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Close Brothers Group plc
Annual Report 2020
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Contents
Strategic Report
Financial Highlights
Our Businesses
Our Purpose
Our Culture
Chairman’s Statement
Chief Executive’s Statement
Our Response to Covid-19
Business Model
Strategy and Key Performance Indicators
Our Responsibility
Non-Financial Information Statement
Our Stakeholder and Board Engagement
Sustainability Report
Financial Overview
Banking
Asset Management
Securities
Risk Report
Governance Report
Board of Directors
Executive Committee
Directors’ Report
Corporate Governance Report
Risk Committee Report
Audit Committee Report
Nomination and Governance Committee Report
Directors’ Remuneration Report
Financial Statements
Independent Auditors’ Report
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
Company Balance Sheet
Company Statement of Changes in Equity
The Notes
Glossary and Definition of Key Terms
Investor Relations
Cautionary Statement
01
02
04
05
06
08
11
12
14
16
17
18
24
34
38
44
46
48
60
62
63
68
79
81
84
87
115
122
123
124
125
126
127
128
129
180
183
183
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Close Brothers Group plc
Annual Report 2020
Financial Highlights1
for the year ended 31 July 2020
01
ADJUSTED2 OPERATING PROFIT
£144.0m
OPERATING PROFIT BEFORE TAX
£140.9m
2019: £264.7m
2020
2019
2018
2017
2016
£144.0m
£270.5m
£278.6m
£268.7m
£233.6m
ADJUSTED3 BASIC EARNINGS PER SHARE
BASIC EARNINGS PER SHARE
74.5p
2020
2019
2018
2017
2016
72.8p
2019: 133.5p
74.5p
136.7p
140.2p
133.6p
128.4p
RETURN ON OPENING EQUITY4
PROFIT ATTRIBUTABLE TO SHAREHOLDERS
£109.5m
2019: £201.6m
8.0%
2020
2019
2018
2017
2016
ORDINARY DIVIDEND PER SHARE5
40.0p
2020
2019
2018
2017
2016
8.0%
15.7%
17.0%
18.1%
18.9%
40.0p
66.0p
63.0p
60.0p
57.0p
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 37 for more details on the basis of presentation.
2 Adjusted operating profit is stated before amortisation of intangible assets on acquisition of £3.1 million (2019: £5.8 million) and profit from discontinued operations of £nil
(2019: £0.8 million).
3 Excludes amortisation of intangible assets on acquisition, discontinued operations and the tax effect of such adjustment.
4 Return on opening equity calculated as adjusted operating profit after tax and non-controlling interests on opening equity less non-controlling interests.
5 Represents the final dividend proposed for the respective years together with the interim dividend declared and paid in those years.
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Financial StatementsGovernance ReportStrategic Report 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 3,500 people.
Banking
Commercial
Retail
Property
Adjusted operating profi t
£4.8m
2019: £86.5m
Adjusted operating profi t
Adjusted operating profi t
£34.9m
2019: £72.5m
£59.5m
2019: £94.7m
The Retail businesses provide
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.6,000 independent
motor dealers and has approximately
260,000 customers in the UK and Ireland.
The Property business specialises in
short-term residential development
finance through Property Finance. The
Property 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.
It also offers refurbishment and bridging
loans through Commercial Acceptances.
Loan book: £1.7 billion
Loan book: £1.7 billion
Average loan size: c.£7,000
Average loan size: c.£1.3 million
Typical loan maturity2: 4 years
Typical loan maturity2: 6 to 18 months
Read more about Banking:
See pages 38 to 43
The Premium Finance business finances
insurance payments for over three million
companies and individuals, via a network
of c.1,600 insurance brokers, allowing their
customers to spread the cost of insurance
premiums over a number of instalments.
Loan book: £1.1 billion
Average loan size: c.£500
Typical loan maturity2: 10 months
The Commercial businesses lend
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.26,000
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, Ireland and
Germany.
Loan book1: £2.2 billion
Average loan size: c.£48,500
Typical loan maturity2: 2 to 4 years
The Invoice and Speciality Finance
business works with c.5,000 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, light
commercial vehicles and buses on
long-term rental contracts.
Loan book1: c.£900 million
Average loan size3: c.£260,000
Typical loan maturity2,3: 3 months
Speciality Finance.
1 Excludes operating lease assets of £2.9 million (31 July 2019: £4.2 million) which relate to Asset Finance and £219.0 million (31 July 2019: £216.2 million) to Invoice and
2 Typical loan maturities for new business on a contractual basis, except Invoice Finance and Novitas which is on a behavioural basis.
3 Average loan size and typical loan maturity include the Invoice Finance business only.
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Asset Management
Securities
Asset Management
Adjusted operating profi t
£20.4m
2019: £21.8m
Winterflood
Operating profi t
£47.9m
2019: £20.0m
Close Brothers Asset Management
The Securities division comprises
provides financial advice and investment
Winterflood, a leading UK market maker
management services to private clients in
for retail stockbrokers and institutions.
the UK. It offers financial planning advice
Winterflood deals in over 15,000
with over 100 professional advisers across
instruments in the UK and overseas, and
the country. It also provides a range of
investment management services,
including full bespoke management,
trades with over 600 institutional asset
managers, retail stockbrokers, wealth
managers, platforms and other market
managed portfolios and funds, distributed
counterparties, providing continuous
both directly via its own advisers and
bespoke investment managers, and
through third party IFAs.
Total client assets: £13.7 billion
Managed assets: £12.6 billion
liquidity through its market-leading
execution services, supported by strong
proprietary technology. Its traders have
extensive experience of executing orders in
a range of market conditions, enabling it to
trade successfully and profitably over many
years.
Read more about Asset Management:
See pages 44 and 45
Average bargains per day: c.82,000
Total counterparties: c.600
Read more about Securities:
See pages 46 and 47
Close Brothers Group plcAnnual Report 2020
03
Banking
Commercial
Retail
Property
Adjusted operating profi t
£4.8m
2019: £86.5m
Adjusted operating profi t
Adjusted operating profi t
£34.9m
2019: £72.5m
£59.5m
2019: £94.7m
Asset Management
Securities
Asset Management
Adjusted operating profi t
£20.4m
2019: £21.8m
Winterflood
Operating profi t
£47.9m
2019: £20.0m
The Commercial businesses lend
principally to small and medium-sized
enterprises (“SME”), both through its
direct sales force and via broker
distribution channels.
The Retail businesses provide
The Property business specialises in
loans to predominantly individuals and
short-term residential development
small businesses, through a network of
finance through Property Finance. The
intermediaries.
Property business operates in London,
the South East and selected regional
The Asset Finance business has c.26,000
point of sale finance for the acquisition of
property developers with a focus on small
customers and provides commercial
predominantly used cars, motorcycles
to medium-sized residential
asset financing, hire-purchase and leasing
and light commercial vehicles. It operates
developments.
solutions for a diverse range of assets and
through a network of c.6,000 independent
The Motor Finance business provides
locations, lending to c.700 professional
motor dealers and has approximately
It also offers refurbishment and bridging
260,000 customers in the UK and Ireland.
loans through Commercial Acceptances.
Close Brothers Asset Management
provides financial advice and investment
management services to private clients in
the UK. It offers financial planning advice
with over 100 professional advisers across
the country. It also provides a range of
investment management services,
including full bespoke management,
managed portfolios and funds, distributed
both directly via its own advisers and
bespoke investment managers, and
through third party IFAs.
Loan book: £1.7 billion
Loan book: £1.7 billion
Average loan size: c.£7,000
Average loan size: c.£1.3 million
Total client assets: £13.7 billion
Managed assets: £12.6 billion
The Securities division comprises
Winterflood, a leading UK market maker
for retail stockbrokers and institutions.
Winterflood deals in over 15,000
instruments in the UK and overseas, and
trades with over 600 institutional asset
managers, retail stockbrokers, wealth
managers, platforms and other market
counterparties, providing continuous
liquidity through its market-leading
execution services, supported by strong
proprietary technology. Its traders have
extensive experience of executing orders in
a range of market conditions, enabling it to
trade successfully and profitably over many
years.
offices throughout the UK, Ireland and
Typical loan maturity2: 4 years
Typical loan maturity2: 6 to 18 months
Read more about Banking:
See pages 38 to 43
Read more about Asset Management:
See pages 44 and 45
Average bargains per day: c.82,000
Total counterparties: c.600
Read more about Securities:
See pages 46 and 47
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
Germany.
Loan book1: £2.2 billion
Average loan size: c.£48,500
Typical loan maturity2: 2 to 4 years
The Invoice and Speciality Finance
business works with c.5,000 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, light
commercial vehicles and buses on
long-term rental contracts.
Loan book1: c.£900 million
Average loan size3: c.£260,000
Typical loan maturity2,3: 3 months
The Premium Finance business finances
insurance payments for over three million
companies and individuals, via a network
of c.1,600 insurance brokers, allowing their
customers to spread the cost of insurance
premiums over a number of instalments.
Loan book: £1.1 billion
Average loan size: c.£500
Typical loan maturity2: 10 months
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020
04
Our Purpose
Close Brothers’ purpose is to help the
people and businesses of Britain thrive
over the long term.
This means supporting our colleagues,
customers and clients, and the
communities and environment in which
they operate, for the benefit of all our
stakeholders. It means helping people and
businesses unlock their potential and plan
for the future with confidence, building
relationships that stand the test of time.
And it means that we continue to be there
for the long term, whatever the climate,
making decisions that are right for today
and for generations to come.
To achieve this, our long-term strategic
approach places exceptional service at
the heart of everything we do. Each 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. Our cultural attributes bring
out the very best of our people, skills and
strong reputation that we have built with
our stakeholders over many years. A
combination of expertise, service and
relationships with teamwork, integrity and
prudence underpins our approach and
gives us the tools to thrive over
the long term.
And we recognise that to help the people
and businesses of Britain thrive, we also
have a responsibility to help address the
social, economic and environmental
challenges facing our business, employees
and clients, now and into the future.
Our Purpose
To help the people and
businesses of Britain thrive
over the long term.
Our Responsibility
To help address the social,
economic and environmental
challenges facing our business,
employees, and clients, now
and into the future.
Our Strategy
To provide exceptional service
to our customers and clients
across lending, savings, trading
and wealth management.
Our Culture
Combines expertise,
service and relationships
with teamwork, integrity
and prudence.
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Close Brothers Group plcAnnual Report 2020 Our Culture
05
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 and supports the
strong reputation we have built with
our stakeholders.
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
Teamwork
We are committed to fostering
a culture that attracts talent,
grows and builds the expertise
of our employees.
We promote teamwork in a fair
and open environment, where
individuals and their contributions
are valued and respected.
Integrity
Service
We insist on trustworthy
behaviour and always acting
with integrity – “doing the right
thing”, internally and externally.
We care about delivering
excellent service and thinking
that’s both entrepreneurial
and disciplined.
Prudence
We take a prudent, robust
and transparent approach to
risk management.
Relationships
We take the time to understand
and build strong long-term
relationships with our clients,
customers and all our
stakeholders.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 06
Chairman’s Statement
A distinctive,
customer
focused culture
During the 2020 financial year, we witnessed
one of the most difficult economic, market
and business environments in our lifetimes
with a profound human impact. Our
disciplined business model, strong culture
and customer-focused approach have served
us well in this environment. We entered the
Covid-19 crisis in a strong position and are
navigating it well, as the group has shown
immense adaptability and deployed
contingency plans very effectively and quickly.
The board’s role during this period of
elevated pressure has been to guide,
challenge and support the executive team
on key decisions, to ensure that the group
emerges from the crisis in the strongest
possible position. I am very impressed to
see how well and cohesively our
colleagues have worked together, allowing
the group to continue to support
customers and clients at this time when
they need us most.
Close Brothers has delivered a resilient
performance over this unprecedented
period. The Banking division has maintained
a strong market position notwithstanding
higher impairment charges; Close Brothers
Asset Management has maintained strong
net inflows as we continue to attract client
assets and new hires; and Winterflood has
delivered a very strong trading performance
as it navigated extraordinary market
movements, making the most of
exceptionally high volumes.
As a result, although adjusted operating
profit reduced by 47%, the group
delivered a solid return on opening equity
of 8.0% (2019: 15.7%).
In April 2020, the board announced that it
had decided to cancel its 2020 interim
dividend recognising the significant
challenges faced by businesses and
individuals and consistent with our purpose
of helping the people and businesses of
Britain. This decision was not taken lightly
given the group’s long history of
uninterrupted dividend payments.
Following a resilient financial and
operational performance in the second half,
the board is now proposing a 40.0p
dividend in respect of the full financial year.
This reflects the board’s confidence in the
group’s business model and strong
financial position, notwithstanding the
current uncertain environment.
While dividend decisions in the 2020
financial year have reflected the
unprecedented uncertainty caused by
Covid-19, our aim remains to return to a
long-term policy of progressive and
sustainable dividend growth in future.
Dividend decisions will continue to balance
returns to shareholders with maintaining a
strong financial position, flexibility to grow
and invest, and the ability to meet our
responsibilities to all stakeholders.
Strategic Discipline and
Operational Readiness
The group’s disciplined business model
and our vast experience and expertise
have allowed us to deliver consistent
service and strong returns in a wide range
of market conditions over many years. It
has also ensured that the group entered
this period of uncertainty in a position of
strength, with a prudently underwritten
loan book and a strong capital, liquidity
and funding position.
While the scale and nature of the current
crisis could not have been anticipated, in
2019 the board and the management
team spent a significant amount of time
on contingency planning, including the
development of playbooks and simulation
exercises for the lending businesses, with
the aim to ensure that the business was
well prepared in the event of a widespread
downturn in the UK economy. These
plans have played a key role in ensuring
we were operationally prepared for the
challenges posed to our organisation
during the Covid-19 pandemic.
From the start of the crisis, the safety and
wellbeing of our colleagues and their
families have been of the highest
importance to us and by the time the
outbreak was at its peak, the majority of
our people had successfully been set up
to work from home. I have been really
pleased to see how speed of response
and operational resilience have allowed
the group to continue operating and
serving customers and clients effectively
throughout the period.
The impact of Covid-19 on all our
stakeholders is at the forefront of the
directors’ minds. The board has held
additional meetings since the beginning of
UK lockdown in March to focus on the
group’s response. The frequency of
meetings increased to a weekly basis at
the peak of the lockdown, and the
directors received regular updates on
developments relating to individual
stakeholder groups. You can read more
about the main areas considered by the
board during the pandemic on page 18.
Strong Culture and Relentless
Customer Focus
Our purpose is to help the people and
businesses of Britain thrive over the long
term, and this is underpinned by a strong
culture and relentless customer focus. This
is as important as ever, as we help our
customers and clients navigate the current
environment, and as the economy recovers,
they will look to us for continued support.
The board considers the group’s purpose,
culture and values as fundamental to its
long-term success and recent events have
shown how deeply they are embedded in
our organisation.
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Close Brothers Group plcAnnual Report 2020 07
This is an unprecedented and uncertain
environment so there will be challenges
ahead of us. However, there will also be
opportunities and I am confident the
group will be able to make the most of
these, building on our strong relationships
and capitalising on the consistent
application of our model throughout our
history.
CEO Succession and Board Changes
In September 2019, Preben Prebensen
decided to step down as chief executive
and move on to the next stage of his
career. Following an extensive search
process undertaken by the board,
considering both internal and external
candidates, Adrian Sainsbury was selected
to succeed Preben as chief executive, with
effect from the end of the board's meeting
held on 21 September 2020.
On behalf of the board, I would like to thank
Preben for his outstanding leadership and
very significant contribution over the last 11
years. He has overseen the transformation
of the group over this period and leaves it in
an excellent position operationally and
financially, with a strong executive team.
Adrian’s deep knowledge and experience,
strong leadership and exceptional
commercial expertise make him ideally
placed to lead the group through the next
stage of its development. His appointment
provides continuity in the group’s
leadership team and business model,
ensuring that we continue delivering for
our people, customers and clients and our
shareholders in the years to come.
We were also pleased to welcome Sally
Williams as an independent non-executive
director on 1 January 2020. Sally brings to
the board extensive knowledge in the
areas of risk, compliance and governance
from over 30 years’ experience in the
financial services sector and her
appointment further strengthens the range
of skills and experiences represented.
After more than nine years' dedicated
service on the board, Geoffrey Howe has
decided not to seek reappointment at this
year's Annual General Meeting. I would
like to thank Geoffrey for his enormous
contribution and his invaluable judgement
and wise counsel. The search to identify a
successor to Geoffrey is well-advanced.
Diversity and inclusion continue to be an
important focus for the board’s succession
planning. It is also important that we
maintain its depth and the appropriate
range of skills and experience, while
ensuring continuity in the stewardship of
the group and its business model. In line
with the recommendations of the Parker
Review, the board will aim to have at least
one director of colour by 2024.
Michael N. Biggs Chairman
Stakeholder Engagement
The board is strongly committed to
maintaining active engagement with
stakeholder groups, ensuring their
priorities and considerations are reflected
in the group’s decision-making. This year
we have introduced a number of new
disclosures setting out how the board has
had regard to all stakeholders’ interests
while complying with the directors’
obligation to promote the success of
Close Brothers in line with section 172 of
the Companies Act. These can be found
on pages 20-23 of this report.
One recent example of the board’s
engagement with stakeholders has been
the triennial review of the remuneration
policy this year, for which we consulted
widely with our largest shareholders. Full
details of the revised Directors’
Remuneration Policy, which will be
submitted to shareholders for
consideration at the company’s AGM later
in 2020, can be found on page 87 in the
Directors' Remuneration Report.
Creating Value Responsibly
for all our Stakeholders
I firmly believe that in order to create
long-term value, we also have a
responsibility to help address the
social, economic and environmental
changes facing our business,
employees and customers.
Sustainability matters appear regularly on
the board and management’s agenda and
we have continued to make good progress
on a range of key developments and
initiatives during the last year.
To help us measure and drive our
progress towards our sustainable goals,
we have set a number of targets and I am
pleased to report that we have met or
exceeded our targets for gender diversity,
customer satisfaction, charitable
donations, and emissions. We are now
introducing more ambitious targets, which
have been aligned to the United Nations
Sustainable Development Goals and are
also now linked to executive pay through
risk management objectives within our
executives’ long-term incentive plan.
I am particularly pleased that we continue
to make progress on our diversity and
inclusion agenda, including exceeding
our initial gender diversity targets, and
this year becoming signatories to the
Race at Work Charter.
Climate risk is now embedded within the
risk governance framework at all levels of
the organisation with a review of processes,
procedures and policies underway to
ensure appropriate consideration of climate-
related risks and opportunities.
Our People
Our people are key in driving the group’s
long-term success and I would like to thank
them for their admirable dedication and
commitment to the organisation, even in the
face of the most challenging circumstances.
Thanks to their professionalism and
expertise, I am confident that, together, we
will continue delivering on our purpose to
help the people and businesses of Britain
thrive, over the long term.
Michael N. Biggs
Chairman
22 September 2020
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 08
Chief Executive’s Statement
Nevertheless, the fundamentals of our
business have remained the same. In our
Banking division we have always focused
on specialist, secured lending. We have
always prioritised great service levels and
the expertise of our people, which has
supported a strong net interest margin
and prudent underwriting.
These attributes were important to our
successful emergence from the last
crisis and are proving equally important
to navigating this one. Although results
this year have been impacted, we are
as confident as ever in the quality of our
loan book and our long-term success
as a provider of funding to small
businesses and individuals through
the most difficult conditions.
Back in 2009, Winterflood did very well
trading highly volatile markets. And this
year, it has shown that expertise again,
producing its best results in a decade, in
arguably even more difficult conditions.
The Asset Management division has gone
through the most change since 2009,
emerging as a private client advice and
investment management business in the
UK. The business has delivered consistently
strong net inflows, including this year, and
has very good future growth prospects.
I have often been asked to describe the
single characteristic that most defines
Close Brothers – and that for me is our
genuinely long-term approach. That
approach defines how we invest in the
business, how we invest in our people,
our relationships with clients and
customers, how we finance the business
and how we see ourselves – as
custodians of this great company.
The last six months have been among the
most challenging of my time here, but I
have been exceptionally impressed by the
way we have navigated them and so very
proud of our people.
I leave the group in very good hands. Adrian
and I have worked together for the last
seven years. He brings outstanding
experience, knowledge and drive and will
lead a very talented and experienced
management team who I am sure will make
the most of the opportunities that lie ahead.
Preben Prebensen
Chief Executive 2009 to 2020
Preben Prebensen Chief Executive 2009 to 2020
A proven
model for the
long term
When I became chief executive in 2009, we
were in the middle of a global financial crisis.
As I hand over to Adrian Sainsbury, we are
managing through the Covid-19 crisis.
In many ways, this crisis is different – not
least in its human and societal impact.
Close Brothers is different too – it is
bigger and stronger, but also simpler
and more focused.
But perhaps even more importantly, the
fundamental aspects of our business
model and our culture are the same, and
that is the real strength of Close Brothers.
Since 2009, we have created more than
1,000 jobs across the group and the
Banking division has tripled its loan
book. Our focus on risk and on
regulation has increased sharply. We
have invested very significantly in
developing our people, in technology
and in our operational capability.
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Close Brothers Group plcAnnual Report 2020
09
Adrian Sainsbury Chief Executive
I am delighted to be introducing Close Brothers’ 2020
annual results; my first as chief executive. It is an honour
to be chosen to lead the group as I truly believe this is
an extraordinary company that plays an important role
in the lives of people and businesses it serves.
On behalf of the Executive Committee, I
would like to thank Preben Prebensen for
his outstanding leadership during a period
of significant growth and development. It
has been a privilege to work with Preben
and I look forward to building on the
excellent position he has established
over the past 11 years.
When I joined Close Brothers in 2013, I
was impressed by the straightforward and
effective business model and by the
distinctive culture, which focuses on
expertise, service and building strong
relationships with customers, clients and
partners. This absolute customer focus
remains at the heart of our strategy, and
our purpose of helping the people and
businesses of Britain thrive.
Our business model has been tried and
tested over the years and its success is
supported by three pillars: the disciplined
application of our pricing and underwriting
criteria; the prudent management of our
financial resources; and the diversity of our
businesses. These are the fundamental
strengths of our model and my role is to
ensure we continue to protect them whilst
taking the business forward.
Consistency in the application of our
pricing and underwriting criteria is a
strategic imperative for us. Our lending is
predominantly secured, with conservative
loan to value ratios, small loan sizes and
short maturities, which allows us to
maintain both a strong net interest margin
and high-quality credit portfolio
throughout the cycle. This means we are
well placed to deal with the potential
impact of adverse conditions whilst
continuing to support our customers.
Prudent management of our financial
resources is also crucial to our long-term
approach to managing the business.
Having strong capital, funding and liquidity
positions allow us to grow, invest and
comfortably meet regulatory requirements.
The diversity and specialism of our
businesses is another key component of
our success. Lending in a variety of sectors,
locations and asset classes where we have
deep expertise, has supported our loan
book performance and financial returns in
times of challenge, as evidenced in this
year’s results. Close Brothers Asset
Management and Winterflood also provide
additional profit streams which further
strengthen our performance as a group.
They are also strong examples of the
expertise of our people in their specialist
fields, which underpins their success in
wealth management and trading.
Navigating the Current Crisis
Our immediate priority is to successfully
navigate the Covid-19 crisis and to
support our people, customers and
clients as the economy recovers. We
entered the current crisis in a strong
position and the group’s agility and strong
operational resilience have allowed us to
respond effectively in a rapidly changing
environment.
Looking after the safety of our colleagues
and ensuring their continued engagement
has always been a priority but this has
been more important than ever since the
onset of the Covid-19 pandemic. I would
like to thank our colleagues for their
extraordinary dedication and commitment
and for all they have done, and continue to
do, to ensure we maximise assistance for
customers and clients and remain
committed to finding the right financial
solutions to help them through these
turbulent times.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 10
Chief Executive’s Statement continued
Financial Performance
Our 2020 financial performance is a story
of two halves. Strong returns in the first
half of the year were followed by a period
where we felt the impact of Covid-19, an
unprecedented turn of events which
affected us all.
Overall, the group reported a 47%
reduction in adjusted operating profit to
£144.0 million (2019: £270.5 million) which
still equated to a solid return on opening
equity of 8.0% (2019: 15.7%).
Despite higher impairment charges, our
lending businesses achieved a resilient
performance in the year, with a broadly flat
loan book reflecting an increase in
customer activity since the easing of
lockdown restrictions in June and July.
Asset Management maintained strong net
inflows of 9% (2019: 9%) and Winterflood
delivered an impressive trading and
financial performance, highlighting the
expertise and experience of our traders
as they navigated extraordinary
market movements.
The income growth of 6% reflected the
strong performance in Winterflood and
the Asset Management division, partially
offset by lower revenue in Banking.
Although we maintained our pricing
discipline, the net interest margin declined
to 7.5% (2019: 7.9%) reflecting lower
activity levels as well as forbearance
measures granted to our borrowers.
Costs increased by 8%, with most of the
increase in Winterflood, reflecting higher
variable costs. They have also increased
in the Asset Management division given
our continued investment to support the
long-term growth potential of the
business. In the Banking division, costs
increased marginally as we continued to
invest in key strategic programmes while
focusing on disciplined cost management.
The uncertain environment led to a sharp
increase in the forward-looking
impairment provisions under IFRS 9, but
we remain confident in the quality of our
loan book.
We have maintained a strong balance
sheet, with our common equity tier 1 ratio
rising to 14.1% (31 July 2019: 13.0%),
significantly ahead of regulatory
requirements, and a continued prudent
funding and liquidity position.
Taking the Model Forward
The impact of Covid-19 has been felt across
our businesses and the outlook is still
uncertain, but the fundamental strengths of
Close Brothers remain unchanged. As a
through-the cycle provider of funding, wealth
management and securities trading services
to individuals and small businesses, our role
remains as important as ever. Our resilient
model and the experience and expertise of
our people leave us well positioned to
respond to opportunities and to continue to
support our customers and clients into the
future.
Investing to take the model forward will
continue to be a priority and it is important
that we maintain capacity to take advantage
of opportunities as they arise, be that new
markets, products or distribution channels.
We are committed to investing for the
future, maintaining our long-term approach
and realising the benefits as our businesses
grow and evolve.
Outlook
The group has adapted well to this
unprecedented environment, drawing
upon our financial and operational
resilience and the deep experience of
our people.
Although we have seen encouraging signs
of increasing economic activity in the UK
since the easing of restrictions in June and
July, the near-term path to recovery
remains highly uncertain.
In the Banking division, we remain
focused on maintaining our prudent and
disciplined approach while continuing to
support our customers through this
challenging environment. Asset
Management continues to have long-term
growth potential and we remain
committed to growing our client base
organically, and through selective hiring
and in-fill acquisitions. Winterflood has
shown good momentum through August
and September but remains sensitive to
changes in the market environment.
Overall, we have a strong balance
sheet, high quality loan book and a
proven, resilient business model, and
are confident that we will emerge from
this crisis in a strong position to
support our customers and clients
through their recovery.
