances to customers
At 1 August 2018
New financial assets originated
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Net transfers between stages and repayments
Final repayments and repayments while stage remained unchanged
Changes to model methodologies
Write offs
At 31 July 2019
2018
£ million
52.4
46.7
(60.0)
39.1
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
6,479.2
5,856.4
204.6
(918.4)
(249.9)
(963.7)
(4,573.0)
86.5
(21.4)
597.3
–
(195.3)
791.5
(126.7)
469.5
(369.3)
23.0
(16.8)
260.1
–
(65.1)
(11.3)
315.4
239.0
(134.8)
(109.5)
(68.6)
7,336.6
5,856.4
(55.8)
(138.2)
(61.2)
(255.2)
(5,077.1)
–
(106.8)
6,864.0
703.7
186.2
7,753.9
Loans and advances to customers in Stages 2 and 3 with a gross carrying amount of £275.0 million prior to modification were modified during
the year. No material gain or loss was recognised as a result of those modifications. The gross carrying amount at 31 July 2019 of modified
loans and advances to customers which transferred from Stage 2 or 3 to Stage 1 during the year was £55.4 million.
Loans and advances to customers comprise
Hire purchase agreement receivables
Finance lease receivables
Other loans and advances
At 31 July
2019
£ million
2018
£ million
2,927.6
453.1
4,268.9
2,852.4
447.6
3,997.5
7,649.6
7,297.5
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
2019
£ million
2018
£ million
1,408.2
2,493.6
73.3
3,975.1
(531.0)
1,387.5
2,372.1
66.0
3,825.6
(513.3)
3,444.1
3,312.3
1,218.9
2,165.2
60.0
1,202.1
2,058.1
52.1
3,444.1
3,312.3
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Close Brothers Group plc
127
The aggregate cost of assets acquired for the purpose of letting under finance leases and hire purchase agreements was £6,060.4 million (2018:
£5,978.8 million). The average effective interest rate on finance leases approximates to 9.4% (2018: 9.6%). 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.
Gross loans and advances to customers by stage and the corresponding impairment provisions and provision coverage ratios are set out below:
At 31 July 2019
Gross loans and advances to customers
Commercial
Retail
Property
Total
Impairment provisions
Commercial
Retail
Property
Total
Provision coverage ratio
Commercial
Retail
Property
Total
At 1 August 2018
Gross loans and advances to customers
Commercial
Retail
Property
Total
Impairment provisions
Commercial
Retail
Property
Total
Provision coverage ratio
Commercial
Retail
Property
Total
Less than
30 days
past due
£ million
Stage 1
£ million
Stage 2
Greater
than or
equal to 30
days past
due
£ million
Total
£ million
Stage 3
£ million
Total
£ million
2,647.7
2,577.1
1,639.2
6,864.0
12.5
10.4
2.0
24.9
0.5%
0.4%
0.1%
0.4%
293.1
239.3
43.2
575.6
10.8
11.2
1.9
23.9
3.7%
4.7%
4.4%
4.2%
17.6
4.9
105.6
128.1
1.1
0.5
1.6
3.2
6.3%
10.2%
1.5%
2.5%
310.7
244.2
148.8
703.7
11.9
11.7
3.5
27.1
3.8%
4.8%
2.4%
3.9%
84.7
26.5
75.0
186.2
27.4
15.0
9.9
52.3
32.3%
56.6%
13.2%
28.1%
3,043.1
2,847.8
1,863.0
7,753.9
51.8
37.1
15.4
104.3
1.7%
1.3%
0.8%
1.3%
Less than
30 days past
due
£ million
Stage 1
£ million
Stage 2
Greater than
or equal to
30 days past
due
£ million
2,452.4
2,452.1
1,574.7
6,479.2
11.8
10.0
1.9
23.7
0.5%
0.4%
0.1%
0.4%
246.1
224.9
58.9
529.9
10.5
10.1
2.4
23.0
4.3%
4.5%
4.1%
4.3%
16.8
4.3
46.3
67.4
1.1
0.4
0.3
1.8
6.5%
9.3%
0.6%
2.7%
Total
£ million
Stage 3
£ million
Total
£ million
262.9
229.2
105.2
597.3
11.6
10.5
2.7
24.8
4.4%
4.6%
2.6%
4.2%
81.2
24.0
154.9
260.1
25.7
14.2
8.9
48.8
31.7%
59.2%
5.7%
18.8%
2,796.5
2,705.3
1,834.8
7,336.6
49.1
34.7
13.5
97.3
1.8%
1.3%
0.7%
1.3%
Increases in Stage 1 loans and advances to customers and expected credit loss provisions have primarily been driven by financial assets
originated and further lending to customers. Total expected credit loss provisions as a percentage of loans and customers (“the provision
coverage ratio”) remained flat at 0.4%.
Stage 2 loans and advances to customers increased by £106.4 million to £703.7 million (1 August 2018: £597.3 million) across all segments,
primarily due to significant increase in credit risk indicators and the 30 days past due backstop being triggered. Stage 2 expected credit loss
provisions as a percentage of loans and advances to customers reduced marginally to 3.9% (1 August 2018: 4.2%) reflecting the change in
composition of loans.
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Annual Report 2019
128
11. LOANS AND ADVANCES TO CUSTOMERS CONTINUED
Stage 3 loans and advances to customers decreased by £73.9 million to £186.2 million (1 August 2018: £260.1 million). These movements were
primarily due to the Property segment, where refinements have been made to the definition of default for the segment causing fewer loans to be
categorised as Stage 3 and transferred to Stages 1 and 2 at 31 July 2019. This definition change incorporated updates to the payment
allocation method used to define the days past due of a loan and the cure period used for default. This has resulted in an increase to the Stage
3 provision coverage ratio to 28.1% (1 August 2018: 18.8%).
12. DEBT SECURITIES
Long trading positions in debt securities
Certificates of deposit
Sovereign and central bank debt
At 31 July 2019
Long trading positions in debt securities
Certificates of deposit
Sovereign and central bank debt
At 31 July 2018
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
13. EQUITY SHARES
Long trading positions
Other equity shares
Fair value
through
profit or
loss
£ million
25.4
–
–
Fair value
through
other
compre-
hensive
income
£ million
–
–
48.3
Amortised
cost
£ million
–
240.7
–
Total
£ million
25.4
240.7
48.3
25.4
48.3
240.7
314.4
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
2019
£ million
44.5
–
1.0
2.8
2018
£ million
43.6
–
–
0.9
48.3
44.5
31 July
2019
£ million
35.3
1.0
31 July
2018
£ million
31.6
0.5
36.3
32.1
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:
31 July 2019
31 July 2018
Exchange rate contracts
Interest rate contracts
Notional
value
£ million
260.5
2,836.7
3,097.2
1.2
28.9
30.1
Notional
value
£ million
120.3
3,530.9
5.6
15.0
20.6
3,651.2
Assets
£ million
Liabilities
£ million
0.1
16.5
16.6
0.7
15.0
15.7
Assets
£ million
Liabilities
£ million
Notional amounts of interest rate contracts totalling £2,282.7 million (31 July 2018: £2,781.4 million) have a residual maturity of more than one
year.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
129
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 2019
31 July 2018
Notional
value
£ million
Assets
£ million
Liabilities
£ million
Notional
value
£ million
Assets
£ million
Liabilities
£ million
735.7
0.2
6.1
719.9
1,251.1
27.6
5.5
1,202.3
1.4
14.1
1.3
12.1
The group generally enters into fair value hedges and cash flow hedges with changes in the relevant benchmark interest rate risk being the
predominant hedged risk.