Adrian Sainsbury
Chief Executive
22 September 2020
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Close Brothers Group plcAnnual Report 2020 Our Response to Covid-19
11
Our purpose is to help the people and businesses of Britain
thrive over the long term, and in the face of Covid-19, we have
focused on maximising our support for colleagues, customers
and partners.
In these unprecedented times our
colleagues have continued to perform
admirably, and have pulled together to
support one another and maintain their
focus on helping our customers and clients
navigate this challenging period. We
recognise the importance of maintaining
our high levels of service for our customers
and clients and have continued to be there
for them, as we have done for many years
and during even the most difficult of times.
Supporting our Colleagues
The safety and wellbeing of our colleagues
is of the utmost importance to us, and we
have supported them through flexible
working arrangements, seeking regular
feedback and making adjustments so that
they can conduct their roles safely.
Throughout this period, we have focused
on maintaining close contact with our
employees, with a series of regular surveys,
internal communications and opportunities
for staff to engage with management and
each other. We take great care to support
the mental wellbeing of our colleagues,
particularly during the unique
circumstances of recent months, and have
provided virtual classes and webinars on
topics such as emotional agility, mental
health, nutrition and remote working.
A number of our colleagues have now
returned to work on-site or begun to
meet customers in person where it is
safe to do so, but the majority remain
successfully working from home, where
our agile deployment of technology
solutions has enabled them to perform
their roles with minimal disruption and
to serve our customers and clients
effectively. At the peak of the UK
lockdown over 95% of our staff were set
up to work from home. We have not made
use of the Coronavirus Job Retention
Scheme as none of our employees were
furloughed during this period.
Supporting our Customers
Throughout this period, we have
maintained regular contact with our
customers and increased their choice of
channels for engagement with us, while our
technology has ensured speed and
simplicity in responding to their needs.
Investments in technology and sales tools
in recent years have enabled our
businesses to adopt a remote sales and
servicing model, allowing them to continue
to reach consumers and small businesses
when face-to-face contact has not been
possible.
Typical Forbearance
Segment
Commercial
Retail
Property
Typical forbearance offered
Capital repayment holidays with fees and charges
waived, or flexing of repayments percentages and
overpayments on invoice discounting and factoring
facilities
Payment deferrals of varying durations, with fees and
charges waived and no interest compounded on the
deferred balance, and with no impact on customer credit
records
Fee-free, payment term extensions for development
loans, and capital repayment holidays for non-
development loans
We have a long history of helping
individuals and SMEs across the UK, and
have introduced a range of forbearance
and other measures to assist customers
and clients who find themselves in
difficulty. The broad range of concessions
we offer reflects our diverse range of
products, sectors and customers, and we
continue to tailor our support to ensure it
is most appropriate for them.
Our Commercial and Property businesses
account for the vast majority of the value
of our forborne loans, and we remain in
close contact with customers who have
been granted forbearance to discuss their
position and identify the most appropriate
financing solution for them. While it is still
too early to know the full impact of
Covid-19, an increasing number of these
customers are now beginning to resume
payments, or return to normal contractual
terms.
Government Support Schemes
In order to maximise our assistance for
small businesses we have become
accredited to lend under the support
schemes introduced by the UK
government, including the Coronavirus
Business Interruption Loan Scheme
(“CBILS”), the Coronavirus Large Business
Interruption Loan Scheme (“CLBILS”) and
the Bounce Back Loan Scheme (“BBLS”).
As at 31 July 2020, we had approved over
£350 million of lending across 1,430 loans
in our Commercial and Property
businesses, with a strong pipeline of
applications. The vast majority of lending is
via CBILS under which we are accredited
to lend up to £750 million, with less than £2
million lent under the BBLS scheme.
Our Resilient Response
Our prudent and resilient business model
has served us well in challenging times
over many years. Whilst Covid-19 has had
a significant impact upon consumers,
businesses and the economy, as well as
on our own financial performance, we
have successfully adapted to these unique
circumstances and our strong operational
resilience has allowed the group to
continue to operate effectively. Our loan
book is predominantly secured and
conservatively underwritten, with a deep
expertise and relationship driven approach
present throughout our lending, trading
and investment management businesses.
We have a strong capital, funding and
liquidity position and are well placed, both
operationally and financially, to navigate
this rapidly evolving environment.
Throughout this period, we have continued
to monitor and adhere to regulatory
guidance in response to Covid-19. Our risk
management processes remain robust,
and our internal controls ensure that we
remain confident in our management of the
impact upon our business activities. You
can read more about our financial response
to Covid-19 in our financial overview on
pages 34 to 47 and our approach to
managing principal risks on pages 53 to 57.
While it remains too early to know the full
impact that Covid-19 will have on the UK
economy, we are confident that our tried
and tested business model and the deep
experience of our people leave us well
prepared to respond to the challenges
and opportunities ahead, protect our
colleagues, and continue supporting
our customers and clients.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 12
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
leading positions in
specialist markets. We
focus on the quality and
returns of our business
rather than overall growth
or market share.
It provides long-
term returns for our
shareholders while also
maintaining a strong
capital base and
balance sheet.
This allows us to
reinvest in our
business through the
economic cycle and
consistently support our
clients and customers.
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.
Long-established proven
business model
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 customers, clients and partners.
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 changing 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.
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Close Brothers Group plcAnnual Report 2020 13
Creating value for our
stakeholders
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: See pages 25 to 28
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 customers 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 withdraw, and this has contributed to high levels
of repeat business and strong net promoter scores across our businesses.
Read more: See pages 28 and 29
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 148% over the last 10 years.
Read more: See pages 34 to 37
Supporting 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 are pleased
to promote a wide range of programmes that help support the causes
that are beneficial to all those around us and are focused on reducing
our environmental impact through our sustainability initiatives.
Read more: See pages 24 to 33
Strong supplier relationships
Our businesses are supported by a large number of suppliers, who enable
us to consistently deliver high service levels to our customers, clients and
partners. We are committed to developing and maintaining transparent and
sustainable working relationships with our suppliers over the long term.
Read more: See page 29
Constructive engagement with regulators
We are committed to sustaining high standards of business conduct across our
businesses. We maintain an open and active dialogue with our key regulators to
ensure we adhere to the relevant regulatory frameworks where we operate.
Read more: See pages 18 to 21
Driving sustainable outcomes
and business performance
High net interest margin
and a quality loan book
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 net interest margin between 7.5%
and 9.8% over the last 10 years and a
predominantly secured, diverse loan book.
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 2.3% over the last 10 years.
Consistent returns
through the cycle
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 1.3% to 3.7%
and group return on opening equity
averaged 16% over the last 10 years.
Sustainable dividend
While dividend decisions in the 2020 financial
year have reflected the unprecedented
uncertainty caused by Covid-19, our aim
remains to return to a long-term policy
of progressive and sustainable dividend
growth in future. Dividend decisions will
continue to balance returns to shareholders
with maintaining a strong financial position,
flexibility to grow and invest, and the ability to
meet our responsibilities to all stakeholders.
Strong net inflows
and consistent trading
profitability in
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 seven loss days in the last financial
year despite volatile trading conditions.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 14
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.
Strategic Objectives
2020 Progress
Future Priorities
Key Performance Indicators
Creating Long-Term Shareholder Value
Protect: A long-term
approach to how we
run our business.
1. Maintain prudent underwriting and
consistent pricing in our lending
2. Maintain a sound level of funding,
liquidity and capital
3. Maintain our strategic imperative of
investing to protect our business
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
Common equity tier 1 capital ratio
Funding cover of loan book
Group return on opening equity
Per cent
2020
2019
2018
14.1
13.0
12.7
Per cent
2020
2019
2018
Per cent
2020
2019
2018
8.0
15.7
17.0
Bad debt ratio
Per cent
2020
2019
2018
• Operational and financial resilience
• Continue adhering to disciplined
underwriting and pricing 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 the ongoing impact of Covid-19
on the UK economy and the group's
customers, clients and partners,
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.
enabled us to successfully adapt and
continue operating effectively during
the pandemic.
• Effective deployment of crisis procedures
and playbooks to respond to the
Covid-19 pandemic.
• Maintained adherence to our disciplined
lending model, prudent loan to value
ratios and strong margin in challenging
market conditions.
• Maintained a strong funding, liquidity and
capital position, with good headroom to
capital regulatory requirements.
• Good progress made on our preparation
for applying to use the Internal Ratings
Based approach for the calculation of
regulatory capital requirements for credit
risk.
• Continued to strengthen and diversify our
funding position with growth in deposits
and additional Motor Finance securitisation.
• Very strong and profitable trading at
Winterflood despite extraordinary
market movements.
• Continued to invest in our key strategic
• Continue to invest through the cycle,
Banking expense/income ratio
Employee engagement
Adjusted basic earnings per share
programmes, which has proven beneficial
in responding to the challenges of
Covid-19.
• Motor Finance transformation programme
has increased new business volumes and
enabled us to deliver better service to
dealers and customers.
• Asset Finance transformation programme
progressing well, enhancing our sales
effectiveness.
• Online portal added to customer
deposit platform and customer
experience enhanced.
• Continued strong employee engagement,
with employee communication a priority
for the business, particularly during
Covid-19.
• Strong customer satisfaction scores
across our businesses, as we have
supported our customers and clients
during this challenging period.
whilst reviewing and prioritising
investment spend.
• Continue to progress Asset Finance
transformation programme to improve
data capability and technology and
optimise operational efficiencies.
• 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.
• Continue to adapt and respond to
developments brought about by
Covid-19, including changes in customer
preferences and in our ways of working.
Net promoter scores
Property repeat business
Per cent
2020
2019
2018
2020
Motor Finance
Retail savings
Premium Finance
52
50
49
77
72
56
Per cent
2020
2019
2018
Per cent
2020
2019
2018
0
0
79
79
Pence
2020
2019
2018
74.5
136.7
140.2
Dividend per share
Pence
2020
2019
2018
40.0
66.0
63.0
Extend: Creating future
value through maximising
our potential and
identifying new
opportunities.
7. Maximise the opportunity in each
of our markets, within the boundaries
of the model
8. Identify new products, distribution
channels and adjacent market
opportunities
• Increased focus on sustainable
• Identify and capitalise on new
investment in Asset Management, with
socially responsible investment
proposition well received.
• New 95 day Corporate Notice product
added to our customer deposit platform.
• Accredited to lend under the support
schemes introduced by the UK
government in response to Covid-19.
• Positive progress made in expanding
Winterflood’s institutional relationships
and Winterflood Business Services.
opportunities to lend as we emerge from
Covid-19.
• Continue to identify and explore new
business areas that fit with our specialist
business model and generate strong
returns.
• Expand offering on deposit platform with
new savings products including cash ISAs.
• Grow client assets and make incremental
hires in Asset Management.
• Develop Winterflood’s institutional
franchise and further grow Winterflood
Business Services.
Loan book growth1
Per cent
2020
2019
2018
Net inflows
Per cent of opening AUM
0
6
7
2020
2019
2018
933175.indb 14
24/09/2020 14:56:21
135
129
132
2.3
0.6
0.6
86
88
89
76
78
77
9
9
12
Close Brothers Group plcAnnual Report 2020 15
Strategic Objectives
2020 Progress
Future Priorities
Key Performance Indicators
Creating Long-Term Shareholder Value
Protect: A long-term
approach to how we
run our business.
1. Maintain prudent underwriting and
consistent pricing in our lending
2. Maintain a sound level of funding,
liquidity and capital
3. Maintain our strategic imperative of
investing to protect our business
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
• Operational and financial resilience
• Continue adhering to disciplined
enabled us to successfully adapt and
continue operating effectively during
the pandemic.
underwriting and pricing in all market
conditions.
• Maintain capital flexibility in an evolving
• Effective deployment of crisis procedures
regulatory environment and submit
and playbooks to respond to the
application for Internal Ratings Based
Covid-19 pandemic.
approach.
• Maintained adherence to our disciplined
• Ensure our compliance with ongoing
lending model, prudent loan to value
regulatory change.
ratios and strong margin in challenging
• Monitor and mitigate external threats,
market conditions.
including the ongoing impact of Covid-19
• Maintained a strong funding, liquidity and
on the UK economy and the group's
capital position, with good headroom to
customers, clients and partners,
capital regulatory requirements.
competition from both established and
• Good progress made on our preparation
emerging players and the UK’s departure
for applying to use the Internal Ratings
Based approach for the calculation of
from the EU.
• Continue to invest in our operational
regulatory capital requirements for credit
resilience, core technology and
risk.
regulatory compliance.
• Continued to strengthen and diversify our
funding position with growth in deposits
and additional Motor Finance securitisation.
• Very strong and profitable trading at
Winterflood despite extraordinary
market movements.
• Continued to invest in our key strategic
• Continue to invest through the cycle,
programmes, which has proven beneficial
whilst reviewing and prioritising
in responding to the challenges of
investment spend.
Covid-19.
• Continue to progress Asset Finance
• Motor Finance transformation programme
transformation programme to improve
has increased new business volumes and
data capability and technology and
enabled us to deliver better service to
optimise operational efficiencies.
dealers and customers.
• Monitor customer needs, preferences
• Asset Finance transformation programme
and trends in technology through
progressing well, enhancing our sales
research and responding to customer
effectiveness.
• Online portal added to customer
deposit platform and customer
experience enhanced.
feedback.
• Ensure we retain and attract staff and
maximise productivity by responding to
employee engagement, training and
• Continued strong employee engagement,
developing our people and investment in
with employee communication a priority
tools and technology.
for the business, particularly during
• Continue to adapt and respond to
Covid-19.
• Strong customer satisfaction scores
across our businesses, as we have
supported our customers and clients
during this challenging period.
developments brought about by
Covid-19, including changes in customer
preferences and in our ways of working.
Common equity tier 1 capital ratio
Per cent
2020
2019
2018
14.1
13.0
12.7
Funding cover of loan book
Per cent
2020
2019
2018
Net interest margin
Per cent
2020
2019
2018
7.5
7.9
8.0
Bad debt ratio
Per cent
2020
2019
2018
Banking expense/income ratio
Per cent
2020
2019
2018
52
50
49
Employee engagement
Per cent
2020
2019
2018
Net promoter scores
2020
Motor Finance
Retail savings
Premium Finance
Property repeat business
Per cent
2020
2019
2018
77
72
56
0
0
79
79
135
129
132
2.3
0.6
0.6
86
88
89
76
78
77
Group return on opening equity
Per cent
2020
2019
2018
8.0
15.7
17.0
Adjusted basic earnings per share
Pence
2020
2019
2018
74.5
136.7
140.2
Dividend per share
Pence
2020
2019
2018
40.0
66.0
63.0
Extend: Creating future
value through maximising
our potential and
identifying new
opportunities.
7. Maximise the opportunity in each
of our markets, within the boundaries
of the model
8. Identify new products, distribution
channels and adjacent market
opportunities
• Increased focus on sustainable
• Identify and capitalise on new
investment in Asset Management, with
opportunities to lend as we emerge from
socially responsible investment
proposition well received.
Covid-19.
• Continue to identify and explore new
• New 95 day Corporate Notice product
business areas that fit with our specialist
added to our customer deposit platform.
business model and generate strong
• Accredited to lend under the support
returns.
schemes introduced by the UK
government in response to Covid-19.
• Expand offering on deposit platform with
new savings products including cash ISAs.
• Positive progress made in expanding
• Grow client assets and make incremental
Winterflood’s institutional relationships
and Winterflood Business Services.
hires in Asset Management.
• Develop Winterflood’s institutional
franchise and further grow Winterflood
Business Services.
Loan book growth1
Per cent
2020
2019
2018
Net inflows
Per cent of opening AUM
2020
2019
2018
9
9
12
0
6
7
1 For 2018, underlying loan book growth of 6.6% excludes the unsecured retail point of sale finance book of
£66.2 million which was held for sale at 31 July 2018.
933175.indb 15
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 16
Our Responsibility
We recognise that to help the people and businesses of Britain thrive
over the long term, we also have a responsibility to help address the
social, economic and environmental challenges facing our business,
employees and customers, now and into the future.
Sustainable themes have experienced an
increased focus in recent months, with an
appreciation that those companies with
stronger sustainable attributes are better
positioned for the long term. The added
context of Covid-19 has broadened the
scope of the discussion to capture a wide
range of stakeholder interests, while
reinforcing socially responsible
considerations as well as the
environmental.
During the year we have focused on
making significant progress with our
wide-ranging sustainability agenda, driving
forward with programmes and initiatives to
address key themes including diversity and
inclusion, social mobility, customer
experiences and responding to the threat
of climate change.
Events of the second half allowed us to
bring our culture of responsibility to the fore
and act in the best interests of all our
stakeholders. Our responsible approach
during the period includes measures that
prioritise the safety and wellbeing of our
colleagues, that promote the fair treatment
of our customers and clients, that are
considerate of our suppliers, and that
continue to make material strides towards
reducing our environmental impact.
As a business that prides itself on
supporting small businesses and
individuals we have the expertise to
support SMEs and entrepreneurs who may
be overlooked by larger finance providers,
creating jobs and opportunities in local
communities across all our regions. Our
strong, lasting relationships with our
customers and clients mean we have a
deep understanding of their needs and
requirements, allowing us to provide both
financial support and advice, and to
promote social mobility through access
programmes, apprenticeships and training
for up-and-coming talent.
Throughout the year we have continued to
make good progress, as shown by our
performance against the targets we set
ourselves last year. Following the
successes of the past year, we are now
setting ourselves a series of more
stretching targets to direct our efforts and
maintain our momentum, including:
• 36% female senior managers by 2025
• Maintain or improve strong customer
satisfaction scores across our businesses
• Achieve a 10% reduction in group-wide
overall emissions by 31 July 20211
• Achieve a 10% reduction in average fleet
vehicle CO2 emissions by 31 July 20212
Helping our People Thrive
Our people underpin the success of our
business and continue to deliver the highest
levels of service to our customers through
their specialist expertise and longstanding
relationships. We are committed to creating
an environment where our colleagues feel
motivated, proud to work for us and can
thrive. To achieve this, we continually
engage with our people, invest in
development opportunities and foster an
inclusive workplace to support them to
reach their full potential.
Ensuring the safety and wellbeing of our
colleagues during this unprecedented
period has been the utmost priority for us.
We were pleased with how quickly and
successfully we were able to set up over
95% of our staff to work from home during
the UK lockdown, and have put in place
many initiatives, virtual classes and
webinars to support our colleagues’ mental
wellbeing during this time. Regular
engagement and feedback has helped to
ensure we are supporting our staff through
this period to the best of our abilities.
Recognising and celebrating the value of
diversity and inclusion across our
workforce has been a key area of focus this
year. We now have wide-ranging employee
participation across a number of group-
wide diversity and inclusion committees,
with executive level sponsorship for each,
as well as internal networks such as our
recently launched LGBTQ+ network for
individuals from across the group to join
various educational and social events.
In addition to targets around diversity and
inclusion set at board and executive level,
our internal mentoring and sponsorship
programmes continue to grow, with
recently launched schemes to promote
women’s career development and
mentoring schemes to support black and
ethnic minority colleagues.
1 Targeted overall emissions reductions against a benchmark of the 2019 financial year.
2 Targeted average fleet vehicle CO2 emissions reductions against a benchmark of the 2020 financial year.
Environmental Responsibility
We take care to ensure that environmental
considerations form an integral part of the
decisions we make as a business. Our
facilities and infrastructure teams continue
to seek out and implement new ways to
reduce our environmental impact, while
employees across the group proactively
raise awareness of environmental issues
and promote responsible behaviours,
initiatives and activities.
This year, the consolidation of our
London property footprint presented an
opportunity to make a significant change
to lowering our environmental impact.
Reducing our office space has a direct
influence on our level of emissions, and
our newly fitted out head office includes a
range of energy efficient systems, plant
and equipment to reduce our carbon
footprint in the years ahead.
We recognise the great importance of
addressing the threat of climate change,
and our ongoing framework development
to identify how the risks and opportunities
of climate change may impact our business
model remains a key area of focus for
senior management.
There When it Matters
We are determined to ensure we can
continue to support our customers and
clients throughout even the most
challenging of times. Covid-19 has proven
to be one of the gravest challenges that
many of our customers and partners have
ever faced, and our response has focused
on providing ease and flexibility for our
customers, new products and services to
help businesses access credit, and a
desire to continuously improve and adapt
to changing customer needs.
While the longer-term impacts of Covid-19
remain uncertain, we are committed to
being an agile and adaptable organisation
that continues to hold an unwavering focus
on customers, clients and partners. We
continue to seek out innovative ways to
help, and enhance our personal approach
by increasing speed of execution,
embedding insights and introducing digital
services. In the months ahead, we will
leverage our market-leading experts to
provide a personalised service for SME
customers and partners on how to
approach their recovery efforts.
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Close Brothers Group plcAnnual Report 2020 Non-Financial Information Statement
17
In line with the non-financial reporting requirements contained in
Sections 414CA and 414CB of the Companies Act 2006, the table
below contains references to non-financial information intended to help
our stakeholders understand the impact of our policies and activities.
Reporting Requirement
Policies and Standards
Information Necessary to Understand
our Impact and Outcomes
Environmental Matters
• Bank Credit Policy Underwriting
Standards
• Environmental Policy
• Our Stakeholders and Board
Engagement, pages 18 to 23
• Sustainability Report, pages 31 and 32
Employees
• Health and Safety Policy
• Whistleblowing Policy
• Key Customer Principles
• Equal Opportunity and Dignity at Work
Policy
Social Matters
• Key Customer Principles
• Bank Credit Policy Underwriting
Standards
Respect for Human
Rights
• Human Rights and Modern Slavery Act
• Privacy and Data Protection Policy
• Cyber Security Policy
• Our Culture, page 5
• Our Response to Covid-19, page 11
• Business Model, pages 12 and 13
• Our Responsibility, page 16
• Our Stakeholders and Board
Engagement, pages 18 to 23
• Sustainability Report, pages 24 to 28
and 33
• Corporate Governance Report, page 77
• Our Response to Covid-19, page 11
• Our Responsibility, page 16
• Our Stakeholders and Board
Engagement, pages 18 to 23
• Sustainability Report, pages 29 to 31
• Sustainability Report, page 33
Anti-Corruption and
Anti-Bribery
• Anti-Money Laundering Policy
• Anti-Bribery and Corruption Policy
• Cyber Security Policy
• Sustainability Report, page 33
Description of Principal
Risks and Impact of
Business Activity
Description of the
Business Model
Non-Financial Key
Performance Indicators
• Principal Risks, pages 53 to 57
• Emerging Risks and Uncertainties,
pages 58 and 59
• Risk Committee Report, pages 79 and 80
• Our Purpose, page 4
• Our Culture, page 5
• Business Model, pages 12 and 13
• Strategy and Key Performance
Indicators, pages 14 and 15
• Our Responsibility, page 16
• Sustainability Report, page 24
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Close Brothers Group plcAnnual Report 2020Financial StatementsGovernance ReportStrategic Report 18
Our Stakeholder and Board Engagement
How Stakeholder Engagement Informs our Decision-Making
At Close Brothers, we have a broad set of stakeholders with differing views and priorities, so it is important that we
actively engage with each group to understand more fully their perspective and take this into account when making
decisions. We undertake a comprehensive programme of stakeholder engagement and value the feedback provided,
embedding this in the decision-making process undertaken both at a board level and throughout the group.
Our stakeholders and why we focus on them
Stakeholders’ key priorities
Colleagues
Close Brothers has over 3,500 employees around the UK, Ireland, the Channel Islands and
Germany. We want a diverse and motivated workforce so that they can continue to deliver
the highest level of service to our customers, clients and partners.
Engagement with employees helps to attract, build and retain a high calibre talent pool and
ensure that our employees remain enthusiastic about their work and Close Brothers.
• A safe working environment
• A fair, supportive, diverse and inclusive
culture where employee feedback is
valued
• Ensuring appropriate rewards
• A commitment to invest in training
and development
Customers, Clients and Partners
The needs of our customers, clients and partners are at the heart of our business and are
core to our purpose of helping the people and businesses of Britain thrive over the long term.
The group has customers, clients and partners in the UK, Ireland, the Channel Islands and
Germany and is focused on upholding reliable, high quality services and a personal approach.
Our long-term success depends on the strength of our relationships with customers,
clients and partners. As such, central to all decision-making is understanding how our
actions can help them and their businesses thrive.
• A customer-led proposition
• A focus on treating customers fairly
• Strong personal relationships and
specialist expertise
• Consistent and supportive customer
service whatever the market conditions
• A responsive service with solutions that
are flexible and executed with speed
Suppliers
Our business is supported by a large number of suppliers, enabling us to provide high
standards of service to our customers, clients and partners.
Engagement with our suppliers enables the group to develop and maintain long-term
and sustainable relationships. This engagement also helps enable our suppliers to better
understand and align to our key policies and procedures and operate responsibly.
• Appropriate and clear payment
procedures
• Strong and sustainable relationships
with Close Brothers
• Fair and equitable conduct of business
Regulators and Government
The Group values an open and transparent relationship with all our regulators,
particularly the Prudential Regulation Authority (“PRA”) and the Financial Conduct
Authority (“FCA”), as well as government authorities and trade associations.
It is important we maintain a culture that is focused on retaining and encouraging high
standards of business conduct and regulatory compliance and openness. Engaging
with the relevant regulators and associations helps to ensure the business is aligned to
the evolving regulatory framework.
• Fair treatment of customers and clients
• Compliance with applicable regulation
• Recognition of the importance of
resilience and risk management
• Provision of high quality information
and regulatory reporting
• Active consideration of risks relating to
sustainability and other climate matters
• Transparent group tax strategy
Communities and Environment
Close Brothers is committed to contributing lasting value and making a positive impact on the
society in which we operate and the environment more broadly.
Participating in local communities helps the board and our employees develop our
understanding of our clients, customers and partners so that we can support them and help
them to achieve their ambition, whilst also building employee engagement.
• A suitable strategy for approaching
sustainability issues
• Support for community initiatives
• Job creation and social mobility
• A long-term focus on addressing
the impacts of climate change
Investors
The group is focused on generating long-term, sustainable value for its investors, while
also maintaining a strong capital base and balance sheet.
Our investors are the providers of capital to our business so it is important that we
engage actively with them and listen and respond to their feedback.
• Strong returns and financial resilience
through the cycle
• Capital generation and distributions
• Sustainable and consistent
business model
• Appropriate governance practices
and regard to environmental and
social responsibility
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Close Brothers Group plcAnnual Report 2020 19
The table below outlines our key stakeholders, why they are important to us,
their key priorities and some of the ways we are engaging with each group.
How we engage with them
Key group and business-level engagement during the year
Engagement with our colleagues takes place daily through line
managers, with senior management regularly speaking at Town Halls
and other business-wide forums. Regular employee opinion surveys
are undertaken and closely monitored and management frequently
hold employment engagement activities to provide updates on
business performance and gather real time feedback, which is
listened to and acted upon. Training and mentoring programmes are
in place to support the development of all employees.
Consistent delivery of high quality service for customers, clients
and partners by our specialist, expert teams is core to our
business model. We ensure this is built around the needs of our
customers, clients and partners and is aligned to our customer
principles by conducting extensive research and analysis of
feedback, captured through our “Voice of the Customer and
Partner” programme. This enables us to improve experiences in
the moment as well as plan for changes to our service and
proposition into the future.