The fair value hedges seek to hedge the exposure to changes in the fair value of recognised assets and liabilities or firm commitments attributable
to interest rate risk. Changes in interest rate risk are considered the largest component of the overall change in fair value. Other risks such as credit
risk are managed but excluded from the hedge accounting relationship. The interest rate risk component is the change in fair value of the fixed rate
hedging items arising solely from changes in the benchmark interest rate.
Cash flow hedges seek to hedge the exposure to variability in future cash flows due to movements in the relevant benchmark interest rate with
interest rate swaps. These future cash flows relate to future interest payments or receipts on recognised financial instruments and on forecast
transactions for periods of up to seven (2018: eight) years. The group applies portfolio cash flow hedging for interest rate risk exposures on a
portfolio of actual and forecast variable interest rate cash flows arising from variable rate borrowings.
Certain items which are economically hedged may be ineligible for hedge accounting in accordance with IAS 39. Therefore, a portfolio of floating
rate liabilities have been designated as eligible hedged items in the cash flow hedge portfolio. The amounts and timing of future cash flows are
projected on the basis of their contractual and forecast terms and other relevant factors. The exposure from this portfolio frequently changes due to
new facilities being originated, contractual repayments and new interest rate swaps added to the portfolio.
To assess hedge effectiveness the change in fair value or cash flows of the hedging instruments is compared with the change in fair value or cash
flows of the hedged item attributable to the hedged risk. A hedge is considered highly effective if the results are within a ratio of 80%-125%.
The main sources of hedge ineffectiveness can include, but are not limited to, differences in the discount rates and cash flow timing differences
between the hedged item and the hedging instrument.
The maturity profile for the notional amounts of the group’s fair value hedges is set out below.
At 31 July 2019
Fair value hedges
Interest rate risk
Fair value hedges have an average fixed rate of 2.8%.
Within
three
months
£ million
Between
three and
six months
£ million
Between
six months
and one
year
£ million
Between
one and
five years
£ million
After more
than five
years
£ million
Total
£ million
On demand
£ million
–
–
–
62.0
826.6
362.5
1,251.1
Details of the hedging instruments for the group’s hedge ineffectiveness assessment are set out below.
Cash flow hedges
Interest rate risk
Fair value hedges
Interest rate risk
Changes in fair
value of hedging
instrument
used for
calculating hedge
ineffectiveness
2019
£ million
Hedge
ineffectiveness
recognised in
income statement
2019
£ million
(6.1)
19.9
–
0.2
The carrying amount of hedging interest rate swaps is held within derivative financial instruments and the hedge ineffectiveness is held within
other income.
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Annual Report 2019
130
14. DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED
Details of the hedged exposures covered by the group’s hedging strategies are set out below.
At 31 July 2019
Fair value hedges
Assets
Debt securities
Loans and advances to customers and undrawn commitments
Liabilities
Deposits by customers
Debt securities in issue
Subordinated loan capital
Carrying amount of
hedged item
£ million
Accumulated amount of
fair value adjustment on
the hedged item
£ million
Changes in
fair value
of hedged
item used for
calculating
hedge
ineffectiveness
£ million
48.3
25.5
73.8
240.5
752.8
175.1
1,168.4
2.8
2.4
5.2
2.0
20.7
0.9
23.6
2.9
2.4
5.3
(1.6)
(20.1)
(3.3)
(25.0)
Details of the impact of hedging relationships on the income statement and other comprehensive income are set out below.
At 31 July 2019
Cash flow hedges
Interest rate risk
1 Amounts have been reclassified to other income.
Changes in
fair value
of hedged
item used for
calculating
hedge
ineffectiveness
£ million
Gains/(losses)
from changes
in value of
hedging
instrument
recognised
in other
comprehensive
income
£ million
Amounts
reclassified
from
reserves to
income
statement1
Hedged
cash flows
will no
longer
occur
£ million
6.1
(6.1)
0.1
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Close Brothers Group plc
131
Goodwill
£ million
Software
£ million
Intangible
assets on
acquisition
£ million
Group total
£ million
Company
software
£ million
150.7
–
–
150.7
0.2
(0.1)
131.6
36.2
(7.0)
160.8
48.1
(7.7)
67.0
–
–
67.0
0.5
–
349.3
36.2
(7.0)
378.5
48.8
(7.8)
150.8
201.2
67.5
419.5
47.9
–
–
47.9
–
–
47.9
102.9
102.8
102.8
75.7
16.6
(4.4)
87.9
20.5
(3.4)
105.0
96.2
72.9
55.9
34.0
7.4
–
41.4
5.8
–
47.2
20.3
25.6
33.0
157.6
24.0
(4.4)
177.2
26.3
(3.4)
200.1
219.4
201.3
191.7
0.4
–
–
0.4
–
–
0.4
0.4
–
–
0.4
–
–
0.4
–
–
–
15. INTANGIBLE ASSETS
Cost
At 1 August 2017
Additions
Disposals
At 31 July 2018
Additions
Disposals
At 31 July 2019
Amortisation and impairment
At 1 August 2017
Amortisation charge for the year
Disposals
At 31 July 2018
Amortisation charge for the year
Disposals
At 31 July 2019
Net book value at 31 July 2019
Net book value at 31 July 2018
Net book value at 1 August 2017
Intangible assets on acquisition relate to broker and customer relationships and are amortised over a period of eight to 20 years.
In the 2019 financial year, £5.8 million (2018: £7.4 million) of the amortisation charge is included in amortisation of intangible assets on acquisition and
£20.5 million (2018: £16.6 million) of the amortisation charge is included in administrative expenses shown in the consolidated income statement.
IMPAIRMENT TESTS FOR GOODWILL
At 31 July 2019, goodwill has been allocated to nine individual CGUs. Seven are within the Banking division, one is the Asset Management
division and the remaining one is the Securities 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 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 loan book growth rates and net return on loan book in the Banking CGUs, expected total client asset
growth rate and revenue margin in the Asset Management CGU and expected market-making conditions in the Securities CGU.
For cash flows beyond the group’s three year planning horizon, a terminal value was calculated using a prudent annual growth rate of 0% (2018:
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 2019, 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.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
132
15. INTANGIBLE ASSETS CONTINUED
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
Close Brothers Asset Management
Winterflood Securities
Novitas
Other
16. PROPERTY, PLANT AND EQUIPMENT
Group
Cost
At 1 August 2017
Additions
Disposals
At 31 July 2018
Additions
Disposals
At 31 July 2019
Depreciation
At 1 August 2017
Charge for the year
Disposals
At 31 July 2018
Charge for the year
Disposals
At 31 July 2019
Net book value at 31 July 2019
Net book value at 31 July 2018
Net book value at 1 August 2017
31 July 2019
31 July 2018
Goodwill
£ million
Pre-tax
discount rate
%
9.0
10.6
10.2
10.2-11.3
38.4
23.3
12.1
29.1
102.9
Goodwill
£ million
38.5
23.3
12.1
28.9
102.8
Pre-tax
discount rate
%
10.0
11.9
10.2
10.2-11.3
Leasehold
property
£ million
Fixtures,
fittings and
equipment
£ million
Assets
held under
operating
leases
£ million
Motor
vehicles
£ million
Total
£ million
22.4
0.3
(0.3)
22.4
5.9
(1.2)
27.1
11.1
2.1
(0.3)
12.9
2.7
(1.0)
14.6
12.5
9.5
11.3
45.1
11.2
(0.5)
55.8
6.2
(6.5)
230.8
79.6
(41.5)
268.9
72.9
(27.7)
55.5
314.1
31.7
6.5
(0.2)
38.0
8.3
(6.1)
40.2
15.3
17.8
13.4
53.0
31.3
(14.2)
70.1
36.1
(12.5)
93.7
220.4
198.8
177.8
0.3
–
(0.2)
0.1
–
–
0.1
0.1
–
–
0.1
–
–
0.1
–
–
0.2
298.6
91.1
(42.5)
347.2
85.0
(35.4)
396.8
95.9
39.9
(14.7)
121.1
47.1
(19.6)
148.6
248.2
226.1
202.7
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
133
The gain from the sale of assets held under operating leases for the year ended 31 July 2019 was £0.3 million (2018: £0.1 million gain).