During the Covid-19 pandemic, employee communication has
been a priority for the business. Additional employee opinion
surveys have been undertaken, with a focus on wellbeing and
return to workplace planning, alongside regular communications
from the executive committee and management teams.
Read more about the ways we have engaged with our
colleagues: See pages 25 to 28.
Throughout the Covid-19 pandemic, we have been in close
contact with our customers, clients and partners to support those
who have found themselves in difficulty during this challenging
period. We remain in regular discussions with our customers to
understand their individual circumstances and tailor the solutions
and support we offer to ensure we best serve their needs.
Read more about the ways we have engaged with our
customers, clients and partners: See pages 28 and 29.
Our key supplier relationships are managed centrally through
our dedicated third party management function, which includes
regular meetings, as well as an annual survey to seek feedback
on Close Brothers as a client.
Our annual supplier survey has been expanded to cover
sustainability matters including our suppliers’ environmental and
social governance, to help inform our understanding of progress
being made by our suppliers.
We maintain a proactive dialogue with the PRA and the FCA and
have a constructive relationship with HMRC to help ensure we are
aligned with the relevant regulatory frameworks.
We regularly interact with the trade bodies and business
associations we are affiliated with to ensure we are engaged
with issues impacting our industry.
Read more about our annual supplier survey and the
sustainability matters it looks at: See page 29.
This year, key engagement with our regulators has revolved
around the appointment of the group's new chief executive, our
involvement in the UK government's support schemes and as
part of our preparations for applying to use the Internal Ratings
Based approach. We have closely followed commentary from the
PRA regarding capital and distributions in light of the evolving
Covid-19 outbreak, as well as regulatory guidance in relation to
customer forbearance.
Read more about the decision to cancel our interim dividend:
See page 22.
Throughout the year, we undertake various community, social and
environmental initiatives, which are coordinated through our
sustainability working group. Many of our employees participate in
group-wide committees established to drive forward a range of
initiatives around diversity and inclusion, helping the environment
and charitable and community activities, with our employee
volunteers the driving force behind our successful community and
charitable events.
This year, we became signatories to the Race to Work Charter,
which will help drive our engagement on matters of racial equality,
increase our awareness of the ethnic diversity of our employees
and take action to support the career progression of ethnic
minority colleagues. We continued to run our established social
mobility programmes, supporting up-and-coming talent in local
communities and providing access and opportunities for those
from less-advantaged backgrounds.
We have an established programme of engagement for
shareholders, debt capital providers and other market participants
through our investor relations team, which includes regular
dialogue with the executive team and chairman.
Read more about how we engage with our local communities:
See pages 29 to 31.
We maintained strong levels of engagement with our investors
during the year that included a programme of meetings with our
chairman focused on environmental, social and governance
matters, a consultation with c.53% of the shareholder register on
our Directors’ Remuneration Policy and engagement with credit
rating agencies, alongside our regular programme of
communication organised by our investor relations team including
investor roadshows, analyst presentations and keeping the
market up to date in line with regulation.
Read more about the review and consultation process for our
Directors’ Remuneration Policy: See page 23.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020
20
Our Stakeholder and Board Engagement continued
Section 172 Statement and
Statement of Engagement with
Employees and Other Stakeholders
Section 172(1) of the Companies Act
2006 requires a director of a company to
act in a way that he considers, in good
faith, would be most likely to promote the
success of the company for the benefit
of its members as a whole, and in doing
so have regard (amongst other factors)
to various other considerations and
stakeholder interests:
• the likely consequences of any
decision in the long term;
• the interests of the company’s
employees;
• the need to foster the company’s
business relationships with suppliers,
customers and others;
• the impact of the company’s
operations on the community
and the environment;
• the desirability of the company
maintaining a reputation for high
standards of business conduct; and
• the need to act fairly as between
members of the company.
The board is responsible for establishing
and overseeing the company’s values,
strategy and purpose, all of which centre
around the interests of key stakeholders
and other factors set out in section 172(1).
How the board engages with,
and has regard to, each of
our stakeholder groups
We have set out in the following pages
examples of how the board engages with,
and has regard to the interests of,
stakeholders. Stakeholder considerations
have been a key focus for the board
during its oversight of the group’s
response to the Covid-19 pandemic.
Further information on the operation of the
board during the pandemic, including the
matters regularly considered, can be
found on page 72 of the Corporate
Governance Report.
The directors are conscious that their
decisions and actions have an impact on
stakeholders, including employees,
customers, suppliers, communities and
investors, and they have had regard to
stakeholder considerations and other
factors in section 172(1) during the year.
Regular engagement with stakeholders,
both directly and indirectly via
management, has continued to be an
important focus for the board and has
ensured that the directors are aware of
and have effective regard to the matters
set out in section 172(1). Throughout the
year, the board receives and discusses
stakeholder insight and feedback and it
ensures that stakeholder considerations
are taken into account in the board’s
deliberations and decision-making.
Whilst the board acknowledges that,
sometimes, it may have to take decisions
that affect one or more stakeholder groups
differently, it seeks to treat impacted groups
fairly and with regard to its duty to act in a
way that it considers would be most likely
to promote the success of the company for
the benefit of its members as a whole,
having regard to the balance of factors set
out in section 172(1).
Considerations relating to the factors in
section 172(1) are an important part of
governance processes and decision-
making both at board and executive
level, and more widely throughout the
group. For example, the Schedule of
Matters Reserved to the Board and the
Terms of Reference for each of the
board’s committees emphasise the
importance of decision-making having
regard to relevant factors under section
172(1) and broader stakeholder
considerations. In addition, this year,
training has been provided to the
directors of subsidiary companies in the
group reminding them of their duties
under section 172(1) and on new
reporting requirements.
Further detail on the board’s
engagement with, and consideration of,
the company’s stakeholders can be
found in the following pages, along with
examples of decision-making that have
had regard to the factors in section
172(1), employee interests, and the need
to foster the company’s business
relationships with suppliers, customers
and others, and the effect of that regard,
including on principal decisions taken by
the company during the financial year.
Colleagues
• Regular updates on employee issues
arising from the Covid-19 pandemic,
including the response to lockdown and
introduction of homeworking, review of
wellbeing issues, discussion of
Covid-19-related employee opinion
surveys and return to workplace
planning.
• Regular communications with
employees via emails and videos,
participation in Town Halls and Q&A
sessions by individual directors.
• Site visits by individual directors to meet
employees and enhance their
understanding of the group’s
operations.
• Director attendance at committees and
forums below board level to understand
and discuss employee-related issues.
• Engagement with employees in board
meetings on relevant topics.
• Presentation and discussion of regular
employee opinion surveys and
follow-up actions at board meetings.
• Review and discussion of a quarterly
culture dashboard, providing an overview
of matters relating to culture and values.
• Support for and attendance at
development and training programmes
attended by employees at different
levels.
• Consideration of compensation and
employee-related matters by the
Remuneration Committee.
• Review of diversity and inclusion
activities and initiatives by the
Nomination and Governance
Committee.
• Ongoing activity to encourage
employee participation in the group’s
Save As You Earn (“SAYE”) and Buy As
You Earn (“BAYE”) share schemes.
• Consideration of employee views in
individual decisions made by the board,
including issues relating to ongoing
transformation programmes, such as
the Motor Finance transformation
programme.
• Board oversight of, and at least
half-yearly updates on, whistleblowing
activity, supplemented by the
appointment of a non-executive director
as the group’s whistleblowing
champion.
• Annual review and approval of the
group’s gender pay gap reporting by
the Remuneration Committee.
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Close Brothers Group plcAnnual Report 2020 21
Regulators and government
• Regular updates on regulatory
developments and interactions during
the Covid-19 pandemic, including
guidance in relation to customer
forbearance.
• Regular direct engagement between
individual directors and regulators.
• Attendance by directors at wider
industry/sector events with regulators.
• Updates on broader regulatory
developments and compliance
considerations during the year,
including summaries of management’s
engagement with regulators, as part of
the Head of Compliance’s regular
updates to the Risk Committee and the
board.
• Engagement with regulators on the
appointment of the group’s new chief
executive and on non-executive
director appointments.
• Provision of regulatory correspondence
to the board and relevant committees.
• Training updates on regulatory
developments and horizon-scanning.
• At least an annual update to the Audit
Committee on taxation matters,
including on engagement with HMRC.
Customers, clients and partners
• Updates on, and consideration of, the
impact of Covid-19 on customers,
clients and partners, including regular
updates on operational matters and
reviews of information relating to the
provision of forbearance to customers
of the Banking division.
• Quarterly in-depth customer updates to
the board including customer metrics
and engagement scores, and updates
on a wide range of matters relating to
customer issues.
• Customer/client updates in monthly
Suppliers
• Updates on, and consideration of, the
impact of Covid-19 on suppliers and
partners.
• Annual deep-dive supplier update to the
board, including, this year, discussion of
the evolution of the group’s third party
management environment and
associated stakeholder and section
172(1) considerations.
• Consideration and approval of
material contracts with suppliers in
line with the Schedule of Matters
Reserved to the Board.
business reports presented to the board
by members of the executive committee.
• Annual review of the group’s
Modern Slavery Statement.
• Updates on supplier considerations as
part of monthly updates provided by
senior management to the board.
• Oversight of relevant policies and
internal processes, including updates
on the group’s anti-bribery procedures.
• Consideration of supplier issues as part
of updates on transformation and
investment programmes.
• Oversight of key supplier relationships
by the board and its committees,
including engagement between the
Audit Committee and the group’s
external auditors.
• Monthly customer and operations
updates to the board by the group
chief operating officer.
• Discussion of customer, client and
partner considerations in individual
decisions to be made by the board,
including major investment programmes.
• Consideration of customer and conduct-
related issues during the year in relation to
particular projects, for example the Risk
Committee’s oversight of the programme
for the transition away from LIBOR.
• Oversight by the Audit Committee of
relevant customer, client and
partner-related items arising from
reviews undertaken by the group’s
internal audit function.
• Attendance by directors at meetings of
the Banking division’s customer forum.
• Consideration of conduct matters as
part of the quarterly culture dashboard
reviewed by the board, together with a
conduct risk dashboard reviewed by
the Risk Committee at each
scheduled meeting.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 22
Our Stakeholder and Board Engagement continued
Principal Board Decision:
2020 Interim Dividend Cancellation
In April 2020, the board took the decision to cancel the payment
of the company’s 2020 interim dividend, recognising the
significant challenges being faced by businesses and individuals
in response to Covid-19, and consistent with the company’s
purpose of helping the people and businesses of Britain.
Although Close Brothers entered the period of economic
uncertainty brought about by the Covid-19 pandemic with a
strong capital and liquidity position and with prudent funding,
the board considered that cancelling the interim dividend would
increase the ability of the company to execute its business
model and maximise the availability of resources to support
customers, clients, partners and colleagues in the early stages
of the pandemic. This decision was not taken lightly given the
group's long history of uninterrupted dividend payments and
the expectation this has created among shareholders.
Stakeholder considerations, and the factors set out in section
172(1), were therefore at the heart of the decision-making
process. As part of its decision-making the board had regard
to the different interests of stakeholders but with an overarching
focus, as required by section 172(1), on acting in the way that
would be most likely to promote the success of the company
for the benefit of its members as a whole. Among other things,
the likely consequences (both in the longer and near term) of
the decision to cancel the interim dividend were key
considerations for the board.
How the board considered, and had regard to, the
interests of key stakeholders and the requirements
of section 172(1)
The decision to cancel the interim dividend was taken following
extensive discussions between the board and management.
• In advance of the decision, the board was regularly updated
on discussions with customers and clients to understand
the difficulties that they were facing and the introduction
of a range of forbearance measures to support them.
• The board also had oversight of Close Brothers’ participation
in the support schemes introduced by the UK government
and accreditation to lend under the Coronavirus Business
Interruption Loan Scheme.
• The provision of UK government assistance to support the
UK economy, as well as the uncertainty of the medium and
longer-term impact of Covid-19 on both the UK economy
and the group were taken into consideration.
• The board considered market developments including the
decisions by the UK’s systemic banks to suspend dividends,
along with the actions of other FTSE 350 companies across
different sectors. The board had particular regard to the
regulatory environment and comments from the regulator
during the period.
• The expectations of shareholders and the impact of any
decision were a key consideration for the board, with a view
to balancing investor priorities given the group’s strong track
record of uninterrupted dividend payments, with maximising
resources given the unprecedented uncertainty.
• Employee sentiment and areas of interest to employees were
frequently communicated to the board given the paramount
importance of employee wellbeing and morale and their
perception of the company’s handling of the Covid-19
pandemic.
• Updates on supplier performance were also taken into
consideration given their vital role in enabling the company to
execute its business model.
Following discussion with the directors, the company also took the
decision to support the community by making a £1 million
donation to NHS Charities Together and match fund donations
from employees to this charity, in addition to personal donations
made by directors.
Following the group’s resilient performance in the second half,
the board has subsequently recommended a dividend of 40.0p
per share in respect of the financial year. Further detail can be
found on page 35.
Communities and environment
• Quarterly updates on environmental,
social and governance (“ESG”) matters
and broader sustainability developments
provided to the Nomination and
Governance Committee.
• Regular discussion by the Nomination
and Governance Committee on the
group’s sustainability targets and
progress in achieving them.
• Engagement with proxy advisers and
other groups on ESG matters, on which
the Nomination and Governance
Committee is updated.
• Executive director participation in
sustainability working groups and other
internal forums.
• Consideration of environmental issues
as part of board discussions on the
group’s London Property Programme.
• Discussion of climate change-related
developments during the year.
• Updates to the board on community
engagement programmes, including
the group’s partnership with social
mobility charity, UpReach.
• Board participation in local charitable
and volunteering activities.
Investors
• Engagement with shareholders through
reports, announcements and other
information available on the group
website.
• Attendance at the AGM in November
2019 by all directors, with presentations
from the chairman and chief executive,
investor Q&A and voting on resolutions.
• Engagement with investors and
sell-side analysts following results
announcements.
• Comprehensive programme of
investor engagement throughout the
year including meetings between the
chairman and major shareholders and
meetings with the management team
and a broad range of current and
potential investors.
• Governance roadshow held by the
chairman with major shareholders,
focusing on ESG matters.
• Provision of ESG-related investor
feedback to the board as part of regular
investor relations reporting.
• Consultation on the triennial review of
the Directors’ Remuneration Policy.
• Engagement with investors, institutional
shareholder groups and proxy agencies
prior to the AGM.
• Provision of a monthly investor
relations report to the board.
• Additional deep-dives for the board on
investor feedback received during
engagement meetings.
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Close Brothers Group plcAnnual Report 2020 23
Principal Board Decision:
Triennial Directors’ Remuneration Policy Review and Consultation
The Remuneration Committee (“the Committee”) is responsible
for setting and implementing the remuneration policy for the
executive directors of Close Brothers, on behalf of the board.
The current Directors’ Remuneration Policy was approved by
shareholders at the 2017 AGM, with over 97% of shareholders
voting in favour. No changes have been made to the structure
since its approval and strong shareholder support has been
received for the implementation of the policy over the last three
years.
During this financial year, the Committee (on behalf of the
board) undertook a detailed review of the policy to assess if any
changes were required to ensure it is aligned with the strategic
priorities of the group and in keeping with developments from a
market, regulatory and corporate governance perspective.
How the board considered, and had regard to, the
interests of key stakeholders and the requirements of
section 172(1)
During the year, the Committee’s extensive review of the
Directors’ Remuneration Policy had regard to the interests of
different stakeholders and relevant considerations under
section 172(1), including the likely consequences of decisions
relating to remuneration in the longer term, the need to act
fairly between members of the company and the role that
executive remuneration plays in promoting the success of the
company for the benefit of its members as a whole.
In line with the company’s practice during previous
policy renewals, the Committee undertook a broad
consultation process.
• The chair of the Committee wrote to the company’s top
15 shareholders representing c.53% of the shareholder
register, as well as the key institutional shareholder
bodies, to communicate the proposed changes to the
remuneration policy and invite comments or feedback
on the proposals.
• The chair of the Committee also met or engaged in detailed
discussions with representatives from five shareholders to
hear their feedback on the proposed changes and discuss
comments and suggestions provided.
Points of feedback from the consultation were shared with the
Committee and were considered as part of the Committee’s
ongoing review and decision-making process.
Following this extensive consultation, the Committee has
proposed a revised Directors’ Remuneration Policy, which can be
found in the Directors’ Remuneration Report on pages 87-114.
The proposed policy remains largely unchanged, although
amendments are included in the following areas:
• A reduction in executive pension contributions to align
these with the general workforce.
• A change to the post-employment shareholding guidelines.
• An update to the financial performance measures for the
annual bonus and LTIP scheme to ensure their alignment with
the business performance and prevailing market conditions.
The strategic scorecard and risk management objectives,
which are used to assess the performance and resulting
remuneration of executive directors, are closely aligned with
the strategic objectives of the business. They also incorporate
measures around employee engagement, customer focus,
sustainability and risk conduct and compliance to ensure that
the views of our different stakeholder groups are taken into
consideration when decisions are made. A full breakdown of
the strategic scorecard and risk management objectives can
be found on pages 105-106 and 108.
The revised Directors’ Remuneration Policy will be
submitted to shareholders for approval at the company’s
AGM later in 2020.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 24
Sustainability Report
Sustainability is
fundamental to
our purpose
Acting sustainably is an integral part of our
strategy, culture and purpose - to help the
people and businesses of Britain thrive
over the long term.
It is present in everything we do, from our
decision making in how we write business,
to the ways in which we support and
engage our colleagues, and the care and
consideration we place on the environment
and the communities we operate in.
We recognise that we have a responsibility
towards the needs of all our stakeholders
and we’re committed to making a positive
impact, both now and into the future. This
long-term ambition is embedded within our
thinking, and guides our approach and the
choices we make, as we appreciate that
our actions today have lasting impacts and
consequences for tomorrow.
It is reflected in our culture, with strong
values that encourage and support
diversity and inclusion at all levels.
It is echoed by the expertise and support
we offer to the people and businesses of
Britain through tailored solutions and
specialist advice, helping them to achieve
their short-term goals and long-term
aspirations. And it permeates our efforts
to reduce our environmental impact and
respond to the threat of climate change.
We take a long-term approach to
managing our business, and the active
steps we take now to protect and nurture
what really matters are the building blocks
of a sustainable future for all of us.
Our Targets
To focus our efforts we set a series of
targets to drive progress across a range of
sustainable themes and align these to the
United Nations Sustainable Development
Goals (“SDGs”).
Focus Area
Ensuring we are
a diverse and
inclusive employer
Serving the needs
of our customers
Contributing to
wider society
Reducing our
environmental
impact
Key Performance
Indicators
33% female senior
managers as at
31 July 2020
Motor Finance
NPS +77
Savings NPS +72
Premium Finance
NPS +56
Payroll giving 4%
above Gold Award
status threshold as
at 31 July 2020
100% of waste
providers that we
contract now send
zero waste to landfill
Existing Targets to
Measure our
Progress
Progress
Against
Targets
Link to UN SDGs
30% female senior
managers by 2020
Maintain or improve
strong customer
satisfaction scores
across our businesses
Maintain our Payroll
Giving Quality Mark
Gold Award status
Achieve zero waste
to landfill by 2021
46% reduction in fleet
vehicle emissions by
31 July 2020 vs
31 July 2019
benchmark
Achieve a 20%
improvement in
fleet vehicle
emissions by 2021
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Close Brothers Group plcAnnual Report 2020 25
Our Sustainable Approach
Sustainability matters appear regularly on
the senior management agenda, and we
have a dedicated working group for
sustainability with representatives from
across our businesses and functions that
reports directly to the group finance
director. The working group provides
regular updates to the board of directors
and group executive committee on key
developments and initiatives across a
range of sustainable themes.
Our climate risk committee meets
regularly to assess and determine our
responses to the risks and opportunities
of climate change, with ultimate oversight
of climate risk matters from the group
chief risk officer. In addition, we have a
series of employee teams dedicated to
championing and implementing initiatives
for inclusion and diversity, charities,
communities and the environment.
Our targets are also now linked to
executive pay through risk management
objectives within our executives’ long-term
incentive plan.
We also 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 division operates
several dedicated Socially Responsible
Investment (“SRI”) funds and continues to
expand its sustainable product offerings.
Environmental, social and governance
(“ESG”) considerations form part of its
formal stewardship code and engagement
policy. We integrate ESG research into our
investment processes at a firm-wide level,
ensuring that material ESG factors are
considered in all investment cases and
that our investment managers can make
fully informed investment decisions for
our clients.
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 set meaningful and achievable targets
to help measure and track the good
progress we are making towards our
sustainable goals.
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 we continue to
enhance our alignment with the SDGs and
keep them in mind as we further develop
our strategic priorities for sustainability.
Valuing our Colleagues
The contribution of our people, their
expertise and the longstanding
relationships they foster, continue to
deliver the highest levels of service for our
customers and clients. We place a great
amount of value on building a diverse and
inclusive talent pool 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.
We continue to partner with leading
diversity organisations, including
Stonewall, Europe’s largest LGBTQ+
charity, to help inform our thinking and
activities. We run training sessions on
inclusive leadership for managers and
senior managers, including our group
executives, highlighting how behaviours
and actions shape our culture and drive
an inclusive environment for all.
This year, we have undertaken a review of
candidate journeys for prospective
employees and our supporting
recruitment process in order to attract and
increase our recruitment of diverse
candidates. We have implemented
inclusive recruitment training for all our line
managers to support an inclusive
candidate experience and ensure our job
advertisements and application forms do
not include bias language.
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Close Brothers Group plcAnnual Report 2020Financial StatementsGovernance ReportStrategic Report 26
Our employees participate in a number of
group-wide working groups established to
drive forward a range of diversity and
inclusion initiatives, each chaired by an
executive sponsor. This year we launched
our ethnic diversity working group, chaired
by our group chief risk officer, and our
LGBTQ+ network “Unity”, chaired by our
group chief operating officer.
Employee engagement
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 2019.
Our latest survey results showed the
group-wide engagement scores remained
high, with an overall score of 86%
consistent with the previous survey and
above external benchmarks at 82%. We
had a very strong overall response rate of
88% 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. We
also run a shorter pulse survey between
cycles to review progress. 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.
Gender Diversity
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 2020
Male
6
59
161
Female
3
11
95
1,780
1,556
1 Includes non-executive directors, excluded from group headcount calculations.
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 36 male and five female employees who are
reported under directors or subsidiary directors.
We gave particular focus to the wellbeing
of our colleagues during the pandemic,
and our recent pulse survey reported over
95% of participants felt supported by
Close Brothers during the crisis, over 80%
felt connected to their teams and over
85% engaged with our social and
wellbeing initiatives.
In our most recent Employee Opinion
Survey, we measured our inclusivity
through culture and wellbeing based
questions. The survey reported that 94%
of our employees feel people of all cultures
and backgrounds are respected and
valued here at Close Brothers.
Racial equality
This year we became signatories to the
Race at Work Charter to help direct our
actions around race equality and ensure
that we have representation of ethnic
minorities across all levels of the
organisation. Under our commitment to the
Charter, we have appointed our chief risk
officer as the executive sponsor for race to
provide visible leadership across the
organisation and we ensure all leaders and
managers are aware of their responsibility
for promoting equality in the workplace.
As part of this commitment, we have set
ourselves a target of increasing our
ethnicity data disclosure levels to cover
60% of our employees by July 2021,
allowing us to more accurately measure
our ethnic balance and inform our actions.
Capturing the ethnicity data of all our
colleagues remains a priority, as this will
allow us to establish a baseline, track
progress and take targeted action to
support racial equality. We are committed
to supporting the career progression of
our ethnically diverse employees and with
support from our group-wide ethnicity
working group, we are launching a
reverse mentoring programme designed
to build coaching skills and to provide our
senior leadership with valuable insight
from the experiences of our minority
ethnic colleagues.
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Close Brothers Group plcAnnual Report 2020Sustainability Report continued 27
A separate working group also focuses on
the setting of ethnically diverse targets for
internal and external roles and on
consideration of diversity in our talent and
succession processes. In line with the
recommendations of the Parker Review, the
board of directors aims to have appointed
at least one director of colour by 2024.
Gender diversity
We are focused on maintaining our strong
and inclusive culture and as part of this we
are committed to reducing our gender pay
gap. We are confident that men and
women are paid equally for performing
equivalent roles across our business, and
the gender pay gap is one of a number of
measures that we use to review our
progress on improving gender balance
across all levels and roles of our
organisation. 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.
We published our 2020 gender pay gap
report despite the UK government
suspending reporting requirements for this
year due to Covid-19. Our mean group-
wide gender pay gap was 39.3% at 5 April
2019, 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 only 1.4%.
Our focus on closing the gender pay
gap is through increasing female
representation in the group at all levels
by setting representation targets and
development programmes.
Further details of our gender pay gap can
be found on our website.
We are also signatories of the Women in
Finance Charter, as part of which we have
appointed the chief executive of
Winterflood as the executive sponsor for
gender balance across the group. We set
a target of 30% of senior manager roles
being held by a female by 31 July 2020,
and as of 31 July 2020 we are pleased to
have exceeded that target by reaching a
level of 33%. We have since determined a
new, more ambitious target of 36% for
2025, and we will continue to update on
our progress against this. Delivery against
our gender balance targets is one of the
objectives in our Long-Term Incentive Plan
for senior management.
At the end of the financial year we had met
the government’s target for 33% of board
members to be women, and remain
broadly in line with Hampton-Alexander
gender targets for executives and their
direct reports.
Another part of our commitment to the
charter is to support the career
progression of women, which we do by
offering a range of development and
mentoring programmes designed to foster
and enable talented females to thrive and
accelerate their careers through personal
development, career structuring and
networking. Our partnerships focused on
developing diverse pools of talent and
promoting better gender balance continue
to include the 30% Club, and we
participate in their leading cross-company
mentoring scheme. Additionally, we aim
for all our entry-level and formal training
programmes to achieve a 50:50 gender
split. This includes our Asset Finance
Sales Academy and our Aspire school
leaver and graduate programmes.
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.
Developing our people
We continue to offer a comprehensive
range of programmes and initiatives that
promote the training and development of
our employees. All our staff have access
to our learning portal, offering them a wide
variety 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
9.2 hours per employee during the year.
We require all staff to complete relevant
regulatory training on an annual basis with
further training offered when required, and
this year again maintained a 100%
completion rate of mandatory training by
eligible employees.
We run several tailored junior training
programmes across the business which
are aimed at growing high potential
individuals to progress into senior roles.
The programmes are made up of personal
development modules, on-the-job
structured training and mentoring. We also
aim to have a strong gender balance on all
our programmes with our most recent
cohorts made up of 55% females.
Over 130 individuals have participated in
our Emerging Leaders programme to
date, which provides individual leadership
development, management and coaching.
The programme is now into its seventh
cohort, broadening our pool of future
leaders, with the majority progressing
through the organisation on completion.