Future minimum lease rentals receivable under non-cancellable operating leases
Within one year
Between one and five years
After more than five years
Company
Cost
At 1 August 2017
At 31 July 2018
At 31 July 2019
Depreciation
At 1 August 2017
At 31 July 2018
At 31 July 2019
Net book value at 31 July 2019
Net book value at 31 July 2018
Net book value at 1 August 2017
The net book value of leasehold property comprises:
Long leasehold property
Short leasehold property
31 July
2019
£ million
31 July
2018
£ million
42.0
65.7
0.6
39.4
61.0
0.8
108.3
101.2
Leasehold
property
£ million
Fixtures,
fittings and
equipment
£ million
Total
£ million
2.7
2.7
2.7
2.7
2.7
2.7
–
–
–
1.1
1.1
1.1
1.1
1.1
1.1
–
–
–
3.8
3.8
3.8
3.8
3.8
3.8
–
–
–
Group
Company
31 July
2019
£ million
31 July
2018
£ million
31 July
2019
£ million
31 July
2018
£ million
1.4
11.1
12.5
1.5
8.0
9.5
–
–
–
–
–
–
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
134
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 2017
Additions
Utilised
Released
At 31 July 2018
Additions
Utilised
Released
At 31 July 2019
Company
At 1 August 2017
Additions
Utilised
Released
At 31 July 2018
Additions
Utilised
Released
At 31 July 2019
31 July
2019
£ million
140.4
50.0
31 July
2018
£ million
135.6
51.5
190.4
187.1
144.5
70.9
17.9
148.0
80.1
21.5
233.3
249.6
Claims
£ million
Property
£ million
Other
£ million
Total
£ million
0.2
0.4
(0.4)
(0.2)
–
0.5
(0.1)
(0.1)
0.3
7.9
0.4
(0.2)
–
8.1
1.0
(0.1)
(3.1)
5.9
14.6
2.9
(2.8)
(1.3)
13.4
3.8
(4.8)
(0.7)
11.7
22.7
3.7
(3.4)
(1.5)
21.5
5.3
(5.0)
(3.9)
17.9
Property
£ million
Other
£ million
Total
£ million
2.0
–
–
0.1
2.1
–
–
(1.7)
0.4
4.1
1.8
(1.3)
(0.6)
4.0
1.2
(0.8)
–
4.4
6.1
1.8
(1.3)
(0.5)
6.1
1.2
(0.8)
(1.7)
4.8
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.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
135
31 July
2019
£ million
547.6
31 July
2018
£ million
512.5
9.6
10.9
20.5
16.4
14.2
30.6
568.1
543.1
Within
three
months
£ million
15.7
1,232.7
10.3
27.4
Between
three
months and
one year
£ million
29.8
2,817.9
–
143.6
On demand
£ million
12.5
78.3
19.0
20.7
Between
one and
two years
£ million
Between
two and
five years
£ million
After
more than
five years
£ million
–
1,157.2
213.2
937.8
–
352.3
276.8
459.5
–
–
–
271.1
Total
£ million
58.0
5,638.4
519.3
1,860.1
18. SETTLEMENT BALANCES AND SHORT POSITIONS
Settlement balances
Short positions in:
Debt securities
Equity shares
19. FINANCIAL LIABILITIES
Deposits by banks
Deposits by customers
Loans and overdrafts from banks
Debt securities in issue
At 31 July 2019
130.5
1,286.1
2,991.3
2,308.2
1,088.6
271.1
8,075.8
Deposits by banks
Deposits by customers
Loans and overdrafts from banks
Debt securities in issue
On demand
£ million
7.9
86.5
9.6
0.6
Within
three
months
£ million
Between
three months
and one year
£ million
16.1
1,275.0
5.2
23.1
31.2
2,570.6
–
561.3
Between
one and
two years
£ million
–
1,142.6
–
190.3
Between
two and
five years
£ million
After
more than
five years
£ million
–
422.5
495.0
709.9
–
–
–
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
At 31 July 2019, the company held £250.3 million (31 July 2018: £249.7 million) debt securities in issue.
As discussed in note 28(c) the group has accessed £490.0 million (31 July 2018: £495.0 million) cash under the Bank of England’s Term Funding
Scheme. 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 2019
At 31 July 2018
20. SUBORDINATED LOAN CAPITAL
Final maturity date
2026
2026
2027
On demand
£ million
Within
three
months
£ million
Between
three months
and one year
£ million
–
–
0.3
0.2
–
–
Between
one and
two years
£ million
213.2
–
Between
two and
five years
£ million
276.8
495.0
After
more than
five years
£ million
–
–
Total
£ million
490.3
495.2
Prepayment
date
Initial
interest
rate
31 July
2019
£ million
31 July
2018
£ million
2021
2021
2022
7.42%
7.62%
4.25%
15.5
31.0
175.1
221.6
15.5
30.9
171.5
217.9
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
136
21. SHARE CAPITAL AND RESERVES
Group and company
Allotted, issued and fully paid
Ordinary shares of 25p each
31 July 2019
31 July 2018
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 107 and 110.
At 31 July 2019, the company’s reserves available for distribution under section 830(2) and 831(2) of the Companies Act 2006 were £376.2 million
(2018: £381.2 million). The directors have applied the guidance provided by ICAEW TECH 02/17 in determining this.
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 9.0% and a minimum total capital ratio of 13.4%. The minimum capital
requirements are inclusive of the capital conservation buffer (currently 2.5% for both CET1 capital and total capital) and the countercyclical
buffer (currently 0.96% effective rate for the group, for both CET1 capital and total capital).
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 2019, the group’s CET1 capital ratio was 13.0% (1 August 2018: 12.7%; 31 July 2018: 12.7%). CET1 capital increased to
£1,169.2 million (1 August 2018: £1,082.2 million; 31 July 2018: £1,084.4 million) primarily due to retained profit.
RWAs, calculated using the standardised approaches, increased to £8,967.4 million (1 August 2018: £8,542.6 million; 31 July 2018: £8,547.5
million) as a result of growth in credit and counterparty risk associated with the loan book.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
137
31 July
2019
£ million
1 August
2018
£ million
31 July
2018
£ million
38.0
1,392.5
19.0
38.0
1,282.8
21.3
38.0
1,327.7
21.3
(216.1)
(65.7)
(37.7)
(5.3)
(0.1)
44.6
(198.1)
(62.7)
(37.6)
(4.0)
(0.2)
42.7
(198.1)
(62.7)
(37.6)
(4.0)
(0.2)
–
1,169.2
1,082.2
1,084.4
195.4
197.9
197.9
1,364.6
1,280.1
1,282.3
7,930.5
884.4
152.5
7,600.5
845.8
96.3
7,605.4
845.8
96.3
8,967.4
8,542.6
8,547.5
13.0%
15.2%
12.7%
15.0%
12.7%
15.0%
CET1 capital
Called up share capital
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
IFRS 9 transitional arrangements2
CET1 capital
Tier 2 capital – subordinated debt
Total regulatory capital3
RWAs (notional)3 – unaudited
Credit and counterparty credit risk
Operational risk4
Market risk4
CET1 capital ratio3 – unaudited
Total capital ratio3 – unaudited
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2019 and 31 July 2018 for a foreseeable dividend being the proposed final
dividend as set out in note 9.
2 The group has elected to apply IFRS 9 transitional arrangements for 31 July 2019, which allow the capital impact of expected credit losses to be phased in over a five-year period.
3 Shown after applying IFRS 9 transitional arrangements and the Capital Requirements Regulations transitional and qualifying own funds arrangements. At 31 July 2019 the fully loaded
CET1 capital ratio is 12.6% and total capital ratio is 14.5% (1 August 2018: CET1 capital ratio 12.2% and total capital ratio 14.2%).
4 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
IFRS 9 transitional arrangements2
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
2019
£ million
1 August
2018
£ million
31 July
2018
£ million
1,406.4
1,303.8
1,348.7
(216.1)
(65.7)
44.6
(5.3)
(0.1)
4.4
1.0
(198.1)
(62.7)
42.7
(4.0)
(0.2)
(0.1)
0.8
(198.1)
(62.7)
–
(4.0)
(0.2)
(0.1)
0.8
1,169.2
1,082.2
1,084.4
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2019 and 31 July 2018 for a foreseeable dividend being the proposed final
dividend as set out in note 9.
2 The group has elected to apply IFRS 9 transitional arrangements for 31 July 2019, which allow the capital impact of expected credit losses to be phased in over a five-year period.
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Annual Report 2019
138
22. CAPITAL CONTINUED
The following table shows the movement in CET1 capital during the year:
CET1 capital at 31 July 2018
Profit in the period attributable to shareholders
Dividends paid and foreseen
Reduction in shareholders’ equity from IFRS 9
IFRS 9 transitional arrangements
Increase in intangible assets, net of associated deferred tax liabilities
Other movements in reserves recognised for CET1 capital
Other movements in deductions from CET1 capital
CET1 capital at 31 July 2019
£ million
1,084.4
201.6
(98.5)
(44.9)
44.6
(18.0)
1.3
(1.3)
1,169.2
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
2019
£ million
163.1
31 July
2018
£ million
162.4
31 July
2019
£ million
156.6
31 July
2018
£ million
159.3
Where the group undertakes to make a payment on behalf of its subsidiaries for guarantees issued, such as bank facilities or property leases or
as irrevocable letters of credit for which an obligation to make a payment to a third party has not arisen at the reporting date, they are included
in these consolidated financial statements as contingent liabilities.
COMMITMENTS
UNDRAWN FACILITIES, CREDIT LINES AND OTHER COMMITMENTS TO LEND
Within one year
After more than one year
31 July
2019
£ million
1,100.6
–
31 July
2018
£ million
1,091.7
35.7
1,100.6
1,127.4
OPERATING LEASE COMMITMENTS
Minimum operating lease payments recognised in the consolidated income statement amounted to £9.5 million (2018: £9.1 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 2019
31 July 2018
Premises
£ million
11.1
28.9
4.5
Other
£ million
4.6
6.1
–
Premises
£ million
12.8
29.5
6.6
Other
£ million
4.2
5.2
–
44.5
10.7
48.9
9.4
OTHER COMMITMENTS
Subsidiaries had contracted capital commitments relating to capital expenditure of £8.9 million (2018: £12.1 million).
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
139
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 76 to 96.
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
2019
£ million
2018
£ million
3.9
0.5
3.4
2.1
9.9
1.7
11.6
4.2
0.6
4.0
2.5
11.3
3.5
14.8
Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £4.1 million
(2018: £6.3 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 2019 attributable, in aggregate, to key management were £0.1 million (31 July 2018: £0.2
million). At 31 July 2019, no members of key management held any of the company’s 4.25% subordinated loan notes. At 31 July 2018, a member
of key management held 500,000 of the company’s 4.25% subordinated loan notes.
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140
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 £12.6 million (2018:
£11.0 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 2019 this scheme had 37 (31 July
2018: 41) deferred members and 49 (31 July 2018: 46) pensioners and dependants.
FUNDING POSITION
The scheme’s most recent triennial actuarial valuation at 31 July 2018 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:
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
2019
%
3.4
2.4
2.0
2.0
23.9
25.5
24.7
26.8
2018
%
3.3
2.3
2.5
2.5
24.3
25.9
25.1
28.0
1 Based on market yields at 31 July 2019 and 2018 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 S2 Light (2018: 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 2017 (2018: 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
2019
£ million
2018
£ million
2017
£ million
2016
£ million
2015
£ million
13.1
29.9
0.2
43.2
(36.5)
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)
6.7
5.1
3.6
1.2
3.1
1 There are no amounts included within the fair value of scheme assets relating to the financial instruments of Close Brothers Group plc.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
141
2019
£ million
(36.4)
(0.9)
2.2
(1.4)
2018
£ million
(38.2)
(0.9)
2.3
0.4
(36.5)
(36.4)
2019
£ million
41.5
1.0
(2.2)
(0.4)
3.3
2018
£ million
41.8
1.0
(2.3)
(0.3)
1.3
43.2
41.5
2019
£ million
3.3
1.3
(2.7)
(1.4)
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)
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
Total actuarial gains/(losses)
1.9
1.7
2.7
(1.9)
(2.0)
Total actuarial gains have been recognised in other comprehensive income. Income of £0.1 million (2018: £0.1 million) 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 2019 and 2018 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)
2019
2018
%
(4.2)
1.8
4.0
£ million
(1.5)
0.7
1.5
%
(5.0)
2.0
3.0
£ million
(1.8)
0.7
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 30% in global equities, 69% in bonds and 1%
in cash (2018: 31% global equities and 69% 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 17 years (2018: 20 years).
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142
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 76 to 96.
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 2019, 0.7 million (31 July 2018: 0.6 million) and 2.1 million (31 July 2018: 2.2
million) of these shares were held respectively and in total £37.7 million (2018: £37.6 million) was recognised within the share-based payments
reserve. During the year £10.9 million (2018: £12.5 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 £19.5 million (2018: £21.7 million). The share-based awards
charge of £3.7 million (2018: £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 2017
Granted
Exercised
Forfeited
Lapsed
Weighted
average
exercise
price
–
Number
1,069,569
455,385
1,155.2p
(210,104) 1,095.5p
1,174.1p
(139,666)
1,170.2p
(6,299)
Number
1,377,483
594,194
(221,266)
(105,559)
(212,823)
At 31 July 2018
1,168,885
–
1,432,029
Granted
Exercised
Forfeited
Lapsed
At 31 July 2019
Exercisable at:
31 July 2019
31 July 2018
412,343
(275,697)
(143,688)
(4,449)
1,157.9p
1,120.3p
1,156.2p
1,156.1p
449,411
(75,888)
(197,158)
(339,164)
1,157,394
–
1,269,230
13,259
–
1,133.0p
–
–
–
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
560,346
426,184
(280,978)
(6,309)
(4,838)
694,405
394,686
(270,776)
(32,704)
–
785,611
4,129
15,585
Number
1,138,718
–
(255,429)
(20,136)
(118,509)
744,644
–
(172,767)
(47,557)
(193,547)
330,773
–
–
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
The table below shows the weighted average market price at the date of exercise:
SAYE
LTIP
DSA
SMP
2019
2018
1,474.7p
1,537.5p
1,493.4p
1,547.0p
1,432.0p
1,453.4p
1,473.2p
1,463.7p
Governance ReportFinancial StatementsStrategic ReportThe Notes continued
Annual Report 2019
Close Brothers Group plc
143
The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are as follows:
SAYE
Between £9 and £10
Between £11 and £12
Between £12 and £13
LTIP
Nil
DSA
Nil
SMP
Nil
Total
2019
Options outstanding
2018
Options outstanding
Weighted
average
remaining
contractual
life
Years
–
2.4
1.5
Number
outstanding
1,611