In 2019 we launched our new Accelerated
Commercial Experience programme for
graduates with two to three years of
experience, helping them develop the skills
to transition into management roles within
the group. Our 2020 cohort consists of
both internal and external candidates.
Supporting our people
The safety and wellbeing of our colleagues
is of paramount importance to us, and we
have taken all steps necessary to ensure
that they can conduct their roles safely
and with minimal disruption during the
Covid-19 crisis. Our supportive flexible
working arrangements, combined with
robust systems and technology, have
enabled the vast majority of our staff to
work successfully from home, and the
measures we have undertaken ensured
that none of our employees were
furloughed during the year.
We promote flexible working wherever
possible across the group and provide a
variety of benefits for our colleagues to
utilise, including enhanced parental leave
and emergency backup care for families.
Our group-wide Working Parents and
Carers Working Group, sponsored by our
General Counsel, collaborate on initiatives
to ensure that our colleagues who balance
family and caring responsibilities with
working life feel supported and are aware of
the resources and tools available to them.
Our Mental Wellbeing Working Group is
sponsored by the chief executive of Close
Brothers Asset Management. We have
over 50 trained Mental Health First Aiders
across our business as well as an
employee assistance programme which
provides employees with confidential
support from a trained professional.
We track and monitor our culture and
employee wellbeing through our pulse
survey and this year we reported over
90% of our employees who participated
felt that they could be themselves at work
and that their colleagues act with integrity.
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Close Brothers Group plcAnnual Report 2020Financial StatementsGovernance ReportStrategic Report
28
Employee engagement
86%
2019: 88%
Retail savings NPS
+722019: +73
Property repeat business
76%
2019: 78%
Total emissions reduction
(20)%
2019: (12)%
It is important to us that we reward our
staff fairly and openly, and we therefore
strive to ensure that clear and transparent
objectives link directly to remuneration
across the group. We are confident that
our enhanced benefit package remains fit
for purpose and satisfies the expectations
of our employees. The group continues to
pay all staff at or above the national living
wage, which is in excess of the national
minimum wage.
We offer both a Save As You Earn scheme
as well as a Buy As You Earn share incentive
plan, which allows employees to acquire
shares on a monthly basis out of pre-tax
earnings. Both offerings remain popular with
our staff, and participation rates in our
long-term ownership schemes remain
strong at 49% of eligible employees.
The group continues to contribute 6% to
its pension auto-enrolment, which is more
than requirements. This ensures a
minimum of 9% in total, without requiring
our employees to contribute any more
than their existing level of 3%.
Helping our Customers Thrive
Our purpose of helping the people and
businesses of Britain thrive over the long
term has seen us build long-lasting
relationships with our customers, clients
and partners that stand the test of time. It
ensures that we have supported our
customers through a wide range of
circumstances, and during this year of
unprecedented times, we have again
been there to provide support,
understanding, flexibility and importantly,
to help drive forward their recovery.
Our purpose underlines the commitment
we have towards our customers, partners
and clients, which is underpinned by a set
of group-wide “Customer Principles” that
guide how we deliver and measure
customer and partner experiences. This
year, we have refreshed our customer
principles to more clearly articulate the
experience we strive to deliver:
• We do the right thing for customers,
clients and partners
• We are flexible, responsive and
execute with speed
• We make decisions informed by
our specialist expertise
• We build relationships based on
quality and trust
To ensure the effective delivery of our
customer principles, we have designed a
new measurement framework this year
that builds on the good progress we have
made to date through our “Voice of the
Customer and Partner” programme. This
ensures we remain constantly aware of
the needs of our customers and partners
in an ever-evolving landscape.
Customer satisfaction
The focus we place upon delivering for our
customers and partners is reflected in the
consistently strong customer experience
scores we achieve on a regular basis
across our businesses.
We continue to achieve strong net
promoter scores (“NPS”) across our
businesses, and these evidence the
strength of our relationships and the faith
our customers place in us. This year we
were pleased to achieve a strong +56 NPS
from our Premium Finance customers,
while our Motor Finance customers rated
us very highly with a +77 NPS. Our retail
savings also achieved a strong +72 NPS
from our customers, while repeat business
remained high at 76% in Property and 59%
in Asset Finance.
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Close Brothers Group plcAnnual Report 2020Sustainability Report continued 29
We pride ourselves on maintaining
longstanding, personal relationships with
our customers, clients and partners, and
the value they place on the expertise and
service levels that we provide. By
recognising that customers also want the
choice of how to engage with us and their
need for a simple, consistent and
accessible experience, we strive to
integrate digital services alongside our
human touch, presenting a unique and
adaptable customer offering.
Resilient customer service
We have maintained a focus on continually
transforming our businesses to serve the
needs of our customers and partners over
many years, and ensuring the resilience
and operational efficiency of our services
has been essential to our approach.
We have a dedicated Customer Insight,
Experience and Design team that helps
our businesses improve experiences, whilst
also optimising efficiency to ensure we
remain fast and responsive. The team
combines capabilities from digital, data
science, automation, design, analytics and
operational excellence. Examples include:
• A commitment to innovation, new
technologies and new ways of working,
demonstrated through a “Design-
thinking” programme with our Property
Finance business to better service the
“Next Generation Property Developer”,
and our continuing investment in
technology to nurture new and sustain
our long-term relationships
• A desire to augment the personal,
human touch that Close Brothers is
respected for with easy-to-use digital
channels, such as the online banking
service launched for our Savings
customers as well as the transformation
of seven websites across the group to
provide an easier way for customers to
engage with us
• A drive to put data insights at the heart
of customer decision-making across
the group, such as leveraging our
investment in SalesForce to put
customer insights into the hands of our
sales teams in Asset Finance
• Streamlining and automating processes
to deliver on our principle of being fast
and responsive. This proved critical
during Covid-19, ensuring customers
got support when they needed it
through the most appropriate channel
for them.
• Providing value-added services for our
partners, by allowing them to leverage
the expertise of our people in the areas
of data science and digital
• The transformation of our customer
complaints system, undertaken during
the last financial year, has allowed us to
better meet the concerns of our
customers and make improvements to
our processes and customer journeys
based on their feedback, resulting in a
32% reduction in complaints and an
18% reduction in referrals to the
Financial Ombudsman Service.
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.
Fundamental to ensuring we treat
customers fairly and deliver on our
promises are our customer forums, which
we conduct across the Banking division
and at business unit level and have now
been in place for over six years. These
forums allow us to examine feedback from
our customers and partners and
determine the best course of action to
take, while also inspiring possibilities for
improved service and value for our
customers and partners.
Senior management regularly engage with
our customers and partners to obtain direct
feedback, which we also gather by inviting
our customers to present at our customer
forums. 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. 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.
Engaging our Suppliers
We engage with our largest suppliers on a
regular basis to ensure that both parties
are attaining optimum value from the
relationship. Our annual survey of key
suppliers who represent our most critical
and strategic services was last conducted
in December 2019 and remains
anonymous to ensure we gather honest
and candid feedback.
The 2019 survey focused upon how Close
Brothers performs as a client, and how
our suppliers feel about doing business
with us. Results saw a positive increase
throughout, demonstrating that our
suppliers are noticing the enhancements
we are making, the transparency and
fairness of our business dealings, and the
benefits of our third party management
framework and operating model.
Feedback indicates that our suppliers
benefit from our frequent contact and
reviews of service, with 80% of
respondents rating our approach to
supplier management as good or excellent.
83% of suppliers feel positive about how
we treat them as valued partners and rate
this as good or excellent.
Our supplier relationships remain mainly
long term, with over 60% spanning
five years or more, and survey responses
suggest that they are increasingly viewed
by our suppliers as strategic and
collaborative partnerships. We continue to
share a strategic vision with our suppliers
to help them understand our direction and
give greater clarity on our structure.
In the last financial year, we also
introduced a survey of sustainability
matters covering suppliers’ environmental
and social governance, to help better
inform our views of the progress each
party is making towards improvements.
A number of our contracts contain clauses
measured against environmental key
performance indicators, which include:
• Annual electricity, gas, water and
waste statistics and audited energy
meter readings
• On target carbon reduction objectives
and waste management action plans
• Obtaining agreed energy and water
reduction targets
• Environmental training for all personnel
operating on the contract
• The use of materials and practices that
conform to Close Brothers’ Environmental
Policy where reasonably practicable
We recognise that our suppliers form a
key part of the service we provide and are
committed to treating them fairly. We are
therefore pleased to have maintained our
Corporate Certification for Ethical
Procurement from the Chartered Institute
of Procurement and Supply (“CIPS”).
A Lasting, Positive Impact on Society
Creating long-term value and a lasting,
positive impact in the communities where
we operate remains a key priority for the
group. As a business whose purpose is to
help the people and businesses of Britain
thrive over the long term, a close
relationship and engagement with local
communities is integral to how we operate
and conduct business. We place a great
deal of value on how we can make a
positive contribution to society, and
maintain a growing range of programmes
and initiatives to support the causes that
benefit those around us.
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Close Brothers Group plcAnnual Report 2020Financial StatementsGovernance ReportStrategic Report 30
Supporting SMEs
We believe that the SME sector is the
lifeblood of the UK economy, and take
great pride in understanding the needs of
SMEs and on helping them to achieve
their ambitions. By helping SMEs thrive in
local communities across the UK we
support the creation of jobs and
opportunities to regions that may be
overlooked by larger finance providers.
We rely upon our specialist expertise and
deep industry knowledge to better
understand the small businesses we work
with and support their commercial plans.
By recognising the unique and individual
needs of our customers and their
communities our local teams can make
fast, reliable lending decisions for when
they need them the most.
The Close Brothers SME Apprentice
Programme is representative of our
longstanding commitment to supporting
SMEs and their local communities, and is
now in its fifth phase. The programme
continues to contribute to the funding of
new apprentices in the manufacturing and
transport sectors, and to date we have
funded over 100 of these apprentices
around the Midlands, helping local SMEs to
secure the skills they need for the future.
Supporting social mobility
We are proud to be an organisation
that supports social mobility and
creates equal opportunities for all,
regardless of background.
We remain signatories of the Social
Mobility Pledge, a campaign to improve
social mobility in the UK. By signing up
we have committed to working towards
partnerships 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.
Consistent with these commitments, we
continue to work with the charity UpReach
on our internship programme for
undergraduates from less-advantaged
backgrounds. A number of interns from
our 2019 intake have gone on to secure
full time roles with the group, and we are
exploring remote opportunities such as
virtual work experience and mentoring
programmes during the current year.
Our established programmes for school
leavers and graduates contribute to the
development of up-and-coming talent,
providing on-the-job learning and
supporting professional studies. Our Aspire
programme, for those not going to
university, gives participants the
opportunity to rotate between and gain
experience of different business lines, while
we support them through professional
qualifications. It also provides an alternative
talent pipeline for our businesses to take on
entry level positions.
Our employees in the community
We actively encourage our staff to fundraise
and volunteer for the causes that matter to
them, and recognise that employee
volunteers are the driving force behind the
successful planning and running of our
community and charitable events.
Our Matched Giving Scheme donates £8
per hour of voluntary time given by our
employees, and we actively encourage
our people to make use of 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. Since inception over 1,500
individuals have participated, and over
190 professionals have been appointed to
trustee board positions.
Charitable activities
Within our regular employee opinion
surveys we ask our employees to choose
their preferred community and health
charity partners. Currently, these are
Make-A-Wish Foundation, who grant
wishes for children with life-threatening
illnesses, and Cancer Research UK, the
latter now for eight consecutive years.
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Close Brothers Group plcAnnual Report 2020Sustainability Report continued 31
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.
The Close Brothers Matched Giving
Scheme matches 50% of funds that our
employees raise for charities. We also
encourage our employees to collaborate
on raising money for causes meaningful to
them by matching funds raised by local,
organised fundraising events and activities.
In addition, our Payroll Giving scheme also
matches charitable contributions while
allowing employee donations to be made
directly from pre-tax salary. Approximately
14% of employees across the group are
signed up to Payroll Giving as at 31 July
2020, achieving us a tenth consecutive year
of the Payroll Giving Quality Mark Gold
Award, and ensuring that we have achieved
our target of maintaining this standard.
This year, the group also decided to make a
£1 million donation to NHS Charities
Together, in recognition of the vital role that
NHS frontline and support staff have in
combating Covid-19, and to match fund
donations from employees to this charity.
Additionally, the executive directors, together
with a number of non-executive members of
the board and members of the group
executive committee, made the personal
decision to donate an element of their salary
or fee to NHS Charities Together.
Our Responsibility Towards the
Environment
We take our responsibility towards the
environment very seriously and recognise
the important part Close Brothers has to
play in supporting the transition to a
carbon neutral economy. Our efforts to
reduce the impact of our operations on
the environment continue at pace, and we
strive to take actions that make a positive
contribution to the world around us.
As a financial services organisation that
appreciates the challenge of climate
change, we recognise the importance of
considering the risks that it poses to our
operations and the way in which climate
change impacts our business model.
Careful consideration of environmental
factors and potential risks now plays an
integral role in the actions we take,
alongside thoughtful evaluation of where
opportunities may arise for Close Brothers
to make a meaningful difference through
our business decisions.
GHG Emissions and Energy Use Summary
Scope
Scope 1 (tCO2e)
Scope 2 (tCO2e)
Scope 3 (tCO2e)
Total location based GHG
emissions (tCO2e)
Average number of employees
Total per employee (tCO2e)
Total market based GHG
emissions (tCO2e)
Total energy use (kWh)2
FY20 geographic breakdown
Total GHG emissions (tCO2e)
Total energy use (kWh)
GHG emissions source
Fuel (Buildings)
Fuel (Owned vehicles)
Electricity
Employee vehicles
Electricity transmission
and distribution
2020
711
1,069
1,633
140
20191
337
1,970
2,107
45
141
179
3,694
3,521
1.05
3,125
17,223,864
4,638
3,416
1.36
4,638
n/a
UK
3,627
16,961,329
Overseas
67
262,535
1 Figures for the 2019 financial year have been restated to include Scope 3 employee vehicles and electricity
transmission and distribution emissions in accordance with SECR reporting requirements
2 Total energy use reported for the 2020 financial year as required under SECR disclosures, but comparative data
not collected for the 2019 financial year
As part of this increasing area of focus we
are taking steps to consider our approach
for aligning with the Taskforce for Climate
Related Financial Disclosures (“TCFD”),
and you can read more about the
development of our framework to achieve
this on page 58.
For a number of years, we have been a
leading provider of finance for the green
energy and renewables sector, supporting
schemes for wind, solar and hydro power
developments, which remains a key
contributor to our Asset Finance business.
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. Our exposure to high carbon
intensive industries such as oil and gas
production is negligible, with minimal
lending activity to these sectors, which
often fall outside of our risk and return
lending criteria.
GHG emissions and energy usage
We continue to work with independent
third party analytics and reporting
consultants to support the gathering of
our environmental data and compiling of
greenhouse gas (“GHG”) emissions. This
enables us to verify the accuracy of our
data and helps us monitor our
performance and develop strategic
insights with plans of action. This year we
have upgraded our energy and carbon
reporting to meet the requirements of the
Streamlined Energy and Carbon
Reporting (“SECR”) standards and
increase the transparency with which we
communicate about our environmental
impact to our stakeholders.
Our methodology for calculating and
disclosing our GHG emissions and energy
use is in accordance with the
requirements of the World Resources
Institute GHG Protocol Corporate
Standard and the SECR standards. We
report on all material Scope 1 and 2
emissions associated with our operations.
Scope 1 includes fuel emissions from
buildings and company vehicles and
Scope 2 includes our emissions from
electricity, while our reported Scope 3
emissions are those related to employee
vehicles and electricity transmission and
distribution.
In 2020, our total location based GHG
emissions were 3,694 tonnes of carbon
dioxide equivalent (“tCO2e”), equating to
1.05 tCO2e per employee, down 20%
overall and 23% per employee since 2019.
Since January 2020 a number of key sites
are now powered by 100% renewable
electricity sources, which has resulted in a
marked reduction in our GHG emissions
under a market based approach of 33%
to 3,125 tCO2e. Emissions in the year also
benefited from significantly lower usage
following the UK lockdown measures in
response to Covid-19, resulting in the
temporary closure of offices and reduced
staff travel.
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
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Close Brothers Group plcAnnual Report 2020Financial StatementsGovernance ReportStrategic Report
32
emissions from our vehicles to 76.6 gCO2/
km (2019: 89.5 gCO2/km). This reflects a
continuation of our significant and
sustained improvement over several years
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.
Due to its relative size, the Banking
division continues to account for the
majority of our GHG emissions. A full
breakdown of our 2020 GHG emissions
and energy use, together with
corresponding data for 2019, is shown in
the table above.
Our actions and progress to improve
We continue to pursue a range of
initiatives and programmes of
improvement to lower our emissions,
reduce our energy use and enhance the
energy efficiency of our offices. This year
our achievements included:
• Moving key sites including our head
office to electricity supplies from 100%
renewable sources
• Additional energy efficient, plug in
hybrid and electric vehicles in our
company car fleet, helped lower our
average vehicle CO2 emissions by 15%
year-on-year
• Installation of more energy efficient
water-cooling systems in our head
office, reducing our electricity
consumption by 10%
We have also undertaken a series of
adjustments to our offices’ fit out such as
energy efficient lighting, installation of smart
meters and reduced water usage. The
consolidation of our London property
footprint and head office refurbishment has
enabled us to significantly improve our
energy use, while adjustments following the
impact of Covid-19 have allowed us to
explore the environmental benefits of more
flexible working, reduced commuting and
optimising our office space. Most of the
impact we have on our environment is a
result of staff travel, our supply chain and
our office network, and 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.
Our successes in reducing fleet vehicle
emissions continue to reach new
milestones, with over 50% of our vehicles
now being plug in hybrids or electric. We
continue to drive towards the use of more
efficient and electric vehicles by offering
an increasing range of these options
across the fleet, and incentivise our staff
to return older and more polluting vehicles
free of charge in exchange for an electric
alternative. From August 2020 we will have
removed all pure petrol and diesel vehicle
options from our company car fleet, with
our range of hybrids and fully electric
vehicles being the only choice available to
employees.
Waste recycling is encouraged in all our
offices, and we are pleased that 100% of
the waste contractors we use across our
offices now send zero waste to landfill,
achieving a target we set ourselves by
2021 ahead of schedule. We also remain
well ahead of our fleet vehicle emissions
target, having lowered our associated
emissions by 46% since the start of the
2020 financial year, benefiting from both
our increased range of hybrid and electric
vehicles, as well as the reduction in staff
travel due to the UK lockdown.
We continue to extend our ambitions and
focus our efforts through increasingly
stretching targets, and this year have
committed to reducing our group-wide
emissions by 10% by 31 July 2021,
benchmarked against the 2019 financial
year. We also recognise the positive impact
we can make through our ongoing efforts to
move towards using more energy efficient
vehicles, and have therefore set ourselves a
more ambitious target of reducing our
average fleet vehicle CO2 emissions by a
further 10% on this year's levels by 31 July
2021.
This year, we have extended the
assessment of our environmental impact
by engaging with our supply chain, and
continue to work with third party suppliers
who share our goal of efficiently using
resources and combatting the adverse
effects of climate change. We are
committed to collecting emissions data
from our suppliers and are exploring the
means to incorporate carbon impact
criteria into our choice of suppliers.
Our internal Environmental Policy outlines
our continued efforts towards
environmental sustainability, and includes:
• 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;
• continuing to monitor and report on our
environmental footprint both internally
and externally;
• reducing 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;
• minimising unnecessary consumption,
improving rates of recycling and
promoting 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
• raising awareness of environmental
issues and promoting 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.
As in prior years, we 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.
Calculation
Our total GHG emissions are reported as
tCO2e, with our energy use reported in
kWh, and are calculated in line with the
GHG Protocol framework and SECR
requirements. In addition to reporting our
total Scope 1 and 2 emissions, we also
disclose a number of Scope 3 emissions
and emissions per employee as an
intensity metric to enable a comparable
analysis in future disclosures. Our GHG
emissions and energy use reported here
cover the Close Brothers group as a
whole including all of its applicable
subsidiaries under SECR.
We continue to monitor and report our
GHG emissions and energy usage on an
ongoing basis and increasingly gather
Scope 3 emissions data for our offices,
including water and waste where this
information is available, to facilitate and
encourage continued performance
monitoring and improvements.
GHG Emissions by Division (tCO2e)1
2,146
2,471
Banking
Asset
Management
Securities
Group
664
842
438
598
446
727
2020
2019
1 Divisional figures for the 2019 financial year have
been re-stated to include Scope 3 employee
vehicles and electricity transmission and
distribution under SECR disclosures.
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Close Brothers Group plcAnnual Report 2020Sustainability Report continued 33
• minimising unnecessary consumption,
improving rates of recycling and
promoting 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
• raising awareness of environmental
issues and promoting 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.
As in prior years, we 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.
Calculation
Our total GHG emissions are reported as
tCO2e, with our energy use reported in
kWh, and are calculated in line with the
GHG Protocol framework and SECR
requirements. In addition to reporting our
total Scope 1 and 2 emissions, we also
disclose a number of Scope 3 emissions
and emissions per employee as an
intensity metric to enable a comparable
analysis in future disclosures. Our GHG
emissions and energy use reported here
cover the Close Brothers group as a
whole including all of its applicable
subsidiaries under SECR.
We continue to monitor and report our
GHG emissions and energy usage on an
ongoing basis and increasingly gather
Scope 3 emissions data for our offices,
including water and waste where this
information is available, to facilitate and
encourage continued performance
monitoring and improvements.
GHG Emissions by Division (tCO2e)1
Banking
Asset
Management
Securities
Group
664
842
438
598
446
727
2020
2019
1 Divisional figures for the 2019 financial year have
been re-stated to include Scope 3 employee
vehicles and electricity transmission and
distribution under SECR disclosures.
2,146
2,471
Our Policies
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:
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.
We are committed to carrying out business
fairly, honestly and openly, operating a
zero-tolerance approach to bribery and
corruption. We are dedicated to ensuring
full compliance with all applicable anti-
bribery and corruption laws and regulations,
including the UK Bribery Act 2010.
Dignity at Work Policy
Our Dignity at Work Policy outlines the type
of behaviour that the company considers to
be unacceptable and explains what
solutions there are if any employee has
experienced or believes someone else has
experienced any discrimination,
harassment or bullying at work.
We ensure equal opportunities for all,
including having a commitment as part of
our Dignity at Work Policy to ensure no
employee is subject to discrimination. This
applies to all work contexts, as well as all
employee lifecycle events, for example in
recruitment, training, promotion and
flexible working requests.
As part of our Dignity at Work Policy, our
colleagues with disabilities are
encouraged to share their condition with
us, to ensure any reasonable adjustments
can be made. We are also members of
the business disability forum to support
the hiring, retention and career
development of employees with
disabilities.
Whistleblowing Policy
We provide a simple, transparent and
secure environment for our employees,
shareholders and other stakeholders to
raise concerns about any potential
wrongdoing within the company.
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
Whistleblowing Policy.
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 79 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.
Privacy Policy
Our Privacy Policy codifies our approach
to protecting personal information, in line
with the General Data Protection
Regulation and UK Data Protection Act
2018. It sets out our core principles for
what personal information we collect and
process, and the controls to which the
data is subject through its life-cycle.
We have a nominated Data Protection
Officer who is accountable for the firm's
approach to privacy management, a Chief
Information Security Officer accountable
for our approach to cyber security, and a
broader operating model in which the
privacy and security requirements are
embedded in operations throughout the
organisation.
Financial Crime Policy
Our policies and standards are intended
to prevent the group, employees, clients
and any other associations or
representatives from being used for the
purposes of financial crime, including but
not limited to money laundering, terrorist
financing, facilitation of tax evasion and
circumvention of financial sanctions.
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 enable compliance
across the organisation.
The Banking division has also committed
to the CIPS Ethical Code of Conduct,
which supports our commitment to
preventing modern slavery from existing
within our supply chain. Further details of
our compliance with the Modern Slavery
Act can be found on our group 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.
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Close Brothers Group plcAnnual Report 2020Financial StatementsGovernance ReportStrategic Report 34
Financial Overview
Close Brothers delivered a resilient performance in an
unprecedented, challenging environment while continuing to
support customers, clients and colleagues.
Group Income Statement
Continuing operations
Adjusted operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profi t
Banking
Commercial
Retail
Property
Asset Management
Winterflood
Group
Amortisation of intangible assets on acquisition
Operating profi t before tax
Tax
Profi t after tax: continuing operations
Profit from discontinued operations, net of tax
Loss attributable to non-controlling interests
Profi t 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
Return on average tangible equity
2020
£ million
2019
£ million
Change
%
866.1
(538.4)
(183.7)
144.0
99.2
4.8
34.9
59.5
20.4
47.9
(23.5)
(3.1)
140.9
(31.4)
109.5
–
–
816.4
(497.4)
(48.5)
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)
109.5
201.6
74.5p
136.7p
72.8p
133.5p
72.8p
40.0p
8.0%
9.4%
134.2p
66.0p
15.7%
17.9%
6
8
279
(47)
(61)
(94)
(52)
(37)
(6)
140
(6)
(47)
(47)
(51)
(45)
(100)
(100)
(46)
(46)
(45)
(46)
(39)
The group’s performance in 2020 was
significantly impacted by the Covid-19
outbreak and the impact of lockdown
restrictions on the UK economy.
Nevertheless, the group delivered a
resilient performance, reflecting the
disciplined application of our model while
continuing to support customers, clients
and colleagues.
Operating Profi t and Returns
Adjusted operating profit decreased 47%
to £144.0 million (2019: £270.5 million),
reflecting higher impairment charges in
the Banking division, partly offset by a
very strong trading performance in
Winterflood, which benefited from
significantly higher volumes since the
Covid-19 outbreak. Statutory operating
profit before tax from continuing
operations decreased 47% to £140.9
million (2019: £264.7 million) and the
operating margin reduced to 17% (2019:
33%). The group delivered a solid return
on opening equity of 8.0% (2019: 15.7%)
despite the reduction in adjusted
operating profit and continued growth in
the equity base. Return on average
tangible equity was 9.4% (2019: 17.9%).
Adjusted operating profit in the Banking
division decreased 61% to £99.2 million
(2019: £253.7 million) primarily due to the
forward-looking recognition of impairment
charges under IFRS 9 to incorporate the
impact of Covid-19. The Asset
Return on opening equity
8.0%
2019: 15.7%
Adjusted operating profi t
£144.0m
2019: £270.5m
Adjusted basic EPS
74.5p
2019: 136.7p
Management division continued to achieve
strong net inflows, although adjusted
operating profit of £20.4 million (2019:
£21.8 million) was down 6% due to
continued investment to support the
long-term growth potential of the business,
which more than offset the income growth
on the prior year. Winterflood delivered a
very strong performance, with operating
profit of £47.9 million (2019: £20.0 million),
up 140%. Group net expenses, which
include the central functions such as
finance, legal and compliance, risk and
human resources, were down 6% at £23.5
million (2019: £25.0 million) primarily due to
lower variable staff costs.