1,011,814
143,969
Number
outstanding
71,486
931,585
165,814
1,269,230
2.2
1,432,029
785,611
330,773
1.9
1.2
694,405
744,644
3,543,008
2.1
4,039,963
Weighted
average
remaining
contractual
life
Years
0.8
2.4
2.5
2.3
1.9
1.7
2.1
For the share-based awards granted during the year, the weighted average fair value of those options at 31 July 2019 was 1,097.3p (31 July
2018: 1,022.6p). The main assumptions for the valuation of these share-based awards comprised:
Exercise period
SAYE
1 Dec 2021 to 31 May 2022
1 Dec 2023 to 31 May 2024
1 Jun 2022 to 30 Nov 2022
1 Jun 2024 to 30 Nov 2024
LTIP
3 Oct 2021 to 2 Oct 2022
DSA
2 Oct 2019 to 1 Oct 2020
2 Oct 2020 to 1 Oct 2021
2 Oct 2021 to 1 Oct 2022
12 Mar 2020 to 11 Mar 2021
11 Mar 2021 to 10 Mar 2022
Share price
at issue
Exercise
price
Expected
volatility
Expected
option life
in years
Dividend
yield
Risk free
interest rate
1,598.8p
1,598.8p
1,468.8p
1,468.8p
1,588.8p
1,588.8p
1,588.8p
1,588.8p
1,430.0p
1,430.0p
1,279.0p
1,279.0p
1,175.0p
1,175.0p
–
–
–
–
–
–
25.0%
23.0%
24.0%
23.0%
24.0%
–
–
–
–
–
3
5
3
5
3
–
–
–
–
–
4.3%
4.3%
4.4%
4.4%
0.8%
1.0%
0.7%
0.9%
4.1%
0.8%
–
–
–
–
–
–
–
–
–
–
Expected volatility was determined mainly by reviewing share price volatility for the expected life of each option up to the date of grant.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
144
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
Profit/(loss) before tax from discontinued operations
Tax paid
Depreciation and amortisation
(Increase)/decrease in:
Interest receivable and prepaid expenses
Net settlement balances and trading positions
Net loans from money brokers against stock advanced
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
Net cash inflow from operating activities
(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 in respect of the sale of discontinued operations and subsidiaries
Cash consideration received
(d) Analysis of cash and cash equivalents1
Cash and balances at central banks
Loans and advances to banks
31 July
2019
£ million
31 July
2018
£ million
264.7
0.8
(55.6)
73.5
(4.8)
(29.2)
15.8
(3.5)
271.2
(3.0)
(66.8)
63.9
(18.4)
15.9
0.3
9.4
261.7
272.5
1.9
(416.6)
(62.7)
9.8
–
9.1
2.8
141.2
9.5
63.7
16.4
(449.8)
(68.0)
(70.2)
(0.9)
14.1
(16.8)
384.1
178.9
45.7
20.4
306.0
(3.6)
(1.2)
87.6
87.6
0.9
0.9
1,094.9
93.4
1,126.2
125.5
1,188.3
1,251.7
1 Excludes Bank of England cash reserve account and amounts held as collateral.
During the year ended 31 July 2019, the non-cash changes on debt financing amounted to £18.6 million (31 July 2018: £9.4 million) arising
largely from interest accretions and fair value hedging movements.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued
Annual Report 2019
Close Brothers Group plc
145
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
66 and 67. 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 IFRS 9 (31 July 2018:
IAS 39).
At 31 July 2019
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
Derivatives
designated
as hedging
instruments
£ million
Fair value
through
profit and
loss
£ million
Fair value
through
other
compre-
hensive
income
£ million
Amortised
cost
£ million
Total
£ million
–
–
–
–
–
–
–
27.8
–
27.8
–
–
–
–
–
–
–
11.6
–
11.6
–
–
–
–
25.4
36.3
–
2.3
2.1
66.1
20.5
–
–
–
–
–
–
9.0
3.5
33.0
–
–
–
–
48.3
–
–
–
–
1,106.4
562.9
108.9
7,649.6
240.7
–
42.5
–
48.3
1,106.4
562.9
108.9
7,649.6
314.4
36.3
42.5
30.1
50.4
48.3
9,759.3
9,901.5
–
–
–
–
–
–
–
–
–
–
547.6
58.0
5,638.4
519.3
1,860.1
14.3
221.6
–
107.0
568.1
58.0
5,638.4
519.3
1,860.1
14.3
221.6
20.6
110.5
8,966.3
9,010.9
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
146
28. FINANCIAL RISK MANAGEMENT CONTINUED
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
(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 2019
Fair
value
£ million
234.1
1,891.2
Carrying
value
£ million
221.6
1,860.1
31 July 2018
Fair
value
£ million
233.7
1,797.4
Carrying
value
£ million
217.9
1,773.4
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.
Investments classified as Level 3 predominantly comprise contingent consideration payable and receivable in relation to the acquisitions and the
disposal of subsidiaries.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
147
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 2019 and 2018.
The tables below show the classification of financial instruments held at fair value into the valuation hierarchy.
At 31 July 2019
Assets
Debt securities:
Long positions in debt securities
Sovereign and central bank debt
Equity shares
Derivative financial instruments
Contingent consideration
Liabilities
Short positions:
Debt securities
Equity shares
Derivative financial instruments
Contingent consideration
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
24.0
48.3
5.6
–
–
77.9
7.9
2.7
–
–
10.6
1.4
–
30.4
30.1
–
61.9
1.7
8.2
20.6
–
30.5
–
–
0.3
–
2.1
2.4
–
–
–
6.0
6.0
25.4
48.3
36.3
30.1
2.1
142.2
9.6
10.9
20.6
6.0
47.1
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
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
148
28. FINANCIAL RISK MANAGEMENT CONTINUED
Movements in financial instruments categorised as Level 3 were:
At 1 August 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
Total losses recognised in the consolidated income statement
Total gains recognised in other comprehensive income
Purchases and issues
Sales and settlements
At 31 July 2019
Equity
shares
£ million
0.8
–
–
–
(0.3)
Contingent
consideration
£ million
(3.9)
0.6
0.3
(1.2)
0.9
0.5
–
–
–
(0.2)
0.3
(3.3)
(1.2)
–
0.4
0.2
(3.9)
The losses recognised in the consolidated income statement relating to instruments held at the year end amounted to £nil (2018: £nil).
(C) CREDIT RISK
Credit risk is the risk of a reduction in earnings and/or value, as a result of the failure of a counterparty or associated party with whom the group
has contracted to meet its obligations 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.
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
Irrevocable undrawn commitments
Total maximum exposure to credit risk
31 July
2019
£ million
31 July
2018
£ million
1,106.4
562.9
108.9
7,649.6
314.4
42.5
30.1
50.4
9,865.2
1,140.4
512.2
140.2
7,297.5
320.6
66.4
16.6
75.7
9,569.6
196.9
191.0
10,062.1
9,760.6
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.
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
149
At 31 July 2019, the group was a participant of the Bank of England’s Term Funding Scheme. Under this scheme, asset finance loan receivables
of £790.6 million (31 July 2018: £773.8 million) were positioned as collateral with the Bank of England, against which £490.0 million of cash
(31 July 2018: £495.0 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 group has securitised without recourse and restrictions £1,299.0 million (31 July 2018: £1,499.3 million) of its insurance premium and
motor loan receivables in return for cash and asset-backed securities in issue of £949.8 million (31 July 2018: £983.3 million). This includes
£35.4 million (31 July 2018: £118.1 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.
Loans to money brokers against stock advanced of £42.5 million (31 July 2018: £66.4 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 31 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. Large loans are subject to approval by a credit committee.
Credit underwriting and in-life monitoring is undertaken either centrally or through regional office networks, appropriate to the diverse and
specialised nature of the businesses and the size and complexity of the transaction. Underwriting authority is ultimately delegated from the
Board Risk Committee and cascaded accordingly, with lending businesses approving lower risk exposures locally subject to compliance with
credit policy and risk appetite.
This model is supported by central oversight and control. An independent central credit risk function provides ongoing monitoring of material
credit risks through the risk assurance programme, a review of appetites and policy, and oversight / approval of large complex credit deals. This
team reports through the chief credit risk officer (“CCRO”) to the group chief risk officer (“GCRO”) and provides monthly reporting to the Credit
Risk Management Committee (“CRMC”) and Group Risk and Compliance Committee (“GRCC”). 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 concessions to support customers which varies 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 an
extension outside terms (for example a higher loan to value or overpayments) and refinancing, which may incorporate an extension of the loan
tenor and capitalisation of arrears. Other forms of forbearance (for example, moratorium; 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 2019 the gross carrying amount of exposures with forbearance measures was £174.5 million (31 July 2018: £148.6 million). All
forborne loans are captured in Stage 2 or Stage 3 for IFRS 9 and hold provisions on a lifetime basis. Total expected credit losses (“ECL”) as a
proportion of loans and advances which are forborne have increased to 10.7% (31 July 2018: 5.7%).
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
150
28. FINANCIAL RISK MANAGEMENT CONTINUED
Analysis of forborne accounts is shown in the table below:
31 July 2019
31 July 2018
Gross loans
and advances
to customers
£ million
7,753.9
7,336.6
Forborne loans
as a percentage
of gross loans and
advances to
customers
£ million
2.3%
2.0%
Forborne
loans
£ million
174.5
148.6
Provision on
forborne loans
£ million
18.7
8.5
The following is a breakdown of forborne loans by concession type at 31 July 2019:
Extension outside terms
Refinancing
Moratorium
Other modifications
Total
Forborne
loans
£ million
130.4
26.2
14.2
3.7
174.5
SEGMENTAL CREDIT RISK
Commercial is a combination of several specialist secured lending businesses. The nature of assets financed varies across the businesses. The
majority of the loan book is comprised of loans less than £2.5 million. Credit quality is predominantly 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.
Retail is predominantly high volume secured lending. The majority of the loan book is comprised of loans less than £20,000. 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.
Property is a low volume, specialised lending portfolio with credit quality assessed on an individual loan by loan basis. The majority of the loan
book is comprised of loans less than £10 million. 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.
CREDIT RISK REPORTING
The following table sets out loans and advances to customers, trade receivables and undrawn facilities by the group’s internal credit risk grading.
The analysis of lending has been prepared based on the following risk categories:
Low risk: The credit risk profile of the borrower is considered acceptable with no concerns on ability to meet obligations as they fall due.
Standard monitoring in place.
Medium risk: Evidence of deterioration in the credit risk profile of the borrower exists which requires increased monitoring. Potential concerns on
ability to meet obligations as they fall due may exist.
High risk: Evidence of significant deterioration in the credit risk profile of the borrower exists which requires enhanced management. Full
repayment may not be achieved with potential for loss identified.
At 31 July 2019
Loans and advances to customers
Low risk
Medium risk
High risk
Ungraded
Undrawn commitments
Low risk
Medium risk
Trade receivables
Low risk
Medium risk
High risk
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
6,837.6
14.9
–
11.5
6,864.0
1,083.9
–
1,083.9
7.9
–
–
7.9
477.8
224.3
1.2
0.4
703.7
8.5
4.4
12.9
–
0.7
–
0.7
55.2
45.7
79.5
5.8
186.2
3.8
–
3.8
–
–
1.2
1.2
7,370.6
284.9
80.7
17.7
7,753.9
1,096.2
4.4
1,100.6
7.9
0.7
1.2
9.8
Governance ReportFinancial StatementsStrategic ReportThe Notes continued Annual Report 2019
Close Brothers Group plc
151
Low risk and Stage 1 loans and advances to customers represent 88% of the overall balance, reflecting the strong quality of the portfolio and
our conservative underwriting approach.
Low risk and Stage 2 represent 6% of loans and advances to customers, primarily reflecting early arrears cases, or agreements which have
triggered a significant increase in credit risk indicator, or a 30-days past due backstop. These loans are considered to be performing and
standard monitoring continues to apply.
Loans and advances to customers reflected as low risk and Stage 3 primarily relate to agreements which have triggered the 90-days past due
backstop but where full repayment is expected.
Medium risk agreements account for 4% of total loans and advances to customers with the majority corresponding with Stage 2. This is
primarily driven by significant increase in credit risk indicators having been triggered, warranting increased monitoring. Loans and advances to
customers reflected as medium risk and Stage 3 primarily relate to agreements that have triggered the 90-days past due backstop in addition
to other significant increase in credit risk triggers.
At 31 July 2018, loans and advances to customers were analysed between the following categories for credit risk under IAS 39. Following
transition, these disclosures are no longer required and have been replaced with the information presented on the previous pages. They are
provided for comparative purposes only.
(I) NEITHER PAST DUE NOR IMPAIRED
The following table shows the ageing based on contractual maturity of loans and advances to customers split by credit assessment method
which were neither past due nor impaired. £4.2 billion had a contractual maturity of less than 12 months demonstrating the short-term nature of
the lending.
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
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
3,332.8
3,613.1
6,945.9
(II) PAST DUE BUT NOT IMPAIRED
Under IAS 39, loans and advances to customers were classified as past due but not impaired when the customer failed to make a payment
when contractually due but there was no evidence of impairment. This included loans which were individually assessed for impairment but
where the value of security met the required repayments. This also included loans to customers which were past due for technical reasons.
The following table shows the ageing based on the period loans and advances to customers were past due, split by credit assessment method,
but for which no impairment provision was raised.
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
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
172.1
87.6
259.7
(III) IMPAIRED
The factors considered in determining whether assets were impaired under IAS 39 are outlined in the accounting policies in note 1(j). Impaired
loans and advances to customers were analysed according to whether the impairment provisions were individually or collectively assessed.
Individually assessed provisions were 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 was applied by the Property business and by the
Invoice and Speciality Finance business within Commercial.
Collectively assessed provisions were considered on a portfolio basis, to reflect the homogeneous nature of the assets. A percentage of the
portfolio was considered impaired by evaluating the ageing of missed payments combined with the historical recovery rates for that particular
portfolio. This methodology was predominantly applied by the Retail businesses and the Asset Finance business within Commercial.
Gross impaired loans were 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%.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
152
28. FINANCIAL RISK MANAGEMENT CONTINUED
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
Individually
assessed
£ million
59.4
(17.1)
Collectively
assessed
£ million
71.6
(22.0)
Total
£ million
131.0
(39.1)
42.3
49.6
91.9
The amount of interest income accrued on impaired loans and advances to customers in 2018 was £8.2 million.
COLLATERAL HELD
The group mitigates credit risk through holding collateral against loans and advances. The group has internal policies on the acceptability of
specific collateral types, which define amongst other things the nature of assets accepted, loan to value and age at origination and exposure
maturity. An asset valuation is undertaken as part of the loan origination process.
The principal types of collateral held by the Group against loans and advances to customers in the Property and Commercial segments include
residential and commercial property and charges over business assets such as equipment, inventory and accounts receivable. Within the Retail
segment the group holds collateral primarily in the form of vehicles in Motor Finance and refundable insurance premiums in Premium Finance,
where an additional layer of protection may exist through broker recourse.
The Banking division’s collateral policies have not materially changed during the reporting period and there has been no significant change in
the overall quality of the collateral held by the group since the prior period.