Operating Income
Adjusted operating income increased 6%
to £866.1 million (2019: £816.4 million), as
strong trading income growth in
Winterflood and higher income in the Asset
Management division were partially offset
by reduced income in the Banking division.
Income in the Banking division decreased
by 3%, reflecting lower customer activity
levels and forbearance measures, with a
reduced net interest margin of 7.5% (2019:
7.9%). Income in the Asset Management
division was up 6%, reflecting higher client
assets. Income in Winterflood increased by
63% as a result of significantly higher
volumes since the Covid-19 outbreak
and very strong trading profitability.
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Close Brothers Group plcAnnual Report 2020 35
Operating Expenses
Adjusted operating expenses increased
8% to £538.4 million (2019: £497.4 million)
with most of the increase in Winterflood
(up 41%), reflecting higher variable costs.
Costs also increased in the Asset
Management division (up 9%), driven by
continued hiring of high net worth portfolio
managers and investment in technology.
In the Banking division, costs increased
marginally (up 1%) driven by continued
investment in key strategic programmes,
partially offset by lower variable
compensation. Overall, the group’s
expense/income ratio was marginally
higher at 62% (2019: 61%) and the
group’s compensation ratio increased
slightly to 37% (2019: 36%).
Impairment charges and
IFRS 9 provisioning
We recognised £183.7 million of
impairment charges (2019: £48.5 million)
with a bad debt ratio of 2.3% (2019: 0.6%),
primarily reflecting the impact of Covid-19
on the forward-looking recognition of
impairment charges under IFRS 9. Our
approach to provisioning reflects the
application of our models overlaid with
expert judgement to determine the
appropriate allocation of loan book
balances between stages, to
macroeconomic scenario weightings, and
to provision coverage at the individual
portfolio level.
Specifically, the increase in impairment
provisions reflected the migration of loans
between stages, including to reflect the
increase in forborne loan balances; the
incorporation of more severe
macroeconomic scenarios, with increased
weighting to the downside; as well as a
review of provision coverage for individual
loans and portfolios.
This resulted in an increase in the coverage
ratio to 3.0% at 31 July 2020 (31 July 2019:
1.3%). We believe this represents an
appropriate level of provision at the balance
sheet date and remain confident in the
quality of our loan book, which is
predominantly secured, prudently
underwritten and diverse, and supported
by the deep expertise of our people.
Tax Expense
The tax expense in the year was £31.4
million (2019: £64.4 million), which
corresponds to an effective tax rate of
22% (2019: 24%). The decrease
primarily reflects an increase in deferred
tax assets following the reversal of the
previously announced reduction in
corporation tax rate.
Earnings per Share
Adjusted basic earnings per share (“EPS”)
from continuing operations decreased 46%
to 74.5p (2019: 136.7p) and basic EPS from
continuing operations decreased 45% to
72.8p (2019: 133.5p).
Discontinued Operations
There were no discontinued operations in
the 2020 financial year. Discontinued
operations in the comparative year reflect
the unsecured retail point of sale finance
business sold on 1 January 2019. The
profit from discontinued operations in 2019
was £1.1 million and included a £2.7 million
profit on disposal net of tax. Basic EPS
from continuing and discontinued
operations was 72.8p (2019: 134.2p),
down 46% on the prior year.
Dividend
Following a resilient financial and
operational performance in the second
half, the board is proposing a dividend of
40.0p per share (2019: 66.0p per share) in
respect of the full financial year. This
reflects the board’s confidence in the
group’s business model and strong
financial position, notwithstanding the
current uncertain environment. Subject to
approval at the Annual General Meeting,
the final dividend will be paid on
24 November 2020 to shareholders on the
register at 16 October 2020.
Balance Sheet
The group entered this period of economic
uncertainty with a strong balance sheet and
has focused on maintaining its prudent
approach to managing financial resources.
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 assets.
Other items on the balance sheet include
treasury assets held for liquidity purposes,
and settlement balances in the 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.
While the loan book was broadly flat in the
year, total assets increased 5% to £11.1
billion (31 July 2019: £10.6 billion). This
primarily reflects an increase in treasury
assets as the group increased its liquidity
holdings in response to Covid-19. Total
liabilities were up 5% to £9.6 billion
(31 July 2019: £9.2 billion) driven by an
uplift in customer deposits. Other assets
and other liabilities both increased as a
result of IFRS 16 accounting adjustments.
Shareholders’ equity of £1.5 billion (31 July
2019: £1.4 billion) continued to build, with
profit in the year partially offset by dividend
payments of £65.8 million (2019: £95.5
million). The group’s return on assets
reduced to 1.0%, reflecting lower
profitability in the year (2019: 1.9%).
Group Balance Sheet
Loans and advances to customers
Treasury assets1
Market-making assets2
Other assets
Total assets
Deposits by customers
Borrowings
Market-making liabilities2
Other liabilities
Total liabilities
Equity
Total liabilities and equity
31 July
2020
£ million
7,616.7
1,733.9
719.1
1,001.8
31 July
2019
£ million
7,649.6
1,395.4
666.1
850.2
11,071.5
10,561.3
5,917.7
2,591.2
622.8
490.2
5,638.4
2,601.0
582.4
333.1
9,621.9
9,154.9
1,449.6
1,406.4
11,071.5
10,561.3
1 Treasury assets comprise cash and balances at central banks, and debt securities held to support lending in
the Banking division.
2 Market-making assets and liabilities comprise settlement balances, long and short trading positions and
loans to or from money brokers.
933175.indb 35
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 36
Financial Overview continued
Group Capital
Common equity tier 1 capital
Total capital
Risk weighted assets
Common equity tier 1 capital ratio
Total capital ratio
Leverage ratio
31 July
2020
£ million
1,254.0
1,441.0
8,863.2
14.1%
16.3%
11.2%
31 July
2019
£ million
1,169.2
1,364.6
8,967.4
13.0%
15.2%
11.0%
Capital
The prudent management of our capital is
a core part of our business model and has
been a key focus since the Covid-19
outbreak to ensure the group can
continue to support customers, clients
and colleagues during these
unprecedented times.
Our common equity tier 1 capital (“CET1”)
ratio increased to 14.1% (31 July 2019:
13.0%), primarily due to retained profit
with the impact of higher impairment
charges largely offset by the capital
add-back under transitional IFRS 9
arrangements. The total capital ratio
increased to 16.3% (31 July 2019: 15.2%).
The group applies IFRS 9 regulatory
transitional arrangements which allows
banks to add back to their capital base a
proportion of the IFRS 9 impairment
charges during the transitional period. Our
capital ratios are presented on a transitional
basis after the application of these
arrangements and the Capital Requirements
Regulations qualifying own funds
arrangements. Without their application, the
CET1 and total capital ratios would be
13.1% and 15.1%, respectively.
CET1 capital increased 7% to £1,254.0
million (31 July 2019: £1,169.2 million)
reflecting resilient capital generation
through £109.5 million of profit in the year
and the transitional IFRS 9 capital
add-back of £55.7 million, partially offset
by the regulatory deduction of dividends
paid and foreseen of £59.9 million and an
increase in intangibles of £20.8 million.
Risk weighted assets (“RWAs”) remained
broadly flat at £8.9 billion (31 July 2019:
£9.0 billion) driven by lower credit risk
RWAs partly offset by an increase in
operational risk RWAs. The decrease in
loan book RWAs includes the
implementation of the revised SME
supporting factor which was accelerated
as part of regulatory measures
announced in light of Covid-19.
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 2020 and 2019. Our capital
ratios remain significantly ahead of
minimum regulatory requirements, leaving
us well placed to continue to help our
customers and clients beyond the crisis
and in a position of strength to respond to
opportunities ahead once restrictions
begin to ease.
Our minimum CET1 capital ratio
requirement is 8.0%, including the
applicable buffers and a 1.0% pillar 2
add-on, with a total capital requirement of
12.3%. Accordingly, we continue to have
significant headroom of over 600bps in
our CET1 capital ratio, and 400bps in the
total capital ratio.
The leverage ratio, which is a transparent
measure of capital strength, not affected
by risk weightings, increased in the year
and remains strong at 11.2% (31 July
2019: 11.0%).
We have continued to make good
progress on our preparations for a
transition to the Internal Ratings Based
(“IRB”) approach, despite the operational
challenges posed by Covid-19. Our initial
IRB model suite is now complete, and we
are currently on track to submit our formal
application to the Prudential Regulation
Authority by the end of the current
calendar year.
Funding
The primary purpose of our treasury
function is to manage funding and liquidity
to support the lending businesses and
manage interest rate risk. Our
conservative approach to funding is based
on the principle of “borrow long, lend
short”, with a spread of maturities over the
medium and longer term, comfortably
ahead of a shorter average loan book
maturity. It is also diverse, drawing on a
wide range of wholesale and deposit
markets including several public debt
securities at both group and operating
company level as well as a number of
securitisation facilities.
We entered this challenging period in a
strong position and further increased our
total funding in the second half of the year
to £10.2 billion (31 July 2019: £9.9 billion)
which accounted for 135% (31 July 2019:
129%) of the loan book at the balance
sheet date. Our average cost of funding of
1.7% was broadly stable on the prior year
(2019: 1.7%).
933175.indb 36
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Close Brothers Group plcAnnual Report 2020 37
Our customer deposit platform, launched
in 2019, has allowed us to offer a wider
range of deposit products to further
diversify our funding and improve
customer experience. In the first half we
introduced a new online portal, with a
number of new savings products to come
during the 2021 financial year, including
cash Individual Savings Accounts (“ISA”)
products, which will continue to grow and
diversify our retail deposit base and further
optimise our cost of funding and maturity
profile. Deposits increased 5% overall to
£5.9 billion (31 July 2019: £5.6 billion) with
non-retail deposits decreasing slightly to
£3.3 billion (31 July 2019: £3.5 billion) and
retail deposits increasing by 22% to £2.6
billion (31 July 2019: £2.1 billion).
Our range of secured funding facilities
include securitisations of our Premium and
Motor Finance loan books, and during the
year we raised £200 million via a third
public Motor Finance securitisation.
Following admission to the Bank of
England’s Term Funding Scheme with
additional incentives for SMEs (“TFSME”),
we transitioned £228 million of drawings
previously under the Term Funding
Scheme to TFSME at the end of July
2020.
Unsecured funding, which includes senior
unsecured bonds and undrawn facilities,
remained broadly unchanged at £1.5 billion
(31 July 2019: £1.5 billion).
We have maintained a prudent maturity
profile. The average maturity of funding
allocated to the loan book remained ahead
of the loan book at 18 months (31 July
2019: 20 months), while the average loan
book maturity stood at 15 months (31 July
2019: 14 months).
LIBOR, which had been the principal sterling
reference rate used by the group, is due to
be withdrawn by the end of 2021. The group
is actively participating in initiatives to
determine the appropriate treatment of all
instruments on the withdrawal of LIBOR,
including the use of SONIA, the Sterling
Overnight Index Average.
Our strong credit ratings have been
considered 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 a “negative”
outlook.
Group Funding1
Customer deposits
Secured funding
Unsecured funding2
Equity
Total available funding
Of which term funding (>1 year)
Total funding as % of loan book
Average maturity of funding allocated to loan book3
31 July
2020
£ million
5,917.7
1,418.2
1,460.1
1,449.6
31 July
2019
£ million
5,638.4
1,404.8
1,462.2
1,406.4
10,245.6
9,911.8
4,671.6
135%
5,493.4
129%
18 months 20 months
1 Numbers relate to core funding and exclude working capital facilities at the business level.
2 Unsecured funding excludes £7.9 million (2019: £29.0 million) of non-facility overdrafts included in borrowings
and includes £295.0 million (2019: £295.0 million) of undrawn facilities.
3 Average maturity of total funding excluding equity and funding held for liquidity purposes.
Group Liquidity
31 July
2020
£ million
1,375.8
72.2
285.9
31 July
2019
£ million
1,106.4
48.3
240.7
1,733.9
1,395.4
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.
Cash and balances at central banks
Sovereign and central bank debt
Certificates of deposit
Treasury assets
Fitch applied a one notch downgrade to
our ratings alongside several mid-sized UK
banks following their downgrade of UK
sovereign debt to AA-, reflecting their view
of the negative impact of Covid-19 on the
UK economy. The result was a rating of
“A-/F2”(from “A/F1”), with a “negative”
outlook (previously “stable”) for both Close
Brothers Group and Close Brothers
Limited.
Liquidity
The group continues to adopt a
conservative stance on liquidity, ensuring it
is comfortably ahead of both internal risk
appetite and regulatory requirements.
Against a backdrop of a generally weak
economic UK outlook driven by the
continued uncertainty over the final Brexit
settlement and the Covid-19 crisis, treasury
assets increased 24% to £1.7 billion
(31 July 2019: £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 LCR requirements
under the Capital Requirements Directive
IV (“CRD IV”), with a 12-month average
LCR unchanged at 823% (2019: 823%).
933175.indb 37
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 38
Banking
Continued focus on
supporting our
customers
Resilient performance in a challenging
environment with all three divisions profitable
Key Financials
Continuing operations1
Adjusted operating income
Adjusted operating expenses
Impairment losses on loans and advances
2020
£ million
586.0
(303.4)
(183.4)
2019
£ million
602.6
(300.5)
(48.4)
Change
%
(3)
1
279
Adjusted operating profi t
99.2
253.7
(61)
Net interest margin2
Expense/income ratio
Bad debt ratio2
Return on net loan book2
Return on opening equity
7.5%
52%
2.3%
1.3%
6.5%
7.9%
50%
0.6%
3.3%
17.5%
Average loan book and operating lease assets
7,854.3
7,654.0
3
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 2019 financial year and
sold on 1 January 2019.
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.
Banking adjusted operating profit
decreased to £99.2 million (2019:
£253.7 million) reflecting the forward-
looking recognition of impairment charges
under IFRS 9 and lower income driven
by the impact of Covid-19. Statutory
operating profit from continuing operations
decreased to £97.2 million (2019:
£251.8 million).
Despite subdued new business volumes
during the lockdown period, the loan book
remained broadly flat in the year at £7.62
billion (31 July 2019: £7.65 billion) as we
experienced an encouraging increase in
client activity as lockdown restrictions
eased. The return on net loan book,
although lower, remained resilient at 1.3%
(2019: 3.3%).
Adjusted operating income decreased
3% to £586.0 million (2019: £602.6
million), reflecting the impact of lower
customer activity and forbearance
measures, with a reduced net interest
margin of 7.5% (2019: 7.9%).
933175.indb 38
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Close Brothers Group plcAnnual Report 2020 Strategic Report
Governance Report
Financial Statements
39
While we remain focused on our pricing
and underwriting discipline, the reduced
net interest margin reflected a period of
lower fee income, as some fees were
waived due to forbearance and transaction
and utilisation levels dropped significantly.
Adjusting for certain items including
modification losses arising from the onset
of Covid-19, the monthly net interest margin
remained broadly stable in the period prior
to the Covid-19 outbreak, with a sharp
drop in April and May before partially
recovering in recent months as activity
levels and fee income benefited from the
easing of lockdown restrictions.
Adjusted operating expenses increased
marginally by 1%, to £303.4 million (2019:
£300.5 million), primarily driven by
investment in strategic projects, including
our multi-year investment programmes in
Motor Finance and Asset Finance,
investment to support our IRB application
and enhancements to our cyber and data
security.
Recent investment to improve our
operational capabilities and our
proposition to customers has been critical
to our effective response to Covid-19. This
included our remote lending capability
which supported our Motor Finance
dealers during lockdown, our deployment
of Salesforce aiding the rapid set-up of a
portal to streamline CBILS applications in
Asset Finance, and our online deposit
portal which allowed us to continue raising
deposits remotely throughout lockdown.
Investment costs increased £10.7 million
on the prior year to £57.2 million, and are
expected to increase further in the year
ahead as we continue to progress these
important initiatives. Excluding these costs
related to investments, operating
expenses decreased £7.8 million on the
prior year to £246.2 million, mainly
Loan Book Analysis
reflecting our focus on cost control and
lower variable compensation. Given the
current environment, we will continue to
review and prioritise investment spend
while maintaining our focus on cost
discipline.
The compensation ratio remained stable
at 28% (2019: 28%). A reduction in
operating income and continued
investment spend resulted in an increase
in the expense/income ratio to 52% (2019:
50%).
Impairment charges increased significantly
to £183.4 million (2019: £48.4million)
corresponding to a bad debt ratio of 2.3%
(2019: 0.6%). Provisions increased across
Commercial, Retail and Property, primarily
to reflect the impact of Covid-19 on
impairments, taking into account loan
book performance, forbearance
measures, and the macroeconomic
outlook across our diverse portfolio of
lending businesses.
This resulted in an overall increase in
provision coverage to 3.0% (31 July 2019:
1.3%), while underlying loan losses and
write offs remained broadly stable on the
previous financial year.
Return on opening equity was resilient at
6.5% (2019: 17.5%) and reflected the
impact of the pandemic on the profitability
of the division.
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.
The loan book remained broadly flat in the
year at £7.62 billion (31 July 2019: £7.65
Commercial
Asset Finance
Invoice and Speciality Finance
Retail
Motor Finance
Premium Finance
Property
Closing loan book
Operating lease assets1
31 July
2020
£ million
3,048.0
2,167.4
880.6
2,834.5
1,749.4
1,085.1
1,734.2
7,616.7
221.9
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
Closing loan book and operating lease assets
7,838.6
7,870.0
1 Operating lease assets of £2.9 million (2019: £4.2 million) relate to Asset Finance and £219.0 million
(2019: £216.2 million) to Invoice and Speciality Finance.
Change
%
1.9
11.4
(15.7)
0.8
(1.5)
4.8
(6.1)
(0.4)
0.7
(0.4)
billion) as growth in our Commercial and
Retail businesses was offset by a
contraction in our Property loan book,
reflecting a resilient overall performance in
a challenging year with the general
election, continuing uncertainty over the
final Brexit settlement and the Covid-19
pandemic impacting customer demand.
The marginal reduction in net loan book
over the year was a result of the increased
provisions to reflect the estimated impact of
Covid-19, but we remain confident in the
overall credit quality of the loan book. The
group’s largest single sector exposure is to
residential property development and
construction (c.21%) predominantly
through the Property loan book. Consumer
lending represented c.30% of the group’s
exposure with Motor Finance and Premium
Finance personal lines comprising c.23%
and c.7% respectively. Sector exposures to
retail, hospitality, leisure, air transport and
oil and gas are minimal.
The Commercial loan book increased to
over £3.0 billion (31 July 2019: £3.0 billion)
reflecting good growth in our Asset
Finance business, although this was
partially offset by a marked reduction in
utilisation levels in our Invoice Finance
business. We experienced a recovery in
new business volumes in Asset Finance in
June and July, as lockdown restrictions
eased, supported by strong demand for
loans under CBILS.
Key Performance Indicators
Net interest margin
Net interest margin
Per cent
2020
2019
2018
Bad debt ratio
Bad debt ratio
Per cent
2020
2019
2018
Return on net loan book
Return on net loan book
Per cent
2020
2019
2018
Return on opening equity
6.5%2019: 17.5%
7.5
7.9
8.0
2.3
0.6
0.6
1.3
3.3
3.5
933175.indb 39
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HEADING IN CHARTS
ARE IN IDESIGN
NOT ILLUSTRATOR
Close Brothers Group plcAnnual Report 2020 Banking: Commercial
Operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profi t
Net interest margin
Expense/income ratio
Bad debt ratio
Change
%
(1)
2
326
(94)
2020
£ million
246.6
(142.6)
(99.2)
4.8
7.6%
58%
3.1%
2019
£ million
249.9
(140.1)
(23.3)
86.5
8.1%
56%
0.8%
Average loan book and operating leases
3,240.8
3,078.9
5
Banking: Retail
Continuing operations1
Adjusted operating income
Adjusted operating expenses
Impairment losses on loans and advances
Adjusted operating profi t
Net interest margin2
Expense/income ratio
Bad debt ratio2
Average loan book
Change
%
(2)
1
125
(52)
2020
£ million
218.4
(126.9)
(56.6)
34.9
7.7%
58%
2.0%
2019
£ million
223.2
(125.5)
(25.2)
72.5
8.1%
56%
0.9%
2,822.6
2,740.6
3
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 2019 financial year and sold on
1 January 2019.
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.
40
Banking continued
In Retail, the loan book remained broadly
flat at £2.8 billion (31 July 2019: £2.8
billion). Although the UK lockdown
resulted in the temporary closure of motor
dealerships which led to a reduction in
new business for Motor Finance as
dealers adapted to trading remotely,
volumes showed strong recovery following
the re-opening of dealerships, resulting in
overall growth in the UK loan book. A
modest reduction in the Irish Motor
Finance business resulted in a slight
decline in the Motor Finance loan book as
a whole. Premium Finance continued to
see solid demand for insurance finance,
resulting in an increase in loan book to
£1.1 billion (31 July 2019: £1.0 billion).
While the pipeline for new developments
remains good, Property experienced
fewer drawdowns on lending facilities as
construction activity remained subdued
throughout the second half of the year.
Higher repayments also contributed to a
reduction in the property loan book of 6%
to £1.7 billion (31 July 2019: £1.8 billion).
Commercial
The Commercial businesses provide
specialist, predominantly secured lending
principally to the SME market and include
Asset Finance and Invoice and Speciality
Finance. The latter includes smaller
specialist businesses such as Novitas, a
specialist provider of finance to clients of
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 to
over £3.0 billion (31 July 2019: £3.0 billion),
reflecting good growth in our Asset Finance
business, although this was partially offset
by a reduction in utilisation levels in our
Invoice Finance business.
The Asset Finance loan book increased
11% in the year as new business volumes
recovered in June and July supported by
strong demand for loans under CBILS for
which a solid pipeline remains. Invoice and
Speciality Finance saw lower utilisation of
Invoice Finance facilities due to softer
demand reflecting economic uncertainty
for most of the year, compounded by
Covid-19 in the second half.
Adjusted operating profit of £4.8 million
(2019: £86.5 million) included £99.2 million
of impairment charges predominantly
driven by Covid-19. Statutory operating
profit was £3.1 million (2019: £84.9 million).
933175.indb 40
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Close Brothers Group plcAnnual Report 2020 41
Operating income of £246.6 million (2019:
£249.9 million) was marginally lower than
the prior year, despite a higher average
loan book, due to a reduction in the net
interest margin to 7.6% (2019: 8.1%),
driven by subdued customer activity
including low rentals utilisations and
actions taken to support our customers
following the UK lockdown.
Adjusted operating expenses increased 2%
to £142.6 million (2019: £140.1 million) mainly
reflecting investment related to the Asset
Finance transformation programme. This
programme is aimed at increased sales
effectiveness through enhanced data
capabilities and technology, with the first
phase expected to deliver additional new
business volumes over time. The next phase
will focus on optimising our operational
efficiency, with upgraded systems and
processes to support the long-term
resilience of the business. This investment
spend resulted in cost growth higher than
the subdued growth in operating income for
the year and the expense/income ratio
increased to 58% (2019: 56%).
Impairment charges increased significantly
to £99.2 million (2019: £23.3 million), with a
bad debt ratio of 3.1% (2019: 0.8%),
primarily reflecting a review of staging and
provision coverage to reflect the increase in
Covid-19 forbearance across the portfolio,
as well as the incorporation of more severe
macroeconomic assumptions. This
resulted in a coverage ratio of 3.9% at
31 July 2020 (31 July 2019: 1.7%).
Our Commercial loan book is
predominantly secured, with minimal
exposure to higher risk sectors and those
impacted most severely through the
recent crisis, such as travel and leisure,
hospitality or oil and gas. Our loans are
conservatively underwritten with prudent
LTVs, supported by our specialist
expertise on the underlying assets and
long standing industry relationships.
As at 31 July 2020, around 7,300
customers, representing 26% of the
Commercial loan book by value, were
subject to forbearance measures as a
result of Covid-19, principally in the form of
payment deferrals with fees and charges
waived in the Asset Finance business, and
flexing of repayments percentages and
overpayments on invoice discounting and
factoring facilities. We remain in close
contact with customers who have been
granted Covid-19 forbearance, and the
majority of these, accounting for over 70%
of the forborne loan book, have now
resumed payments.
Retail
The Retail businesses provide
intermediated finance, principally to
individuals and small businesses, through
motor dealers and insurance brokers.
The Retail loan book was broadly flat at
£2.8 billion (31 July 2019: £2.8 billion) as
5% loan book growth in Premium Finance
offset a slight decline of 1% in the Motor
Finance loan book.
The Premium Finance loan book increased
5% to £1.1 billion (31 July 2019: £1.0 billion)
against a challenging backdrop with
growth across the business, with strong
demand for insurance finance. The
business continues to be well positioned
competitively, following the multi-year
investment programme in its infrastructure
over recent years to improve both broker
and end customer experience.
Despite the impact of the temporary
closure of motor dealerships during
lockdown, the UK Motor Finance loan
book remained resilient, benefiting from
recent investment in sales capability and
grew overall following a sharp recovery in
volumes as lockdown restrictions eased in
June and July. This was offset by a
modest reduction in Ireland, which
accounts for 26% (2019: 28%) of the
Motor Finance loan book, where we
operate through a local partner, First Auto
Finance, who provide the distribution and
dealer relationships. The Motor Finance
loan book reduced 1% overall at £1.7
billion (31 July 2019: £1.8 billion).
Overall, adjusted operating profit for Retail
was £34.9 million (2019: £72.5 million) and
included higher impairment charges of
£56.6 million driven by Covid-19. Statutory
operating profit was £34.6 million (2019:
£72.2 million).
Adjusted operating income was down
2% year-on-year at £218.4 million (2019:
£223.2 million) with a decline in net
interest margin to 7.7% (2019: 8.1%),
reflecting a reduction in fee income driven
by lower activity levels and forbearance in
both businesses, particularly in the latter
half of the year.
Commercial adjusted operating profi t
Retail adjusted operating profi t
Property operating profi t
£4.8m
2019: £86.5m
£34.9m
2019: £72.5m
£59.5m
2019: £94.7m
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 42
Banking continued
Adjusted operating expenses increased
1% to £126.9 million (2019: £125.5 million),
and the expense/income ratio increased to
58% (2019: 56%), reflecting a reduction in
operating income along with volume-driven
costs and ongoing investment in both
Premium Finance and Motor Finance. 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.
Impairment charges increased to
£56.6 million (2019: £25.2 million) with
a bad debt ratio of 2.0% (2019: 0.9%),
primarily reflecting movement between
stages in the Motor Finance loan book,
including the impact of Covid-19
forbearance in the second half, with a
more modest increase in Premium
Finance. This resulted in an increased
provision coverage ratio to 2.5% at 31 July
2020 (31 July 2019: 1.3%).
We remain confident in the credit quality
of the Retail loan book. The Motor Finance
loan book is secured on principally
second-hand family vehicles which are
less exposed to depreciation or significant
declines in value. Our core Motor Finance
product remains hire-purchase contracts,
with limited exposure to residual value risk
associated with Personal Contract Plans
(“PCP”), which accounted for only 11% of
the Motor Finance loan book at 31 July
2020. The Premium Finance loan book
benefits from various forms of structural
protection including premium refundability
and broker recourse for the personal lines
product.
As at 31 July 2020, around 58,600
customers across Motor Finance and
Premium Finance, accounting for 9% of
the Retail loan book by value, were
subject to forbearance measures as a
result of Covid-19, principally in the form of
payment holidays. We continue to closely
monitor the performance of the loan book
as customers emerge from Covid-19
concessions, with over three quarters of
forborne loan balances currently up to
date, settled or having recommenced
payments.
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.
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 regional market remains
important to us and we launched an office
in Manchester in 2019 to progress this
initiative.
loan book of 6% to £1.7 billion (31 July
2019: £1.8 billion). Following the easing of
the lockdown in June and July, customer
demand for new housing appears to have
rebounded, supported by the temporary
reduction in stamp duty. Our new
business pipeline and committed facilities
remain strong.
We experienced fewer drawdowns on
lending facilities as construction activity
remained subdued for most of the second
half of the year. Higher repayments also
contributed to a reduction in the Property
The business delivered an operating profit
of £59.5 million (2019: £94.7 million) which
included higher impairment charges of
£27.6 million (2019: (£0.1) million)
predominantly driven by Covid-19.
Banking: Property
Operating income
Operating expenses
Impairment losses on loans and advances
Operating profi t
Net interest margin
Expense/income ratio
Bad debt ratio
Average loan book
Change
%
(7)
(3)
na
(37)
2020
£ million
121.0
(33.9)
(27.6)
59.5
6.8%
28%
1.5%
2019
£ million
129.5
(34.9)
0.1
94.7
7.1%
27%
(0.0%)
1,790.9
1,834.5
(2)
933175.indb 42
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Close Brothers Group plcAnnual Report 2020
43
The Property loan book is conservatively
underwritten with a maximum LTV of 60%
at origination on residential development
finance, which accounts for the vast
majority of the loan book. We work with
experienced, professional developers,
with a focus on mid-priced family housing,
and have minimal exposure to the prime
central London markets.
As at 31 July 2020, 187 customers,
accounting for 18% of the Property loan
book by value, were subject to forbearance
measures as a result of Covid-19,
principally in the form of fee-free extensions
for residential development loans, where
we remain confident in the quality of the
underlying borrower and security. Forborne
loans continue to be assessed on a
case-by-case basis and we remain in close
contact with each of our customers.
Operating income was down 7% year-on-
year at £121.0 million (2019: £129.5 million)
reflecting the reduction in loan book and
net interest margin which decreased to
6.8% (2019: 7.1%) driven by actions taken
to support our customers such as waiving
of fees on term extensions.
Operating expenses of £33.9 million
(2019: £34.9 million) reduced 3% despite
the opening of the new Manchester office
and continued technology investment
across the Banking division. Although the
expense/income ratio increased to 28%
(2019: 27%), it remained low reflecting the
lower operational requirements of the
business with larger transaction sizes and
a relatively small number of loans.
Impairment charges increased to £27.6
million (2019: (£0.1) million) primarily
reflecting more conservative
macroeconomic assumptions, and
review of provisions for individual
impaired loans. This resulted in a bad
debt ratio of 1.5% (2019: (0.0%)) and a
provision coverage ratio of 2.5% at
31 July 2020 (31 July 2019: 0.8%).
933175.indb 43
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 44
Asset Management
Continued good
momentum in
challenging
markets
HEADING IN CHARTS
ARE IN INDESIGN
NOT ILLUSTRATOR
Asset Management continued to achieve
strong net inflows, with good demand for
our integrated advice and investment
management services, while maintaining
excellent client service during challenging
market conditions.
Key Performance Indicators
Net infl ows
Net inflows
Per cent of opening AUM
2020
2019
2018
Revenue margin
Revenue margin
BPS
2020
2019
2018
9
9
12
94
93
98
Operating margin
Operating margin
Per cent
2020
2019
2018
Return on opening equity
Return on opening equity
Per cent
2020
2019
2018
16
18
20
29
32
34
The division delivered £20.4 million (2019:
£21.8 million) adjusted operating profit and
an operating margin of 16% (2019: 18%),
impacted by weaker equity markets in the
second half of the year. Statutory
operating profit before tax was
£19.3 million (2019: £17.9 million).
Total operating income increased 6% to
£128.2 million (2019: £120.4 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 from new advice
business, which were impacted by
Covid-19 and the resulting economic
downturn, particularly during the
traditionally busy tax-year end period.
Revenue margin increased to 94 bps
(2019: 93 bps) due to the timing of equity
market movements and associated
average asset levels and income.
933175.indb 44
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Close Brothers Group plcAnnual Report 2020 45
Key Financials
Investment management
Advice and other services1
Other income2
Operating income
Adjusted operating expenses
Impairment losses on financial assets3
Adjusted operating profi t
Revenue margin (bps)
Operating margin
Return on opening equity
Change
%
12
(4)
(15)
6
9
–
(6)
2020
£ million
91.4
35.5
1.3
128.2
(107.7)
(0.1)
20.4
94
16%
28.7%
2019
£ million
81.7
37.2
1.5
120.4
(98.5)
(0.1)
21.8
93
18%
32.1%
1 Income from advice and self-directed services, excluding investment management income.
2 Includes net interest income and expense, income on principal investments and other income. Other income
includes a £1.1 million and £1.4 million gain on disposal of non-core assets in the 2020 and 2019 financial years,
respectively.
3 Impairment losses 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 infl ows
Market movements
Total managed assets
Advised only assets
Total client assets1
Net fl ows as % of opening managed assets
31 July
2020
£ million
11,673
2,350
(1,257)
1,093
(172)
12,594
1,118
13,712
9%
31 July
2019
£ million
10,378
2,107
(1,213)
894
401
11,673
1,651
13,324
9%
1 Total client assets include £5.1 billion of assets (31 July 2019: £5.0 billion) that are both advised and managed.
Total client assets include a reduction of £0.3 billion in the year, reflecting the disposal of non-core assets.
Despite the recent recovery in equity
markets, negative market movements for
the year as a whole reduced our managed
assets by £172 million. The combined
impact with positive net inflows resulted in
managed assets increasing 8% overall to
£12.6 billion (31 July 2019: £11.7 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 reduced total client assets by £0.3
billion in the 2020 financial year. We
continue to provide self-directed services to
clients via our own platform. Advised assets
under third party management decreased
by 32% following the disposal of this
self-directed client portfolio and continued
transfers of assets into our management.
Total client assets increased 3% overall, to
£13.7 billion (31 July 2019: £13.3 billion).
Adjusted operating expenses increased
9% to £107.7 million (2019: £98.5 million),
and the expense/income ratio increased
to 84% (2019: 82%). Growth in expenses
reflects continued investment in people
and new hires, alongside technology to
further enhance our operating efficiency
as well as an increase in the regulatory
FSCS levy. Headcount grew by 3% in the
year, reflecting hiring of advisers and
portfolio managers, consistent with our
growth strategy. The compensation ratio
increased slightly to 55% (2019: 54%)
primarily reflecting headcount growth.
Continued Strong Net Infl ows
Notwithstanding the challenging market
conditions arising from the impact of
Covid-19, we achieved strong net inflows of
£1,093 million (2019: £894 million), a net
inflow rate of 9% (2019: 9%) of opening
managed assets. This reflected continued
good demand for both our investment
management and integrated wealth
services, with strong inflows from our
recent portfolio manager hires in addition to
those from our own and third party
advisers, though inflows slowed in the
second half due to the impact of Covid-19
on client interaction.
Fund Performance Over the Year
Our funds and segregated bespoke
portfolios are designed to provide
attractive risk-adjusted returns for our
clients, consistent with their long-term
goals and investment objectives. Over the
12-month period to 31 July 2020 and the
three-year period to 31 July 2020, eight
out of our 14 multi-asset funds
outperformed their relevant peer group
average. Our bespoke strategy
composites continued to perform well
against peer averages over the year, and
over a three and a five-year period, in line
with our strong long-term outperformance
track record for these strategies.
Well Positioned for Future Growth
While recognising the challenges of
Covid-19 and its impact on global markets,
we have remained focused on providing
excellent service to our clients throughout
these difficult times. Our continued
investment in technology ensures that we
are improving our operational leverage,
efficiency and resilience. We continue to
make significant progress in the
implementation of strategic technology
enhancements to strengthen our systems,
propositions and service to clients.
Sustainable investment strategies remain
a key focus area across the investment
management industry, and our socially
responsible investment proposition
continues to be well received, with further
sustainable fund launches planned for
the coming year.
Our vertically-integrated, multi-channel
business model leaves us well positioned
to benefit from proven ongoing demand for
our integrated advice and investment
management services, and the structural
growth opportunity presented by the
wealth management industry. We continue
to see significant long-term growth
potential for our business and remain
committed to growing our client base both
organically and through selective hiring of
advisers and investment managers, or
through in-fill acquisitions.
Total managed assets
£12.6bn
2019: £11.7bn
933175.indb 45
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 46
Securities
Winterflood is a leading UK market maker,
focused on delivering high quality execution
services to stockbrokers, wealth managers
and institutional investors.
Key Performance Indicators
Operating income
£ million
2020
2019
2018
Operating margin
Per cent
2020
2019
2018
£151.9m
£93.4m
£109.1m
Average bargains per day
’000
2020
2019
2018
82
56
68
Return on opening equity
Per cent
2020
2019
2018
32
21
26
50
21
29
Key Financials
Operating income
Operating expenses
Impairment losses on financial assets
Operating profi t
Average bargains per day ('000)
Operating margin
Return on opening equity
Change
%
63
41
na
140
2020
£ million
151.9
(103.8)
(0.2)
47.9
82
32%
50.4%
2019
£ million
93.4
(73.4)
–
20.0
56
21%
20.7%
Operating profi t
£47.9m
2019: £20.0m
Return on opening equity
50.4%
2019: 20.7%
Very Strong Trading Performance in
Extraordinary Market Conditions
Winterflood is a leading UK market maker,
focused on delivering high quality
execution services to stockbrokers, wealth
managers and institutional investors.
Winterflood had a very strong year, with
the expertise and experience of our
traders enabling them to navigate
successfully the challenging and volatile
market conditions and deliver operating
profit of £47.9 million (2019: £20.0 million).
In the first half of the financial year,
continued Brexit and general election
outcome uncertainty contributed to a
slowdown in the UK capital markets. In
contrast, the second part of the year saw
significant volatility driving heightened
trading activity across global equity
markets, with increasing geopolitical
tensions and the Covid-19 pandemic
leading to global lockdowns and
unprecedented levels of fiscal support
measures from governments and
central banks.
Operating income increased 63% to
£151.9 million, reflecting strong trading
activity in the second half of the year, with
the extreme volatility driving investor activity
and trading volumes. The significant
pick-up in activity enabled Winterflood to
deliver its highest annual revenue since
2000, with strong activity across the FTSE
350, AIM and investment trusts in particular.
The extraordinary market conditions saw
Winterflood surpass its previous record
high for daily bargains of 139,000 in
August 2011, first achieving 154,000 in
February 2020 and subsequently
achieving 186,000 in June. Average daily
bargains over the year increased 48% to
82,003 (2019: 55,518) and the teams’
experience and ability to focus on
managing risk resulted in only seven loss
days (2019: two loss days). Winterflood
maintained full operational capacity
throughout the year, despite the
challenges brought on by Covid-19,
demonstrating the strength of our
technology and the expertise of our
traders.
Operating expenses increased 41% to
£103.8 million, driven by the variable
nature of Winterflood’s cost base, with the
increased revenue performance and
trading activity leading to higher staff
compensation and settlement costs. The
expense/income ratio decreased to 68%
(2019: 79%) as a result of the high levels
of income in the year, partially offset by the
corresponding increase in variable costs.
The compensation ratio remained stable
at 48% (2019: 48%).
Winterflood continues to take advantage
of complementary market opportunities
and is progressing well with developing
wider relationships with institutional
clients. In November 2019, direct client
trading with US counterparties
commenced after an affiliate licensed
broker dealer was established in the US.
Winterflood Business Services, which
provides outsourced dealing and custody
services for asset managers and platforms
in the UK, has had a successful year,
generating good levels of trading income
and increasing assets under administration
to £4.1 billion (2019: £3.7 billion) as a result
of growth in client base, offset by negative
market movements in the second half.
Following a very strong performance in the
second half of the 2020 financial year,
Winterflood has continued to trade
successfully in the early part of 2021, but as
a daily trading business remains sensitive to
changes in the market environment.
933175.indb 46
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Close Brothers Group plcAnnual Report 2020
Strategic Report
Governance Report
Financial Statements
47
[Winterflood 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.]
Very strong trading
performance in
extraordinary
market conditions
[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%).]
933175.indb 47
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Close Brothers Group plcAnnual Report 2020 48
Risk Report
The protection of our established business
model is a key strategic objective. Effective
management of the risks we face is central
to everything we do.
Our Approach to Risk
The group faces a number of risks in the
normal course of business providing
lending, deposit taking, wealth
management services and securities
trading. To manage these effectively, a
consistent approach is adopted based on
a set of overarching principles, namely:
• adhering to our established and proven
business model, as outlined on pages
12 and 13;
• 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 limits.
This Risk Report provides a summary of
our approach to risk management, covering
each of the key aspects of the firm’s
Enterprise Risk Management Framework. A
summary of the group’s principal risks is
also included, together with an overview of
emerging risks and uncertainties.
Role of the Board
The board retains overall responsibility for
overseeing the maintenance of a system
of internal control which ensures that an
effective risk management framework and
oversight process operates across the
group. The risk management framework
and associated governance arrangements
are designed to ensure 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.
Risk management across the group is
overseen by the Board Risk Committee.
The Committee is responsible for
reviewing risk appetite, monitoring the
group’s risk profile against this and
reviewing the day-to-day effectiveness of
the risk management framework. In
addition, the Committee is responsible for
overseeing the maintenance and
development of an appropriate and
supportive risk culture and for providing
risk input into the alignment of
remuneration with performance against
risk appetite. The Committee’s key areas
of focus over the last financial year are set
out on pages 79 and 80.
Enterprise Risk Management
The group employs an Enterprise Risk Management
Framework to provide the board and senior management
with oversight of the organisation’s financial position as
well as the risks that might adversely affect it.
The framework details the core risk management
components and structures used across the firm, and
defines a consistent and measurable approach to
identifying, assessing, controlling and mitigating, reviewing
and monitoring, and reporting risk – the risk process
lifecycle. This sets out the activities, tools, techniques and
organisational arrangements that ensure all principal risks
facing the group are identified and understood; and that
appropriate responses are in place to protect the group
and prevent detriment to its customers and colleagues.
This enables the group to meet its goals and enhances its
ability to respond to new opportunities.
The framework is purposely designed to allow the
capture of business opportunities whilst maintaining an
appropriate balance of risk and reward within the
group’s agreed risk appetite.
Enterprise Risk Management Framework
Risk C
& A
I d entify
are
w
ult
n
u
r
e
e
s
s
t i t e
e
p
p
Ris k A
ort
p
e
R
Principal
Risks
S
t
r
e
s
s
T
e
s
t
i
n
g
A
s
s
e
s
s
l
o
r
t
n
o
m
e
st
y
d
C
al C
o ntrol an
M itigate
Intern
S
R
e
vie
M
w and
onitor
Risk Governance
933175.indb 48
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Close Brothers Group plcAnnual Report 2020
49
The group closely monitors its risk profile
to ensure that it continues to align with its
strategic objectives as documented on
page 14. The board considers that the
group’s current risk profile remains
consistent with its strategic objectives.
Risk Appetite
Risk appetite forms a key component of
the group’s risk management framework
and refers to the sources and levels of risk
that the group is willing to assume in order
to achieve its strategic objectives and
business plan. It is managed through an
established framework that facilitates
ongoing communication between the
board and management with respect to
the group’s evolving risk profile. This
enables key decisions concerning the
allocation of group resources to be
made on an informed basis.
A well-defined risk appetite is set on a
top-down basis by the board with
consideration to business requests and
executive recommendation. Appetite
measures, both qualitative and
quantitative, are applied to inform
decision making, and monitoring and
reporting processes. Early warning
trigger levels are also employed to drive
required corrective action before overall
tolerance levels are reached.
The group conducts a formal review of its
risk appetites annually, as part of the
strategy-setting process. This aligns
risk-taking with the achievement of strategic
objectives. Adherence is monitored through
the group’s risk committees on an ongoing
basis with interim updates to individual risk
appetites considered as appropriate
through the year.
Stress Testing
Stress testing represents another core
component of the risk management
framework and is employed, alongside
scenario analysis, to support assessment
and understanding of the risks to which
the group might be exposed in the future.
As such, it provides valuable insight to the
board and senior management, playing an
important role in the formulation and
pursuit of the firm’s strategic objectives.
Stress testing activity within the group is
designed to meet two principal objectives:
1. Inform capital and liquidity planning
– including liquidity and funding risk
assessment contingency planning and
recovery and resolution planning; and
2. Supporting ongoing risk and portfolio
management – including risk appetite
calibration, strategic decisioning, risk/
reward optimisation and business
resilience planning.
To support these objectives, stress testing
is designed to cover the group’s most
material risks, with activity conducted at
various levels, ranging from extensive
firm-wide scenario analysis to simple
portfolio sensitivity analysis.
Stress testing also represents a critical
component of both the firm’s ICAA and
ILAA processes with scenario analysis
additionally employed as part of the
group’s Recovery Plan.
Risk Governance
The group’s risk management approach
is underpinned by a strong governance
framework that it considers appropriate
to both the size and strategic intentions
of its businesses.
The framework is founded on a “three
lines of defence” model, as set out below:
The key principles underlying this
approach 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.
Effective
management
of the risks
we face
933175.indb 49
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 50
Risk Report continued
Three Lines of Defence
First line of defence
Second line of defence
Third line of defence
The Businesses
Risk and Compliance
Internal Audit
Group Risk and Compliance
Committee
(Reports to the Risk Committee)
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.
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 managing risk exposures.
• Promotes a culture of customer focus
and appropriate behaviours.
• Ongoing monitoring of positions and
management and control of risks.
• Portfolio optimisation.
• Self-assessment.
Risk Committee
(Reports to the board)
Audit Committee
(Reports to the board)
Audit Committee mandates the head of
group internal audit with day-to-day
responsibility for independent assurance.
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.
Risk Committee delegates to the group
chief risk officer day-to-day responsibility
for oversight and challenge on risk-
related issues.
Risk functions (including compliance)
provide support, assurance 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
• Overarching “risk oversight unit” takes
an integrated view of risk (qualitative
and quantitative).
• Supports through developing and
advising on risk strategies.
• Facilitates constructive check and
challenge – “critical friend”/“trusted
adviser”.
• Oversight of business conduct.
Aligned to these core principles, the governance framework operates through various delegations of authority from the board
downwards. These cover both individual authorities as well as authorities exercised via the group’s risk committee structure.
Risk Committee Structure
Group Board
Board Risk Committee
Executive Committees
Risk-Specifi c Committees
Divisional Committees
• Group Risk and Compliance
Committee
• Model Governance Committee
• Capital Adequacy Committee
• Asset and Liability Committee
• Credit Risk Management Committee
• Group Credit Committee
• Impairment Adequacy Committee
• Operations and Technology Risk
Committee
• Divisional Risk and Compliance
Committees
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Close Brothers Group plcAnnual Report 2020 51
Risk Committee Overview
Group Risk and Compliance
Committee
Provides oversight of the group’s risk profile, alignment to risk appetite and effectiveness
of the risk management and compliance framework.
Model Governance Committee
Provides oversight of the group’s exposure to model risk through the review, approval
and monitoring of all high materiality models.
Capital Adequacy Committee
Monitors group and bank capital adequacy, incorporating capital planning, stress testing,
governance, processes and controls.
Asset and Liability Committee
Provides oversight of risk management and internal control for the bank and its
subsidiaries across liquidity, funding and market risk.
Credit Risk Management Committee
Monitors the group’s credit risk profile, examining current performance and key portfolio
trends, ensuring compliance with risk appetite.
Group Credit Committee
Reviews material credit transactions and exposures from a credit, reputational, funding
structure and business risk perspective.
Impairment Adequacy Committee
Governs the bank’s impairment process, reviewing the financial position relating to
impairment and ensuring adequate coverage is held across the portfolio.
Operations and Technology Risk
Committee
Monitors and oversees group-wide operational resilience, including technology, security,
supplier and operational risk appetite, examining industry, regulatory and technical risks.
Divisional Risk and Compliance
Committees
Provide oversight of risk profile, alignment to risk appetite and effectiveness of the risk
management and compliance framework at a divisional or business level.
Together, these committees facilitate an
effective flow of key risk information, as
well as functioning to support effective risk
management at each stage of the risk
process lifecycle. They also provide an
effective escalation channel for any risks
or concerns, supporting the maintenance
of an effective risk culture.
Over the past 12 months the group has
continued to strengthen its risk
governance framework and specifically
the organisation’s risk and compliance
committees, both at a group and
divisional level. These continue to work
efficiently and effectively.
Internal Control System
Aligned to the risk governance framework,
risk control and oversight across the
group is supported by the maintenance of
a range of internal controls. These cover
risk and financial management and
reporting and control processes and are
designed to ensure the accuracy and
reliability of the firm’s 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 controls are
overseen by the Audit Committee.
This structure establishes a link between
group strategy and day-to-day operations
in a manner consistent with agreed risk
appetite, while simultaneously facilitating
board and executive-level oversight and
assurance as to the application of said
strategy via conformance with underlying
policy and standard requirements.
The accounting policies form part of a
broader policy framework, overseen by the
board, that supports the foundation of a
strong risk management structure.
Group Policies are supported by Group
Standards, Divisional/Business-level Policies
and Procedures which, together, outline the
way in which policy is implemented and
detail the process controls in place to ensure
compliance. Policies and Standards relating
to the group’s principal risks are fully
covered within the framework, and include
specific documents relating to financial
crime compliance (e.g. anti-money
laundering/anti-bribery and corruption)
and whistleblowing.
Group Policy Framework
ERMF
p
u
Gro
Group Policies
Group Standards
Divisional / Business
Level Policies
Procedures
usiness
B
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Risk Report continued
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 also 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.
Risk Culture and Awareness
Maintenance of an effective risk
management culture is integral to the
group meeting its regulatory conduct
requirements and assisting the
accomplishment of key strategic goals.
The risk culture:
• supports the group and its directors to
meet their legal and regulatory
obligations, particularly with respect to
the identification and management of
risks and the need for a robust control
environment;
• underpins the group’s purpose,
strategy, cultural attributes and
divisional values;
• provides enhanced awareness of risk in
business operations by highlighting
strengths and weaknesses and their
materiality to the business and, in turn,
facilitating informed decision making;
• optimises business performance by
facilitating challenge of ineffective
controls and improving the allocation
of resources;
• ensures allocation of capital for
operational risk is proportionate for
the risks identified;
• improves the group’s control
environment; and
• assists in the planning and prioritisation
of key projects and initiatives.
The relationship between risk and reward
is also a key priority with all staff evaluated
on an ongoing basis against qualitative
and quantitative criteria. This encourages
long-term, stewardship behaviours
together with a strong and appropriate risk
and conduct culture.
For further information on our approach to
remuneration for the group’s directors see
pages 87 to 114.
Managers actively promote a culture in
which risks are identified, assessed,
managed and reported in an open,
transparent and objective manner, and
where appropriate staff conduct is
viewed as critical.
All members of staff are responsible for risk
identification and reporting within their area
of responsibility and are encouraged to
escalate risks and concerns where
necessary, either through line or business
management or by following the provisions
of the Group Whistleblowing Policy.
Group Risk Management operates
independently of the business, providing
oversight and advice on the operation of
the risk framework, and assurance that
agreed processes operate effectively and
that a risk and conduct culture is
embedded within the business.
Risk Culture
Locally embedded
Risks managed in an
open, transparent and
objective manner
Open escalation
channels
Escalation of risks
and concerns
encouraged; individual
accountability
Risk
Culture
Independent
2nd Line
Providing oversight,
advice and assurance
Risk/Reward
Regular evaluations
encourage long-
term, stewardship
behaviours
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Close Brothers Group plcAnnual Report 2020 53
Principal Risks
The following pages set out the principal
risks that may impact the group’s ability to
deliver its strategy, how we seek to
mitigate these risks, and relevant key
developments, both over the last year and
anticipated for the next financial 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
that the group faces and our approach to
mitigating them remain broadly consistent
with prior years. This consistency has
underpinned the group’s track record of
trading successfully and supporting our
clients over many years.
The summary should not be regarded as
a complete and comprehensive statement
of all potential risks faced by the group,
but reflects those which the group
currently believes may have a significant
impact on its future performance.
Key:
No change
Risk decreased
Risk increased
Risk
Risk Management and Mitigation
Business Risk
The group operates in an environment
where it is exposed to an array of
independent factors. Its profitability is
impacted by the broader UK economic
climate, changes in technology, regulation
and customer behaviour, cost movements
and competition from traditional and new
players, varying in both nature and extent
across its divisions.
Changes in these factors may affect the
bank’s ability to write loans at its desired
risk and return criteria, result in lower new
business volumes in Asset Management
or impact levels of trading activity at
Winterflood.
The group’s long track record of
successful trading is supported by a
consistent and disciplined approach to
pricing and credit quality, both in
competitive markets and through periods
of heightened risk. This allows us to
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 businesses and product portfolio,
which provides resilience against
competitive pressure or market weakness
in any one of the sectors we operate in.
The group is planning for a range of
different economic and business
scenarios to ensure it has the resources
and operational capability to continue
operating effectively.
Change/Outlook
Covid-19 has significantly impacted UK
economic activity and has increased
uncertainty regarding future economic
conditions and the resulting impact on
our customers and clients. While a
range of measures to support
individuals and businesses have been
introduced, their long-term
effectiveness and impact on the
broader competitive environment
remain uncertain.
We continue to focus on supporting our
customers, maintaining underwriting
standards and investing in our business.
Further commentary on the market
environment and its impact on each of
our divisions is outlined on pages 34 to
47. Our business model is set out on
pages 12 and 13.
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Risk Report continued
Risk
Risk Management and Mitigation
Capital Risk
The group is required to hold sufficient
regulatory capital (including equity and
other loss-absorbing debt instruments)
to enable it to operate effectively. This
includes meeting minimum regulatory
requirements, operating within risk
appetites set by the board and
supporting its strategic goals.
Change/Outlook
Conduct Risk
The group’s relationship-focused model
amplifies the importance of exhibiting
strong behaviours in order to ensure
positive outcomes for our customers.
Failing to treat customers fairly, to
safeguard client assets or to provide
advice and products which are in clients’
best interests, also 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.
Change/Outlook
Capital risk is measured using CET1 and
total capital ratios, determined in line with
regulatory capital adequacy requirements.
These ratios, and associated metrics, are
actively monitored, and reported quarterly
to the regulator. They are also disclosed
annually in the group’s Pillar 3 disclosures
as well as in the Annual Report – see
pages 36 and 37.
Both actual and forecast capital adequacy
is reported through the group’s
governance framework with oversight
from the Capital Adequacy Committee.