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 is concentrated in Retail and Commercial, as the large
majority of Property loans are greater than £1.0 million. There is a broad range of LTV ratios in both Retail and Commercial below £1.0 million,
with the majority falling between 70% and 100%. 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 2019
LTV
Less than 70%
70% to 90%
Greater than 90%
At 31 July 2018
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
245.5
577.7
226.2
–
41.6
2.6
1,518.9
38.0
7.6
1,764.4
657.3
236.4
1,049.4
44.2
1,564.5
2,658.1
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
237.3
514.5
201.2
953.0
–
7.5
17.2
1,529.1
13.1
–
1,766.4
535.1
218.4
24.7
1,542.2
2,519.9
Gross loans and advances to customers which are credit-impaired at 31 July 2019 and where exposure at origination exceeded £1.0 million:
LTV
Less than 70%
70% to 90%
Greater than 90%
At 31 July 2019
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
2.9
0.5
13.0
16.4
–
–
2.3
2.3
20.5
3.0
–
23.5
23.4
3.5
15.3
42.2
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Close Brothers Group plc
153
FINANCIAL ASSETS: TREASURY ASSETS
The credit risk presented by the group’s treasury assets is low. Immaterial impairment provisions are recognised for cash and balances at
central banks, certificates of deposit and sovereign and central bank debt. These financial assets are considered to be investment grade and in
Stage 1.
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
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 and loans for money brokers against stock advanced:
At 31 July 2019
Not past due
Less than 30 days past due
More than 30 days but less than 90 days past due
More than 90 days past due
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
529.5
31.8
–
–
561.3
–
–
0.6
–
0.6
–
–
–
1.0
1.0
529.5
31.8
0.6
1.0
562.9
In 2018, settlement balances were classified as neither past due nor impaired when the respective trades had not yet reached their settlement
date. Settlement balances were classified as past due but not impaired when trades failed to be settled on their contractual settlement date.
Within one month
Between one and three months
Between three months and one year
Over one year
Neither past
due nor
impaired
£ million
489.7
–
–
–
31 July 2018
Past due
but not
impaired
£ million
19.4
1.5
1.2
0.4
Total
£ million
509.1
1.5
1.2
0.4
489.7
22.5
512.2
(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.
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28. FINANCIAL RISK MANAGEMENT CONTINUED
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 2019:
0.5% increase
0.5% decrease
2019
£ million
(4.0)
5.1
2018
£ million
(4.9)
5.8
The average impact in 2019 on our base case EaR measure due to a parallel 0.5% increase or decrease in interest rates was a £4.3 million
decrease and £5.2 million increase respectively.
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 2019:
0.5% increase
0.5% decrease
2019
£ million
–
–
2018
£ million
0.8
(0.8)
The average impact in 2019 on our base case EVE measure due to a parallel 0.5% increase or decrease in interest rates was a £0.4 million
increase and £0.4 million decrease respectively.
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
2019
£ million
(4.3)
2018
£ million
(3.9)
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.
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155
MARKET PRICE RISKS
TRADING FINANCIAL INSTRUMENTS: EQUITY SHARES AND DEBT SECURITIES
The group’s trading activities relate to Winterflood. The following table shows the group’s trading book exposure to market price risk:
For the year ended 31 July 2019
Equity shares
Long
Short
Debt securities
Long
Short
For the year ended 31 July 2018
Equity shares
Long
Short
Debt securities
Long
Short
Highest
exposure
£ million
Lowest
exposure
£ million
Average
exposure
£ million
Exposure
at 31 July
£ million
39.8
27.2
24.5
9.7
32.1
17.1
22.0
5.7
30.9
14.2
16.7
25.6
12.0
13.6
35.3
10.9
24.4
25.5
9.6
15.9
Highest
exposure
£ million
Lowest
exposure
£ million
Average
exposure
£ million
Exposure
at 31 July
£ million
41.1
29.1
24.8
9.4
30.4
19.7
12.0
8.5
32.0
16.0
16.0
22.2
11.8
10.4
31.6
14.2
17.4
25.6
16.4
9.2
With respect to the long and short positions on debt securities £12.6 million and £0.4 million (2018: £10.8 million and £0.8 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 £2.4 million decrease (2018:
£1.7 million decrease) in the group’s income and net assets on the equity trading book and a £1.6 million decrease (2018: £0.9 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.
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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 2019 of £9.9 billion (31 July 2018: £9.6 billion). This funding is
significantly in excess of its loans and advances to customers at 31 July 2019 of £7.6 billion (31 July 2018: £7.3 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 2019
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
–
12.5
69.7
19.0
–
14.3
–
0.1
11.6
547.6
15.7
1,235.7
10.9
32.9
–
1.7
7.6
89.5
–
27.8
1,137.7
0.9
37.1
–
3.7
5.8
6.1
–
2.0
1,700.5
1.8
130.9
–
5.4
8.6
1.7
–
–
1,573.9
493.9
1,465.0
–
43.3
34.8
10.6
In more
than five
years
£ million
–
–
–
–
292.1
–
245.4
9.0
2.3
Total
£ million
547.6
58.0
5,717.5
526.5
1,958.0
14.3
299.5
65.9
121.8
Total
127.2
1,941.6
1,219.1
1,850.9
3,621.5
548.8
9,309.1
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
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 2019
At 31 July 2018
In more than
three months
but not more
than six
months
£ million
88.8
3.4
In more than
six months
but not more
than one
year
£ million
8.6
7.8
In more than
one year but
not more
than five
years
£ million
34.8
50.2
In less
than three
months
£ million
163.3
63.5
On
demand
£ million
5.6
42.1
In more
than five
years
£ million
9.0
14.9
Total
£ million
310.1
181.9
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157
(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 2019
Derivative financial assets
Derivative financial liabilities
At 31 July 2018
Derivative financial assets
Derivative financial liabilities
Gross
amounts
recognised
£ million
Master netting
arrangements
£ million
Financial
collateral
£ million
Net amounts
after offsetting
£ million
30.1
20.6
16.6
15.7
(14.9)
(14.9)
(12.4)
(5.4)
(8.3)
(8.3)
(7.7)
(7.2)
2.7
0.2
0.6
0.2
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 £4,843 million at 31 July 2019 (31 July 2018:
£4,348 million). Included in revenue on the consolidated income statement is management fee income of £31.3 million (2018: £27.6 million) from
unconsolidated structured entities managed by the group.
30. IMPLEMENTATION OF IFRS 9
The group has adopted IFRS 9 Financial Instruments with effect from 1 August 2018. In accordance with the requirements of IFRS 9,
comparative information has not been restated and transitional adjustments have been accounted for through retained earnings at 1 August
2018, the date of initial application.
At 1 August 2018, retained earnings decreased by £44.9 million reflecting an increase in impairment provisions of £59.0 million partly offset by
an increase in deferred tax assets of £14.1 million. £58.2 million of the increase in impairment provisions relates to loans and advances to
customers while the remaining £0.8 million relates to other financial assets.
This increase in impairment provisions principally reflects the additional expected credit loss on performing and underperforming loans, as well
as a broader definition of default compared to IAS 39 and the addition of forward-looking macroeconomic assumptions.
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158
30. IMPLEMENTATION OF IFRS 9 CONTINUED
The following table sets out the impact of IFRS 9 on the group balance sheet at 1 August 2018.