Annually, as part of the ICAAP, the group
also undertakes its own assessment of its
capital requirements against its principal
While Covid-19 has affected capital
generation due to lower than expected
profits, the impact has been offset by a
moderation in the loan book, reducing
RWAs. Regulatory actions to bolster
capital, most notably guidance on
distributions and the removal of
countercyclical capital buffers, have
also increased the group’s capital
surplus, allowing lending to continue
where demand exists.
The group is committed to treating all
customers fairly and delivering an
appropriate product suite.
We seek to mitigate conduct risk by:
• providing straightforward and
transparent products and services to
our clients and customers;
• maintaining a clear governance and
approval process for both existing and
new products to ensure they meet the
needs for which they are designed;
risks (Pillar 2a) together with an
assessment of how capital adequacy could
be impacted in a range of stress scenarios
(Pillar 2b). Under both assessments, the
group ensures that it retains sufficient levels
of capital adequacy.
The group retains a range of capital risk
mitigants, the most notable being its strong
capital generating capacity, arising from its
track record of sustained profitability. The
group also maintains access to capital
markets and has in recent years
successfully issued Tier 2 capital
instruments.
Further commentary on the group’s
capital is outlined in note 22 on pages
156 to 158.
• employing appropriate arrangements to
confirm regulatory requirements and
guidance aimed at ensuring positive
client and customer outcomes are
sufficiently embedded within business
practices. A programme of risk-based
monitoring is also employed to verify
adherence; and
• utilising a range of regularly reviewed
conduct risk measures to identify and
respond to adverse thematic trends.
Regulatory focus and prioritisation of
conduct risk continues to increase.
Over the course of the year, the FCA
has issued specific guidance around
vulnerable customers and motor
commissions as well as general
guidance aimed at supporting
customers during the Covid-19
pandemic, all of which directly impact
the group. Separate workstreams have
been established to ensure the group
can meet all minimum requirements
and regulatory expectations.
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Risk
Risk Management and Mitigation
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
2020 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.
Change/Outlook
Funding and
Liquidity Risk
The Banking division’s access to funding
remains key to support our lending
activities and the liquidity requirements
of the group.
Change/Outlook
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.
Credit losses have increased in the year to
31 July 2020, primarily as a result of
Covid-19. The macroeconomic shock
resulting from the pandemic has caused
increased forbearance levels and migration
of accounts from Stage 1 to Stages 2 and
3. Expected Credit Loss (“ECL”) has also
increased as a result of the IFRS 9
macroeconomic adjustments and
management has made further adjustments
to modelled outputs where considered
appropriate. Other counterparty exposures
are broadly unchanged, with the majority of
our liquidity requirements and surplus
funding placed with the Bank of England.
Our funding approach is based on the
principles of “borrow long, lend short” and
diversity by source and channel. This
approach provides resilience and flexibility.
Total available funding is kept well in
excess of the loan book to ensure funding
is available when needed.
A strong liquidity position is maintained to
ensure that we remain comfortably ahead
of both internal risk appetites and
regulatory requirements. Liquidity risk is
While economic uncertainty 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.
During the last year, a third public motor
finance securitisation was executed,
evidencing our ability to access debt
markets, while online savings were
introduced.
In response to Covid-19, Treasury
successfully migrated its funding and
liquidity operations to remote working
Our exposures to counterparties are
mitigated by:
• excess liquidity of £1.4 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.
We continue to closely monitor Covid-19
impacts as well as uncertainty over Brexit
and the UK economic outlook. 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 38 to 43.
Further details on loans and advances to
customers and debt securities held are in
notes 11 and 12 on pages 144 to 148 of the
financial statements.
Our approach to credit risk management
and monitoring is outlined in more detail in
note 28 on pages 165 to 178.
assessed on a daily basis to ensure
adequate liquidity is held and remains
readily accessible in stressed conditions.
Funding and liquidity risks are reviewed at
each meeting of the bank’s Asset and
Liability Committee.
while funding was increased through an
uplift in customer deposits. This action
facilitated an increase in treasury assets,
predominantly deposits placed with the
Bank of England, ensuring the
maintenance of sufficient headroom to
both internal and external liquidity
requirements.
Further commentary on funding and
liquidity is provided on pages 36 and 37.
Further financial analysis of our funding is
shown in note 19 on page 155 of the
financial statements.
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Risk Report continued
Risk
Risk Management and Mitigation
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.
Change/Outlook
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, models and systems, or as a
result of external factors.
Impacts to the business, customers, third
parties and the markets in which we
operate are considered within a maturing
framework for resilient end-to-end delivery
of critical business services.
Legal and regulatory risks are also
considered as part of operational risk.
Failure to comply with existing legal or
regulatory requirements, or to react to
changes to these requirements, may have
negative consequences for the group.
Similarly, changes to regulation can impact
our financial performance, capital, liquidity
and the markets in which we operate.
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.
When measuring interest rate risk in the
Banking book the following components
are considered:
• repricing risk: the risk presented by
assets and liabilities that reprice at
different times and rates;
• embedded optionality risk: the risk
presented by contract terms embedded
in certain assets and liabilities; and
• basis risk: the risk presented when
yields on assets, and costs on liabilities,
are based on two different bases.
Interest rate risk has increased during
the year with base rates currently at
historic lows, increasing the potential for
a negative rate environment. Where
relevant, systems have been tested and
confirmed as able to support negative
rates.
The traded market risk environment has
also been affected by Covid-19 and its
impact on the economy, driving
elevated volatility and an increase in
corporate insolvencies.
The group seeks to maintain its
operational resilience through effective
management of operational risks,
including by:
• sustaining robust operational risk
management processes, governance
and management information;
• identifying key systems, third party
relationships, processes and staff,
informing investment decisions;
• investing in technology to provide reliable
and contemporary customer service
offerings and effective model outputs;
• attracting, retaining and developing
high-quality staff through the operation
of competitive remuneration and
benefit structures and an inclusive
environment that embraces diversity
and recognises behaviours aligned to
our cultural attributes;
• investing in cyber security including
expertise, tools and staff engagement;
• maintaining focus on personal data
protection;
• adopting fraud prevention and detection
capabilities aligned with our risk profile;
and
• planning and rehearsing strategic and
operational responses to severe but
plausible stress scenarios.
Two core measures are subsequently
monitored on a monthly basis: Earnings at
Risk (“EaR”) and Economic Value (“EV”).
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.
Further detail on the group’s exposure
to market risk is outlined in note 28 on
pages 175 and 176 of the financial
statements.
The sensitivity analysis on interest rate
exposures shown in note 28 on page
175 demonstrates the limited level of
exposure to interest rate and foreign
exchange movements.
Legal and regulatory risks are mitigated by:
• responding in an appropriate, risk-
based and proportionate manner to any
changes to the legal and regulatory
environment as well as those driven by
strategic initiatives;
• implementing appropriate and
proportionate policies, standards and
procedures designed to capture
relevant regulatory and legal
requirements;
• providing clear advice on legal and
regulatory requirements, including in
relation to the scope of regulatory
permissions and perimeter guidance;
• delivering relevant training to all staff,
including anti-money laundering,
anti-bribery and corruption, conduct risk,
data protection and information security.
This is augmented by tailored training to
relevant employees in key areas;
• deploying a risk-based monitoring
programme designed to assess the
extent to which compliant practices are
embedded within the business;
• maintaining, where possible,
constructive and positive relationships
and dialogue with regulatory bodies and
authorities; and
• maintaining a prudent capital position
with headroom above minimum capital
requirements.
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Risk Management and Mitigation
57
Operational Risk
continued
Change/Outlook
Existing incident and crisis management
capabilities were mobilised upon the
emergence of Covid-19, enabling the
business to sustain operations whilst
adjusting to new ways of working.
Notwithstanding, the current pandemic
may lead to increased risks associated with
people, operational process execution,
third party management, information
security and fraud. The group continues to
utilise its operational risk management
framework to manage these risks with
oversight by relevant risk committees.
Despite the challenges arising from
Covid-19, improvements are continuing
across the operational risk framework
including further enhancement of
information security management and
strengthening of the firm’s operational
resilience.
The volume and complexity of regulatory
and legal requirements applicable to the
group also continues to increase.
We continue to invest in experienced
people and relevant systems and
processes to help us navigate the
increasingly complex regulatory and
legal landscape. Arrangements in place
to mitigate these risks continue to
evolve in their sophistication, application
and effectiveness.
Reputational Risk
Protection and effective stewardship of
the group’s reputation are fundamental to
its long-term success.
Detrimental stakeholder perception could
lead to impairment of the group’s current
business and future goals. This could
arise from any action or inaction of the
company, its employees or associated
third parties.
Reputational risk monitoring and
management are embedded throughout
the organisation, including via:
• focus on employee conduct, with
cultural attributes embedded
throughout the group;
• supplier and intermediary conduct
management through the
relationship lifecycle;
• new product approval and existing
product review processes for business
products and services;
• a proactive approach to environmental,
social and governance matters;
• embedding of reputational risk
management within the management
frameworks of other risk types; and
• proactive communication and
engagement with investors, analysts
and other market participants.
A key responsibility of the group’s board is
to define, promote and monitor the
company’s culture, and adherence to our
cultural framework is reported regularly to
the board via the group’s culture
dashboard; see page 75 of the Corporate
Governance Report.
Change/Outlook
The group’s proactive approach to
engaging with emerging topics such as
environmental, social and governance
matters continues to mitigate the risk of
rapidly changing external factors.
The group’s strong culture, responsible
approach to stakeholders and
commitment to open and transparent
communication continue to mitigate
potential reputational risk, despite
heightened business, conduct and
operational risks arising from Covid-19.
The group’s prudent business model
also continues to act as a natural
mitigant of reputational risk.
Note: Both Defined Benefit Pension Obligation Risk and Tax Risk are also classified internally as principal risks, however neither is deemed sufficiently material to impact the
group’s ability to deliver its strategy. The group’s defined benefit pension scheme was closed to new entrants in 1996 and to future accrual in 2012. For further information see
note 25 on pages 160 and 161.
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Risk Report continued
Emerging Risks and Uncertainties
In addition to day-to-day management
of its principal risks, the group utilises
an established framework to monitor
its portfolio for emerging risks and
consider broader market uncertainties,
supporting organisational readiness
for external volatility.
This incorporates input and insight from
both a top-down and bottom-up
perspective:
• Top-down: identified by directors and
executives at a group level via the
Group Risk and Compliance
Committee and the board.
• Bottom-up: identified at a business-
level and escalated, where appropriate,
via risk updates into the Group Risk and
Compliance Committee.
Group-level emerging risks are monitored
by the Group Risk and Compliance
Committee on an ongoing basis, with
agreed actions tracked to ensure the
group’s preparedness should an emerging
risk crystallise.
Emerging risks and uncertainties currently
tracked by the group are detailed below.
Risk
Economic Uncertainty
Mitigating Actions and Key
Developments
Outlook
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.
Covid-19 has notably increased economic
uncertainty in the UK and across global
markets more generally. Notwithstanding
the resilience of our model, we are
continuing to plan for a range of different
economic and business scenarios.
Further commentary on the attributes and
resilience of the group’s diversified
business model is shown on pages 12
and 13 with commentary on the market
environment and its impact on each of our
divisions outlined on pages 34 to 46.
Economic and Political
Uncertainty as a
Result of the UK’s Exit
from the EU
A transition programme was implemented
in 2016 with group-wide participation and
regular senior management oversight.
This included the launch of a Brexit
Forum, responsible for tracking ongoing
developments and progressing
appropriate contingency plans.
While direct impact remains low given the
group’s limited presence within the
European Union, developments continue
to be closely monitored ahead of the end
of the current transition period.
Plans are now in place for all plausible
outcomes and will be initiated as required.
Preparations have been 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.
Financial Loss
Resulting from
the Physical or
Transitional Impacts of
Climate Change
Development of an appropriate and
regulatory-compliant climate risk
framework is ongoing and is managed by
a Climate Risk Working Group. Regular
updates are provided to the Risk
Committee which retains oversight
responsibility, while senior management
responsibility is assigned to the group
chief risk officer.
Climate risk is now embedded within the
risk governance framework at all levels of
the organisation with a review of
processes, procedures and policies
underway to ensure appropriate
consideration of climate-related risks. A
group-wide impact analysis exercise has
identified a set of core risk themes with
work underway to enhance corresponding
risk management frameworks.
Climate risk represents an area of
increasing focus, both within the group
and across the industry more broadly. We
are closely monitoring regulatory
developments as well as emerging best
practice and are exploring various
avenues to leverage this as appropriate to
support framework development.
The short-dated tenor of our lending
book and strong resilience capabilities
mitigate current risk exposure, however a
strategic review is underway to further
assess both the opportunities and risks
posed by climate change. Outputs from
this will further shape the group’s
response and support our planned
alignment with the recommendations
of the Taskforce for Climate Related
Financial Disclosures (“TCFD”).
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Close Brothers Group plcAnnual Report 2020 59
Risk
Transition from
LIBOR
Disruption
from Scottish
Independence
Legal and
Regulatory Change
Mitigating Actions and Key
Developments
Outlook
A programme is underway to transition the
firm away from the use of LIBOR in loan
documentation, Treasury transactions and
other forms of contract in favour of
alternative Risk-Free Rates (“RFRs”).
The scope of this work encompasses
both new contracts and existing
contracts that mature after 31 December
2021, the deadline set by the Prudential
Regulatory Authority and the Financial
Conduct Authority.
Monitoring is in place to track changes in
the political landscape with regard to
Scottish independence.
In the event that Scotland does vote for
independence in a future referendum, we
are confident that any resulting disruption
can be managed effectively with minimal
impact on business operations.
The group maintains an established
horizon scanning framework to identify
future regulatory and legal changes that
could materially impact its operations.
High-level gap and impact analyses are
undertaken to assess new compliance
requirements with programmes of work
initiated to address any identified issues.
The extent and nature of this work ranges
from simple isolated remedial activity to
large multi-year projects, depending on
the complexity and scale of the change.
We have made good progress in making
the relevant changes to loan
documentation to move away from the
use of LIBOR and upgrading, where
necessary, our processing systems. We
will continue to support industry initiatives
relating to the transition from LIBOR and
remain on track to effect the necessary
changes by 31 December 2021.
An increase in support for Scottish
independence has been observed in
recent opinion polls. We continue to
monitor developments closely.
A sustained increase in legal and
regulatory change has been experienced
in recent years and this is expected to
continue in the short to medium term with
the continued implementation of existing
EU legislation into UK law, and possible
future regulatory and legal divergence.
The evolving government and regulatory
response to Covid-19 is also expected to
drive further change.
This Strategic Report was approved by the board and signed on its behalf by:
Adrian Sainsbury
Chief Executive
22 September 2020
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 60
Board of Directors
United by our purpose
MIKE BIGGS
CHAIRMAN
ADRIAN SAINSBURY
CHIEF EXECUTIVE
MIKE MORGAN
GROUP FINANCE
DIRECTOR
LESLEY JONES
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
GEOFFREY HOWE
SENIOR
INDEPENDENT
DIRECTOR
OLIVER CORBETT
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
PETER DUFFY
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
SALLY WILLIAMS
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
Board Appointment
Mike was appointed a
director in March 2017
and chairman of the
board from 1 May 2017.
Board Appointment
Adrian was appointed to
the board as chief
executive on
21 September 2020.
Board Appointment
Mike was appointed to
the board as group
finance director in
November 2018.
Board Appointment
Lesley was appointed a
director in December
2013.
Background and
Experience
Mike has over 40 years’
experience of the financial
services industry. He
served as chairman of
Direct Line Insurance
Group plc from 2012 until
August 2020. 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 an Associate of the
Institute of Chartered
Accountants in England
and Wales.
Background and
Experience
From 2016 to September
2020, Adrian was
managing director of
Close Brothers' Banking
division. Since August
2013 he has been a
director of Close Brothers
Limited, the group’s
banking subsidiary.
Adrian has previously
held executive roles at
Barclays, RBS and Bank
of Ireland and was chief
executive of ANZ Bank in
Europe. Adrian has also
been chairman of the
Asset Based Finance
Association, the UK and
Ireland industry body.
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
and N Brown Group plc.
Lesley was previously a
non-executive director of
ReAssure Group plc
(where she also chaired
the Risk Committee) and
Northern Bank Limited.
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.
Committee
Membership
Mike is chair of the
Nomination and
Governance Committee.
Committee
Membership
Lesley is chair of the
Risk Committee and a
member of the Audit,
Remuneration, and
Nomination and
Governance Committees.
Committee
Membership
Geoffrey is a member of
the Audit, Remuneration,
Risk, and Nomination and
Governance Committees.
Committee
Membership
Committee
Membership
Committee
Membership
Bridget is chair of the
Oliver is chair of the
Peter is a member of
Remuneration Committee
Audit Committee and a
the Risk Committee.
and a member of the
member of the
Audit, Risk, and
Nomination and
Remuneration, Risk, and
Nomination and
Governance Committees.
Governance Committees.
933175.indb 60
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BRIDGET
MACASKILL
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
2013.
Board Appointment
Board Appointment
Board Appointment
Board Appointment
Bridget was appointed a
Oliver was appointed a
Peter was appointed a
Sally was appointed a
director in November
director in June 2014.
director in January 2019.
director in January 2020.
Background and
Background and
Background and
Background and
Experience
Experience
Experience
Experience
Bridget is a non-executive
Oliver is chief financial
Peter is chief executive
Sally is also a non-
director of Jones Lang
officer of McGill &
officer of
executive director of
LaSalle Incorporated, and
Partners Ltd. He was
Moneysupermarket.com
Lancashire Holdings
chairman of Cambridge
formerly chief financial
Group PLC and President
Limited and of Family
Associates LLC. Bridget
officer of Hyperion
of the Incorporated
was formerly chairman of
Insurance Group Limited
Society of British
Assurance Friendly
Society Limited
First Eagle Holdings, Inc.
and finance director of
Advertisers. He previously
(OneFamily), where she
and a senior adviser to
First Eagle Investment
Management LLC, of
LCH. Clearnet Group
Limited and of Novae
Group plc. Oliver is a
served as chief executive
chairs the Audit
officer of Just Eat Limited,
Committee. She is a
having been interim chief
member of the Institute of
which she was president
chartered accountant
executive officer and chief
Chartered Accountants of
and chief executive officer.
and previously worked for
customer officer of Just
England & Wales. Sally
Bridget was also a trustee
KPMG, SG Warburg,
Eat plc before that.
has extensive risk,
of the TIAA-CREF funds
Phoenix Securities (later
Between 2011 and 2018,
compliance and
and a non-executive
Donaldson Lufkin
Peter held a number of
governance experience,
director of Jupiter Fund
Jenrette) and Dresdner
senior roles at easyJet
having held senior
Management plc,
Kleinwort Wasserstein,
plc, including as chief
executive positions at
Prudential plc, Scottish &
where he was managing
commercial officer and
Marsh, National Australia
Newcastle plc, J
director of investment
group commercial
Sainsbury plc, Hillsdown
banking. Oliver was also
director. Prior to that,
Bank and Aviva. Prior to
that, Sally held a number
Holdings plc and of the
a non-executive director
Peter held roles at Audi
of roles at
Federal National Mortgage
of Rathbone Brothers plc.
UK Ltd and Barclays
PricewaterhouseCoopers
Association in the US.
Bank plc over a period
LLP in both their risk
of more than 15 years.
management and audit
teams over a period of
15 years.
Committee
Membership
Sally is a member of
the Risk and Audit
Committees.
Close Brothers Group plcAnnual Report 2020
61
OLIVER CORBETT
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
PETER DUFFY
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
SALLY WILLIAMS
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
Board Appointment
Oliver was appointed a
director in June 2014.
Board Appointment
Peter was appointed a
director in January 2019.
Board Appointment
Sally was appointed a
director in January 2020.
MIKE BIGGS
CHAIRMAN
ADRIAN SAINSBURY
MIKE MORGAN
CHIEF EXECUTIVE
GROUP FINANCE
LESLEY JONES
INDEPENDENT
GEOFFREY HOWE
SENIOR
DIRECTOR
NON-EXECUTIVE
INDEPENDENT
DIRECTOR
DIRECTOR
Board Appointment
Board Appointment
Board Appointment
Board Appointment
Board Appointment
Adrian was appointed to
Mike was appointed to
Lesley was appointed a
Geoffrey was appointed a
Mike was appointed a
director in March 2017
and chairman of the
the board as chief
executive on
board from 1 May 2017.
21 September 2020.
the board as group
finance director in
November 2018.
2013.
director in December
director in January 2011
and is the company’s
senior independent
director.
Background and
Background and
Background and
Background and
Background and
Experience
Experience
Experience
Experience
Experience
Mike has over 40 years’
From 2016 to September
From 2010 to 2018 Mike
Lesley has extensive
Geoffrey was previously
experience of the financial
2020, Adrian was
was chief financial officer
banking experience,
chairman of Jardine Lloyd
services industry. He
managing director of
of Close Brothers’ Banking
having previously held
Thompson Group plc,
served as chairman of
Close Brothers' Banking
division, and since 2010
several line management
Railtrack plc and
Direct Line Insurance
division. Since August
he has been a director of
positions within Citigroup
Nationwide Building
Group plc from 2012 until
2013 he has been a
Close Brothers Limited,
and was group chief
August 2020. Mike was
director of Close Brothers
the group’s banking
previously chairman of
Limited, the group’s
subsidiary. Mike is a
credit officer of Royal
Bank of Scotland plc
Society, a non-executive
director of Investec plc
and JP Morgan Overseas
Resolution Limited, then
banking subsidiary.
chartered accountant and
from 2008 to 2014. Lesley
Investment Trust plc, a
a FTSE 100 UK life
Adrian has previously
chair of the ICAEW
is also a non-executive
director of Robert
assurance business, and
held executive roles at
Financial Services Faculty
director of Moody’s
Fleming Holdings Limited
has acted as both chief
Barclays, RBS and Bank
Board and ICAEW Council
Investors Service Limited
and managing partner of
executive officer and
of Ireland and was chief
member. Prior to joining
and N Brown Group plc.
law firm Clifford Chance.
group finance director of
executive of ANZ Bank in
Close Brothers, Mike held
Lesley was previously a
Resolution plc. Prior to
Europe. Adrian has also
a number of senior roles at
non-executive director of
that he was group finance
been chairman of the
director of Aviva plc. Mike
Asset Based Finance
Scottish Provident and
RBS, most recently as
Association, the UK and
finance director of the
ReAssure Group plc
(where she also chaired
the Risk Committee) and
Ireland industry body.
Wealth Management
Northern Bank Limited.
Division of RBS.
is an Associate of the
Institute of Chartered
Accountants in England
and Wales.
BRIDGET
MACASKILL
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
Board Appointment
Bridget was appointed a
director in November
2013.
Background and
Experience
Bridget is a non-executive
director of Jones Lang
LaSalle Incorporated, and
chairman of Cambridge
Associates LLC. Bridget
was formerly chairman of
First Eagle Holdings, Inc.
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 Jupiter Fund
Management plc,
Prudential plc, Scottish &
Newcastle plc, J
Sainsbury plc, Hillsdown
Holdings plc and of the
Federal National Mortgage
Association in the US.
Committee
Membership
Mike is chair of the
Nomination and
Governance Committee.
Committee
Membership
Committee
Membership
Lesley is chair of the
Geoffrey is a member of
Risk Committee and a
the Audit, Remuneration,
member of the Audit,
Remuneration, and
Nomination and
Governance Committees.
Risk, and Nomination and
Governance Committees.
Committee
Membership
Bridget is chair of the
Remuneration Committee
and a member of the
Audit, Risk, and
Nomination and
Governance Committees.
Committee
Membership
Oliver is chair of the
Audit Committee and a
member of the
Remuneration, Risk, and
Nomination and
Governance Committees.
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 executive
officer of
Moneysupermarket.com
Group PLC and President
of the Incorporated
Society of British
Advertisers. He previously
served as chief executive
officer of Just Eat Limited,
having been interim chief
executive officer and chief
customer officer of Just
Eat plc before that.
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
Peter is a member of
the Risk Committee.
Background and
Experience
Sally is also a non-
executive director of
Lancashire Holdings
Limited and of Family
Assurance Friendly
Society Limited
(OneFamily), where she
chairs the Audit
Committee. She is a
member of the Institute of
Chartered Accountants of
England & Wales. Sally
has extensive risk,
compliance and
governance experience,
having held senior
executive positions at
Marsh, National Australia
Bank and Aviva. Prior to
that, Sally held a number
of roles at
PricewaterhouseCoopers
LLP in both their risk
management and audit
teams over a period of
15 years.
Committee
Membership
Sally is a member of
the Risk and Audit
Committees.
933175.indb 61
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Close Brothers Group plcAnnual Report 2020Financial StatementsGovernance ReportStrategic Report
62
Executive Committee
ADRIAN SAINSBURY
CHIEF EXECUTIVE
ANGELA YOTOV
GROUP GENERAL COUNSEL
MIKE MORGAN
GROUP FINANCE DIRECTOR
MARTIN ANDREW
ASSET MANAGEMENT CHIEF EXECUTIVE
REBEKAH ETHERINGTON
GROUP HEAD OF HUMAN RESOURCES
ROBERT SACK
GROUP CHIEF RISK OFFICER
PHILIP YARROW
WINTERFLOOD CHIEF EXECUTIVE
MARTYN ATKINSON
GROUP CHIEF OPERATING OFFICER
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Close Brothers Group plcAnnual Report 2020 63
Directors’ Report
The directors of the company present their report for the year
ended 31 July 2020.
The Strategic Report set out on pages 1 to 59 of this Annual
Report, and the Corporate Governance Report, the committee
reports and the Directors’ Remuneration Report set out on pages
68 to 114 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 183 of this Annual Report.
Results and Dividends
The consolidated results for the year are shown on page 122
of the financial statements. The directors recommend a final
dividend for the year of 40p (2019: 44p) on each ordinary share
which, following the cancellation of the interim dividend in April
2020, makes an ordinary distribution for the year of 40p
(2019: 66p) per share. The final dividend, if approved by
shareholders at the 2020 Annual General Meeting (“AGM”), will
be paid on 24 November 2020 to shareholders on the register
at 16 October 2020. Further information on the final dividend
recommended by the directors can be found on page 35 of this
Annual Report.
On 2 April 2020, the company announced that the board had
decided to cancel the payment of the 2020 interim dividend,
which would have been payable on 22 April 2020, recognising the
significant challenges faced by businesses and individuals during
the Covid-19 pandemic, and consistent with the group’s purpose
of helping the people and businesses of Britain thrive over the
long term. Further information on the board’s decision can be
found on page 22 of this Annual Report.
Directors
The names of the directors of the company at the date of this
report, together with biographical details, are given on pages 60
and 61 of this Annual Report. All the directors listed on those
pages were directors of the company throughout the year, apart
from Adrian Sainsbury and Sally Williams, who were appointed
as directors on 21 September 2020 and 1 January 2020,
respectively. In addition, Preben Prebensen served as a director
throughout the year, retiring on 21 September 2020.