Classification and
measurement1
IAS 39
IFRS 9
IAS 39
carrying
amount
31 July
2018
£ million
IFRS 9
transitional
adjustment
£ million
IFRS 9
carrying
amount
1 August
2018
£ million
LAR
LAR
LAR
LAR
LAR
AFS
HFT
AFS
HFT
LAR
HFT
FV(H)
AC
AC
AC
AC
AC
FVOCI
FVPL
FVPL
FVPL
AC
FVPL
FV(H)
LAR
FVPL
AC
AC
FVPL
AC
AC
HFT
AC
AC
AC
AC
AC
FVPL
AC
AC
FVPL
AC
AC
FVPL
AC
AC
AC
AC
AC
FVPL
AC
AC
FVPL
AC
1,140.4
512.2
140.2
7,297.5
320.6
250.5
44.5
25.6
32.1
0.5
31.6
66.4
16.6
1.1
15.5
201.3
226.1
43.0
187.1
49.4
2.1
135.6
67.5
(0.1)
(0.1)
(0.1)
(58.2)
(0.2)
(0.2)
–
–
–
–
–
–
–
–
–
–
–
14.1
(0.3)
(0.3)
–
–
–
1,140.3
512.1
140.1
7,239.3
320.4
250.3
44.5
25.6
32.1
0.5
31.6
66.4
16.6
1.1
15.5
201.3
226.1
57.1
186.8
49.1
2.1
135.6
67.5
10,251.0
(44.9) 10,206.1
543.1
512.5
30.6
55.2
5,497.2
509.8
1,773.4
22.4
15.7
17.4
249.6
244.2
5.4
217.9
0.6
8,902.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
543.1
512.5
30.6
55.2
5,497.2
509.8
1,773.4
22.4
15.7
17.4
249.6
244.2
5.4
217.9
0.6
8,902.3
1,348.7
(44.9)
1,303.8
10,251.0
(44.9) 10,206.1
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
Total equity
Total liabilities and equity
1 Abbreviations
AC – amortised cost
AFS – available for sale
FV(H) – derivatives held for hedging and carried at fair value
FVOCI – fair value through other comprehensive income
FVPL – fair value through profit or loss
HFT – held for trading
LAR – loans and receivables
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159
31. INVESTMENTS IN SUBSIDIARIES
In accordance with section 409 of the Companies Act 2006, the following is a list of the group’s subsidiaries at 31 July 2019 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 Limited1
Brook Funding (No.1) Limited13, 20
Capital Lease Solutions Limited1
CBM Holdings Limited1
CLL I Limited14
Close Asset Finance Limited2
Close Brewery Rentals Limited6
Close Brothers Asset Finance GmbH (Germany)16
Close Brothers Factoring GmbH (Germany)16
Close Brothers Finance plc1
Close Brothers Limited1
Close Brothers Military Services Limited5
Close Brothers Premium DAC19
Close Brothers Technology Services Limited (85% shareholding)1
Close Brothers Vehicle Hire Limited15
Close Business Finance Limited2
Close Credit Management (Holdings) Limited1
Close Finance (CI) Limited (Jersey)17
Close International Bank Holdings Limited (Guernsey)4
Close Invoice Finance Limited1
Close Leasing Limited14
Close Motor Finance Limited5
Close PF Funding I Limited12, 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 plc13, 20
Orbita Funding 2017-1 plc13, 20
Orbita Holdings Limited13, 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 Corporation18
ASSET MANAGEMENT
Adrian Smith & Partners Limited1
Cavanagh Financial Management Limited8
CBF Wealth Management Limited (80% shareholding)1
CFSL Management 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
Place Campbell Close Brothers Limited (50% shareholding)11
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 Wilmington House, High Street, East Grinstead, West Sussex RH19 3AU, United Kingdom.
12 25 Canada Square, Level 37, London E14 5LQ, United Kingdom.
13 35 Great St. Helen’s, London EC3A 6AP, United Kingdom.
14 Olympic Court Third Avenue, Trafford Park Village, Manchester M17 1AP, United Kingdom.
15 Lows Lane, Stanton-By-Dale, Ilkeston, Derbyshire DE7 4QU, United Kingdom.
16 Grosse Bleiche 35-39, 55116, Mainz, Germany.
17 Conway House, Conway Street, St Helier JE4 5SR, Jersey.
18 1209 Orange Street, Wilmington 19801, New Castle, Delaware, U.S.A.
19 Swift Square, Building 1, Santry Demesne, Northwood, Dublin, DO9 AOE4, Ireland.
Subsidiaries by virtue of control:
20 The related undertakings are included in the consolidated financial statements as they are controlled by the group.
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160
Glossary and Definition of Key Terms
12 month expected credit loss
provision (“12 month ECL”)
Adjusted
Losses that result from default events occurring within the next 12 months
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 operating income less adjusted operating expenses and impairment losses on financial
assets
Asset Risk Consultant (“ARC”)
Independent investment management consultant providing manager research and benchmarking for
private client investment managers, charities, trustees and family offices
Assets under administration
Total assets for which Winterflood Business Services provide custody and administrative services
Bad debt ratio
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”)
Common equity tier 1 (“CET1”)
capital
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 capital as defined by the CRR. CET1 capital consists of the highest quality capital including
ordinary shares, share premium account, retained earnings and other reserves, less goodwill and
intangible assets and certain other regulatory adjustments
CET1 capital ratio
Measure of the group’s CET1 capital as a percentage of risk weighted assets, as required by CRR
Compensation ratio
Total staff costs as a percentage of adjusted operating income
Credit impaired
Where one or more events that have a detrimental impact on the estimated future cash flows of a loan
have occurred. Credit impaired events are more severe than SICR triggers. Accounts which are credit
impaired will be allocated to Stage 3
Discounting
The process of determining the present value of future payments
Dividend per share
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 interest rate (“EIR”)
The interest rate at which revenue is recognised on loans and discounted to their carrying value over the
life of the financial asset
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
Expected credit loss (“ECL”)
The unbiased probability-weighted average credit loss determined by evaluating a range of possible
outcomes and future economic conditions
Exposure at default (“EAD”)
The capital outstanding at the point of default
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
Forbearance
Forbearance occurs when a customer is experiencing financial 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
Funding allocated to loan book
Total funding excluding equity and funding held for liquidity purposes
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161
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
Gross carrying amount
Loan book before expected credit loss provision
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
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
Lifetime expected credit loss
provision (“Lifetime ECL”)
Liquidity coverage ratio
Losses that result from default events occurring within the lifetime of the loan
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
Loss given default (“LGD”)
The amount lost on a loan if a customer defaults
Managed assets
Total market value of assets which are managed by Close Brothers in one of our investment solutions
Market abuse regulation (“MAR”) European regulation aimed at increasing market integrity and investor protection
MiFID II
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
Modelled expected credit loss
provision
ECL = PD x LGD x EAD
Net carrying amount
Loan book value after expected credit loss provision
Net interest margin (“NIM”)
Adjusted 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
Net Promoter Score (“NPS”)
A measure of customer satisfaction by which 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 a form of vehicle finance where the customer defers a significant portion of credit to the final
repayment at the end of the agreement, thereby lowering the monthly repayments compared to a
standard hire purchase arrangement. At the final repayment date, the customer has the option to: (a)
pay the final payment and take the ownership of the vehicle; (b) return the vehicle and not pay the final
repayment; or (c) part-exchange the vehicle with any equity being put towards the cost of a new vehicle
Probability of default (“PD”)
Probability that a customer will default on their loan
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 closing assets at a balance sheet date
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Annual Report 2019
162
Return on net loan book
(“RoNLB”)
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. Average total client assets calculated as a two-point average
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
Significant increase in credit risk
(“SICR”)
An assessment of whether credit risk has increased significantly since initial recognition of a loan
using a range of triggers. Accounts which have experienced a significant increase in credit risk will be
allocated to Stage 2
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 in the Asset Management division
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
Watch list
Internal risk management process for heightened monitoring of exposures that are showing increased
credit risk
Glossary and Definition of Key TermscontinuedGovernance ReportFinancial StatementsStrategic Report 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
Annual Report 2019
Close Brothers Group plc
163
Date
November 2019
21 November 2019
26 November 2019
January 2020
31 January 2020
March 2020
May 2020
July 2020
31 July 2020
September 2020
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. Except as may be required by law or regulation, 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. 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.
Governance ReportFinancial StatementsStrategic Report Close Brothers Group plc
Annual Report 2019
164
AUDITOR
PricewaterhouseCoopers LLP
SOLICITOR
Slaughter and May
CORPORATE BROKERS
J.P. Morgan Cazenove
UBS AG London Branch
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