In accordance with the UK Corporate Governance Code, each of
the current directors will retire at the 2020 AGM and offer
themselves for reappointment at that meeting with the exception of
Geoffrey Howe who has decided not to seek reappointment at the
AGM following more than nine years’ service on the board. He will
therefore stand down from the board at the conclusion of the AGM.
The search to identify a successor to Geoffrey is well-advanced
and, subject to completion of the regulatory approval process, the
board anticipates being in a position to announce its final decision
on an appointment in due course following the AGM in November.
Adrian Sainsbury’s appointment as a director and chief executive
took effect at the end of the board’s meeting held on
21 September 2020, having been announced by the company on
22 June 2020. Further details on the robust search process that
resulted in Adrian’s appointment can be found in the Report of
the Nomination and Governance Committee on page 84 of this
Annual Report.
On 24 September 2019, the company announced that Preben
Prebensen had decided to step down as chief executive and a
member of the board. Preben ceased to be chief executive and
a member of the board with effect from the end of the board’s
meeting held on 21 September 2020.
On 16 December 2019, the company announced that, following a
search process overseen by the Nomination and Governance
Committee, the board had decided to appoint Sally Williams as
an independent non-executive director with effect from 1 January
2020. Sally is a member of the board’s Risk Committee and Audit
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 Sally’s
appointment can be found in the Report of the Nomination and
Governance Committee on page 85 of this Annual Report.
Further details on the directors’ remuneration and service
contracts or appointment letters (as applicable) can be found in
the Directors’ Remuneration Report on pages 99 to 101 of this
Annual Report.
Directors’ interests
The directors’ interests in the share capital of the company at
31 July and 18 September 2020 are set out on pages 113 and
114 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 page 74 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 2020,
152,060,290 ordinary shares were in issue, of which 733,825
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 2019 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 £12,617,073;
• allot shares up to an aggregate nominal amount of £25,234,146
for the purposes of a rights issue;
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 64
Directors’ Report continued
• allot shares having a nominal amount not exceeding in
aggregate £1,892,561 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 £1,892,561, for the purpose of financing a
transaction determined by the directors to be an acquisition or
other capital investment as defined by the Statement of
Principles on Disapplying Pre-Emption Rights published by the
Pre-Emption Group;
• allot shares having a nominal amount not exceeding in
aggregate £4,731,402 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 15,140,488 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 2019 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 162 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
19 November 2020 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
282,508 Treasury Shares with an aggregate nominal value of
£70,627, representing 0.19% of its issued share capital, for an
aggregate consideration of £3.99 million. It transferred 212,792
shares out of treasury, to satisfy share option awards, for a total
consideration of £2.4 million.
At 31 July 2020, the company held 733,825 Treasury Shares with
a nominal value of £0.18 million. The maximum number of
Treasury Shares held at any time during the year was 935,598
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 162 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 295,520 ordinary shares.
Substantial Shareholdings
Details of substantial shareholdings in the company are set
out in the Corporate Governance Report on page 77 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
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resolution of the company’s shareholders. The articles of
association can be viewed at www.closebrothers.com/investor-
relations/investor-information/corporate-governance.
Further details can be found on pages 18 to 33 of the Strategic
Report and also on pages 77 and 78 of the Corporate Governance
Report.
Following a periodic review, a resolution will be proposed at
the 2020 AGM to amend the articles of association by
making a number of changes in line with company law
developments, technology changes and best practice.
Further details of the resolution will be set out in the Notice
of AGM to be sent to shareholders.
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’ Remuneration Report on pages 68 to 114
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 59
of this Annual 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 25 to 27 of the Strategic Report.
More information on diversity at board level and the board’s
oversight of diversity initiatives can be found on page 70 of the
Corporate Governance Report and in the Report of the
Nomination and Governance Committee on page 85 of this
Annual Report.
Signifi cant 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 £1.6 billion at 31 July
2020 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.
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.
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 applicable, to the satisfaction of any performance
conditions at that time and pro-rating of awards.
Employment practices
Information on the company's employment practices, including
with respect to disabled employees and its approach to investing
in and rewarding its workforce, is set out in the Sustainability
Report on pages 24 to 33 of the Strategic Report.
Greenhouse gas emissions
Information on the group's greenhouse gas emissions, energy
consumption and energy efficiency action is set out in the
Sustainability Report on pages 31 to 32 of the Strategic Report.
Employee engagement
The group acknowledges the importance of engaging with its
employees and listening to their views. The board believes that
engaged employees are more likely to remain enthusiastic about
their work and the organisation, and is committed to ensuring that
employees feel valued and supported. The company has chosen,
in accordance with section 414C(11) of the Companies Act 2006,
to include in its Strategic Report, information about how the
directors have engaged with employees, and had regard to
employee interests, and the effect of that regard, including on the
principal decisions taken by the company during the financial year,
that would otherwise be disclosed in this Directors’ Report. Further
detail can be found on pages 18 to 28 of the Strategic Report and
also on pages 77 and 78 of the Corporate Governance Report.
Business relationships
The group values the strong reputation it has built with
customers, clients, partners and other stakeholders, which is
critical to the long-term sustainability of the group’s business.
The company has chosen, in accordance with section 414C(11) of
the Companies Act 2006, to include in its Strategic Report,
information about how the directors have had regard to the need to
foster the company’s business relationships with suppliers,
customers and others, and the effect of that regard, including on
the principal decisions taken by the company during the financial
year, that would otherwise be disclosed in this Directors’ Report.
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 129.
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 and the features of its
internal control and risk management systems are described on
pages 48 to 59 and the risks associated with the group’s financial
instruments are analysed in note 28 on pages 165 to 178 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 (2019: £nil).
Charitable Donations
Further information on the group’s charitable activities, and on the
charitable donations made in the year, can be found on pages 30
and 31 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 64
There are no other matters which the Company is required to
report under Listing Rule 9.8.4R.
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Directors’ Report continued
Research and Development Activities
During the normal course of business, the group continues to
invest in new technology and systems and to develop new
products and services to improve operating efficiency and
strengthen its customer proposition.
As part of the directors’ consideration of the appropriateness of
adopting the going concern basis in preparing the Annual Report,
a range of forward-looking scenario analyses have been
considered. This has included a central scenario, a severe but
plausible downside scenario and reverse stress testing.
Resolutions at the 2020 AGM
The company’s AGM will be held on 19 November 2020.
Resolutions to be proposed at the AGM include the
reappointment of directors, the approval of the Directors’
Remuneration Policy, 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, the amendment of the company’s articles of association
and authority for the company to purchase its own shares.
The full text of each of the resolutions to be proposed at the 2020
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.
At the present time, there remains uncertainty as to the impact
that Covid-19 will have on the company’s AGM in 2020. The
board’s current expectation is that government guidance will not
allow shareholders to attend the meeting in person. Further
information on the board’s current expectations in relation to the
AGM can be found on page 78 of this Annual Report. More
information will be set out in the Notice of AGM to be sent to the
company’s shareholders in due course.
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’s business activities, financial performance, capital
levels, liquidity and funding position, and risk management
framework, along with the principal and emerging risks likely to
affect its future performance, are described in the Strategic
Report and the Risk Report.
The group continues to have a strong, proven and conservative
business model supported by a diverse portfolio of businesses.
While the impact of Covid-19 has lowered group profitability
during the year, the group remains well positioned in each of its
core businesses, and is strongly capitalised, soundly funded and
has access to the required levels of liquidity.
The scenarios modelled are based on a range of economic
assumptions, driven by the estimated impact of Covid-19,
encompassing both severity and the period of assumed recovery.
In all modelled scenarios it has been concluded that no significant
structural changes to the company or group will be required.
In the central and downside scenarios the company and group
continue to operate with sufficient levels of liquidity and capital for
the next 12 months, with the group’s capital ratios and total
capital resources comfortably in excess of PRA requirements.
For each of the divisions, the directors have also considered the
impact of the central and downside scenarios on financial
performance. For Banking these include expected customer
demand that underpins loan book growth, forbearance measures
offered to our customers as well as government support measures
and the impact this will have on the bad debt ratio and net interest
margin. For Asset Management, the level of markets and amount
of net flows as a percentage of opening managed assets was
considered. For Winterflood, the volume of trading activity within
their markets and expected trading revenue was assessed. Across
the divisions, the impact of the selected downside scenario
demonstrated the resilience of our business model.
In making this assessment, the directors have also considered
the operational agility and resilience of the company and group,
noting that the business has successfully adapted to new ways of
working and that operational and system performance have been
maintained, and are expected to continue to be.
In conclusion, the directors have determined that there is no material
uncertainty that casts doubt over the company’s or the group’s
ability to continue as a going concern for the next 12 months from
the date of the approval of these financial statements.
Accordingly, they continue to adopt the going concern basis in
preparing the Annual Report.
Viability Statement
In accordance with provision 31 of the UK Corporate Governance
Code, the board has assessed the prospects of the group and
confirms that it has a reasonable expectation that the company
and group will continue to operate and meet its liabilities, as they
fall due, for the three-year period up to 31 July 2023.
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 well-
embedded strategic planning cycle, which has been adapted in
2020 to reflect the unprecedented impact of Covid-19 on the UK
economy and the uncertainties that exist in the economic outlook.
We continue to adopt a three-year period for our regulatory and
internal stress testing processes, including: (i) group-wide internal
forecasting and stress testing, which has undergone significant
review and challenge, to confirm the viability of the group given the
impact of Covid-19; (ii) the Internal Capital Adequacy Assessment
Process (“ICAAP”), which forecasts key capital requirements; and
(iii) the Internal Liquidity Adequacy Assessment Process (“ILAAP”),
which identifies liquidity requirements.
As part of the directors’ assessment of the viability of the group,
additional forecasting and stress testing has been undertaken to
reflect uncertainties in the economic environment. A range of
forward-looking scenarios have been considered, with distinct
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economic assumptions encompassing both severity of a downturn
and the timing of any assumed recovery from the impact of
Covid-19. The modelling considers the group’s future projections of
profitability, cash flows, capital requirements and resources, and
other key financial and regulatory ratios over the period. In the
modelled scenarios, it has been assumed that no significant
structural changes to the company or group will be required. The
central and extreme downside scenarios have been built on the
same principles as those outlined for the next 12 months in the
going concern disclosure, extended out over the three-year period.
An additional third scenario represents a mid-case with less
material adverse impact in the first 12 months than the extreme
downside scenario and a slower subsequent recovery than in the
central scenario. In all scenarios, the company and group continue
to operate with sufficient levels of liquidity and capital over the
three-year period, with the group’s capital ratios comfortably in
excess of PRA requirements and liquidity well above regulatory
minima. The directors have also considered the financial
performance of the scenarios by division. These are in line with the
considerations employed for the going concern assessment.
Across the divisions, the financial impact of the downside scenario
assumptions demonstrates the resilience of our business model. In
addition, the directors have reviewed the key management actions
which would be taken in the event of an extreme downside, in
order to mitigate the stress, and the viability of these actions.
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
Emerging Risks and Uncertainties on pages 53 to 59;
• the group’s current financial position and prospects – please
see the Financial Overview on pages 34 to 46;
• the group’s business model and strategy – please see
Business Model, and Strategy and Key Performance Indicators
on pages 12 to 15; and
• the board’s risk appetite, and the robust assessment of the
group’s principal risks and how these are managed – please
see the Risk Report on pages 48 to 59.
The directors have also considered the results from the most
recent version of the following reviews, which were conducted
prior to the Covid-19 pandemic:
• the annual review of the Recovery Plan where reverse stress
testing was employed to support the identification of potential
adverse circumstances and events, and test the efficiency;
• effectiveness of recovery actions and planning;
• the 2019 ICAAP, which included both stress testing and
scenario analysis. At a group level two scenarios were run, one
based on the latest PRA scenarios, the other representing an
alternative severe, but plausible, scenario. Both took 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; and
• the 2019 ILAAP, which was 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.
Directors' Responsibility Statement
The directors, whose names and functions are listed on pages
60 and 61, are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law
and regulation.
Company law requires the directors to prepare financial statements
for each financial year. Under that law the directors have prepared
the group financial statements in accordance with International
Financial Reporting Standards (“IFRSs”) as adopted by the
European Union and the parent company financial statements in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS
102 “The Financial Reporting Standard applicable in the UK and
Republic of Ireland”, and applicable law). Under company law the
directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs of
the group and parent company and of the profit or loss of the
group and parent company for that period.
In preparing the 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 the Directors’ Remuneration Report comply with
the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the group and parent
company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of
the corporate and financial information included on the
company’s website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Each of the directors confirms that, to the best of their knowledge:
• the group and parent company financial statements, prepared in
accordance with the relevant financial reporting frameworks, give
a true and fair view of the assets, liabilities, financial position and
profit or loss of the group and parent company respectively;
• the Strategic Report, together with the Directors’ Report and the
Corporate Governance Report, include a fair review of the
development and performance of the business and the position
of the group and parent company, together with a description of
the principal risks and uncertainties that they face; and
• the Annual Report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the
information necessary for shareholders to assess the group
and parent company’s position, performance, business model
and strategy.
By order of the board
Alex Dunn
Company Secretary
22 September 2020
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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
2020. The pages that follow provide detail on the group’s
governance structure 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
The board strongly believes that high standards of corporate
governance and effective board oversight are important to the
group’s performance, the delivery of its strategy and in supporting
long-term sustainable success for the company’s shareholders
and other stakeholders. At Close Brothers, we are committed to
maintaining a robust and effective governance and risk
management framework. The board therefore welcomes the
principles and provisions set out in the 2018 UK Corporate
Governance Code, many of which were well-embedded in prior
years. We are pleased to report that we have now completed our
first year under the new Code and set out further detail on how
we have complied with it in this report.
During the Covid-19 pandemic, the board has adapted to ensure
that it continues to provide effective oversight of the group’s
operations, and challenge and support for senior management,
whilst maintaining its clear focus on stakeholder interests. The
board has met regularly via video conference during the
pandemic, including weekly meetings at the peak of the UK
lockdown. Further information on the operation of the board
during the pandemic appears later in this report.
The board acknowledges the continuing focus on sustainability
and the contribution that business makes to the wider
community. Once again this year, the board has spent time on
sustainability considerations, including as part of strategy
discussions and regular environmental, social and governance
(“ESG”) updates, and I have been pleased to discuss the board’s
approach in this area with shareholders. The board has remained
conscious of the group’s purpose, and the importance of
continuing to support our customers, clients and employees
during the challenges presented by Covid-19.
On 22 June 2020, we were delighted to announce that Adrian
Sainsbury had been selected to succeed Preben Prebensen as
chief executive. Adrian’s deep knowledge and experience, strong
leadership and exceptional commercial expertise make him
ideally placed to lead the group through the next stage of its
development. His appointment also provides continuity in the
group's leadership team and business model, ensuring that we
continue delivering for our people, our customers, and our
shareholders in the years to come. Preben formally stepped
down as chief executive and a director at the end of the board’s
meeting on 21 September 2020, after 11 years in the role. On
behalf of the board, I would like to thank Preben for his
outstanding leadership and very significant contribution over
many years.
The board was further refreshed during the year with the
appointment of Sally Williams, who became an independent
non-executive director on 1 January 2020. Further detail on the
search process led by the Nomination and Governance Committee
that culminated in Sally's appointment can be found on page 85.
After more than nine years' dedicated service on the board,
Geoffrey Howe has decided not to seek reappointment at this
year's AGM. I would like to thank Geoffrey for his enormous
contribution to the board and his invaluable judgement and wise
counsel. The board's search to identify a successor to Geoffrey is
well-advanced and, subject to completion of the regulatory
approval process, the board anticipates being in a position to
announce its final decision on an appointment in due course
following the AGM in November. I am pleased that Oliver Corbett
has agreed to take on the additional role of senior independent
director on an interim basis during the period between Geoffrey
stepping down from the board at the AGM and the appointment of
a permanent successor.
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69
Stakeholder engagement continues to be a priority for the board.
During the year the board has used formal meetings and other
opportunities to discuss the group’s performance and delivery of its
strategy with group and divisional executives. This included
consideration of stakeholders and their interests, as well as risks
arising from the wider regulatory, economic and political
environment. This year, we have introduced enhancements to our
corporate governance reporting in line with the Code and applicable
legislation. You can find our formal statement in relation to section
172 of the Companies Act 2006, together with further detail about
how the directors have engaged with, and had regard to the interests
of, stakeholders, in the Strategic Report on pages 18 to 23.
The board recognises the important role that 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 focus for the board. Once
again, in my own engagement with employees from across the
group, I have been pleased to see the group’s strong and
distinctive culture in action, as evidenced by our employees’
desire to support customers, clients and partners during the
Covid-19 pandemic.
Diversity and inclusion continues to be an important area for the
board and the Nomination and Governance Committee, including
as part of ongoing board succession planning and the development
of a diverse and inclusive talent pipeline below board level. This year,
the directors approved amendments to the board diversity and
inclusion policy, to include the aim of having at least one director of
colour by 2024. Further detail on the board’s approach to diversity
and inclusion can be found on page 70.
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 page 76.
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 2019
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. The Remuneration Committee
has spent considerable time in the year on its triennial review of
the Directors’ Remuneration Policy which, following extensive
consultation with shareholders, will be submitted for approval at
this year’s AGM. Further information on the new policy can be
found on pages 91 to 101.
Engagement and dialogue with shareholders are very important to
the board and I have been pleased to meet with a number of our
shareholders during the year to discuss a range of topics and to
ensure that the board is aware of our shareholders’ views. The
company’s AGM is scheduled to take place on 19 November 2020.
This would usually be a valuable opportunity for me and my fellow
directors to meet with shareholders and discuss the performance
of the group. The board’s current expectation is that government
guidance will not allow shareholders to attend the AGM in person.
Further detail, including on a facility for shareholders to submit
questions on the business of the AGM, will be set out in the Notice
of AGM to be published in due course. If it is not possible for the
board to meet with shareholders in November, we hope to be able
to return to a more typical AGM next year.
Michael N. Biggs
Chairman
22 September 2020
UK Corporate Governance Code
The UK Corporate Governance Code 2018, published by the
Financial Reporting Council (“FRC”) (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,
with the exception of the item noted below.
The only exception relates to provision 38 of the Code, which
requires the pension contribution rates of executive directors to
be aligned with those available to the workforce. During the 2020
financial year, the pension contribution rate of the former chief
executive, Preben Prebensen, exceeded that of the general
employee population in line with his service contract and the
Directors’ Remuneration Policy approved by shareholders in 2017
prior to publication of the Code. The pension contribution rate of
the group’s new chief executive, Adrian Sainsbury, is (like that of
the group finance director, Mike Morgan) aligned with the general
employee population, and the group is now therefore compliant
with provision 38 in the current financial year. Additional
information on the executive directors’ remuneration can be found
in the Directors’ Remuneration Report that follows later in this
Annual Report. Further detail as to how the company has applied
and complied with the Code is set out in the remainder of this
Corporate Governance Report.
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 delivers
long-term shareholder value, thereby making a contribution to
wider society. A key responsibility of the board is to define,
promote and monitor the company’s culture and values, setting
the “tone from the top”. It also ensures effective engagement with,
and participation from, shareholders and other stakeholders.
When making decisions, the board has regard to the interests of
a range of stakeholders, including employees, customers, clients
and shareholders, as well as its broader duties under s.172 of the
Companies Act 2006. The company’s formal s.172 statement can
be found on page 20 of this Annual Report.
Another key function of the board is to establish the group’s
strategy, strategic objectives and purpose and to monitor
management’s performance against those objectives, and provide
direction for the group as a whole. The board also supervises the
group’s operations, with the aim of ensuring that it maintains a
framework of prudent and effective controls which enables risks to
be properly assessed and appropriately managed.
The board acknowledges its role in assessing the basis on which the
group generates and preserves value over the long term. It spends
time during the year, in scheduled board meetings, during its annual
strategy discussions and in other sessions with senior management
and stakeholders, considering how opportunities and risks to the
future success of the group’s business should be addressed,
alongside discussions on the sustainability of the group’s model.
Further information on these considerations can be found in the
Strategic Report on pages 1 to 59 of this Annual Report.
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Corporate Governance Report continued
Board size and composition
The board has nine members: the chairman, two executive
directors and six 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. The board and the
Nomination and Governance Committee monitor the overall size
of the board and the balance between its executive and non-
executive membership. During the 2020 financial year, the board
considers that its size has remained appropriate given the
company’s operations, however it is possible that additional
appointments will be made over the coming years, including as
part of the board’s proactive approach to succession planning.
Details of the individual directors and their biographies are set out
on pages 60 and 61.
Board and senior management diversity and inclusion
The board acknowledges the benefits that diversity and inclusion
can bring to the board and to all levels of the group’s operations.
As such, the board is committed to the promotion of diversity and
inclusion across the group and to ensuring that all employees are
treated fairly.
The board maintains a board diversity and inclusion policy, which
is reviewed annually by the Nomination and Governance
Committee. The policy 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. This year, the policy was updated to codify the
board’s aims (i) in its search for board appointments, of engaging
only with external search firms which are signatories to the
Voluntary Code of Conduct for Executive Search Firms and (ii) of
having at least one director of colour by 2024 in line with the
recommendations of the Parker Review.
The key aims and principles set by the board in its diversity and
inclusion policy for board-level appointments and progress
made include:
1. Maintaining female representation on the board of at
least 30%
Whilst the board aims to maintain female representation of at
least 30%, it recognises that due to its relatively small size, the
appointment or departure of a single director can have a
significant impact on the achievement of this aim. At the date of
this report, three of the board’s nine members are women,
meaning that female representation is in line with the
recommendation of the Hampton-Alexander Review. The board
remains committed to seeking to improve further its position on
gender diversity when appropriate opportunities arise whilst
continuing to make appointments based on merit, objective and
defined criteria, and the particular skills and experience required
for individual appointments.
2. Having at least one director of colour by 2024
The board acknowledges the importance of cultural and ethnic
diversity and the benefits this can bring. In line with the
recommendations of the Parker Review, the board will aim to
have at least one director of colour by 2024. External search firms
used by the Nomination and Governance Committee will continue
to be instructed to consider candidates from a broad range of
backgrounds and experiences when preparing long-lists for
review by the Committee.
3. Engaging only external search firms which are signatories to
the Voluntary Code of Conduct for Executive Search Firms
For board-level appointments, the Nomination and Governance
Committee aims to engage only executive search firms which are
signatories to the Voluntary Code of Conduct for Executive
Search Firms. During the year, the Committee was supported in
searches by MWM Consulting and Heidrick & Struggles, both of
which are signatories to the Voluntary Code.
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. When
considering board composition and appointments, the board and
the Nomination and Governance Committee continue to have
regard to relevant best practice and the findings of the Hampton-
Alexander Review and the Parker Review.
The board regularly considers diversity and inclusion, including
activities across the group to encourage a diverse pipeline, as
part of discussions around succession planning and talent
management throughout the year. During the year, the
Nomination and Governance Committee received regular
updates in this area, including in relation to the activities of
employee working groups established to consider a broad range
of discrete areas relating to diversity and inclusion matters.
Further information on these initiatives can be found on
pages 25 to 27 of the Strategic Report.
In line with the Code, further commentary on the diversity of the
board, the Nomination and Governance Committee’s oversight of
diversity and inclusion matters, and future plans in this regard, is
set out in the Nomination and Governance Committee Report on
page 85. The board’s diversity and inclusion policy is available on
the Corporate Governance section of the company’s website.
The policy is subject to annual review by the Nomination and
Governance Committee.
Matters reserved to the board
A number of key decisions are reserved for, and may only be
made by, the board. These specific matters and decisions are set
out in a formal schedule, which enables the board and executive
management to operate within a clear governance framework.
The schedule of matters reserved to the board is reviewed
annually and is published on the company’s website.
The matters and decisions specifically reserved for the
board include:
• responsibility for the overall direction of the group and oversight
of the group’s management;
• approval of the group’s strategy and monitoring its delivery;
• oversight 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;
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• 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, the interests of
the company’s stakeholders, and any other relevant factors.
Board and committee meeting attendance in 2019/2020
During the year the board held seven regular scheduled
meetings. In addition, all members of the board attended a
strategy session with senior management in June 2020.
The attendance of directors at scheduled meetings of the board
and the committees of which they were members during the 2020
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. This included attendance by the executive
directors at all meetings of the Audit and Risk Committees during
the year.
The board held 11 additional ad hoc meetings in the year to
consider a number of matters, including the group’s response to
Covid-19 and the chief executive succession. The Nomination
and Governance Committee held four additional ad hoc meetings
during the year to discuss the chief executive succession and
non-executive director recruitment processes, and to consider
and recommend to the board the appointments of Sally Williams
and Adrian Sainsbury. The Remuneration Committee held two
additional ad hoc meetings during the year to discuss executive
director pay and the compensation package for the new chief
executive. The Risk Committee held one additional ad hoc
meeting during the year to review the 2019 Internal Capital
Adequacy Assessment Process. These additional meetings are
not reflected in the table below. Further information on the
operation of the board during the Covid-19 pandemic can be
found below.
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.
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 during the year on an informal basis to
discuss matters relevant to the group.
All non-executive directors receive the papers for meetings of
those board committees of which they are not a member, and
have a standing invitation to attend those meetings as an
observer.
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.
Board
Audit Committee
Remuneration Committee
Risk Committee
Nomination and
Governance Committee
Attended
Total
Attended
Total
Attended
Total
Attended
Total
Attended
Total
Executive directors
Preben Prebensen1
Mike Morgan
Non-executive directors
Mike Biggs
Oliver Corbett
Peter Duffy
Geoffrey Howe
Lesley Jones
Bridget Macaskill
Sally Williams2
7
7
7
7
7
7
7
7
5
7
7
7
7
7
7
7
7
5
5
5
5
5
3
5
5
5
5
3
5
5
5
5
5
5
5
5
6
6
6
6
6
4
6
6
6
6
6
4
5
5
5
5
5
5
5
5
5
5
1 Preben Prebensen ceased to be a director at the conclusion of the board’s meeting on 21 September 2020 after deciding to step down as chief executive as previously
announced on 24 September 2019. Adrian Sainsbury joined the board as chief executive at the conclusion of the board’s meeting on 21 September 2020 and was not
therefore eligible to attend board meetings during the 2020 financial year as a director; however, he attended all board meetings in the year in his previous role as Banking
division managing director.
2 Sally Williams was appointed as an independent non-executive director and a member of the Audit and Risk Committees with effect from 1 January 2020.
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Corporate Governance Report continued
Operation of the board during the Covid-19 pandemic
The board met regularly via video conference during the Covid-19
pandemic to monitor the evolution of the pandemic and its impact
on the group, and to oversee the group’s response. In addition to
scheduled board meetings in the period (included in the table on
page 71), the board held eight ad hoc meetings between the entry
of the UK into lockdown in March and the end of the financial year
on 31 July 2020, meeting weekly at the peak of the lockdown.
The board’s focus and agenda developed during these meetings
as the pandemic and its impact on the group moved into different
phases. A key priority for the board throughout was consideration
of the impact of the pandemic on key stakeholder groups,
including employees, customers, clients, partners, suppliers and
shareholders, and the directors received regular updates on
developments relating to individual stakeholder groups.
The main areas considered by the board during the pandemic
included:
• reviewing the operational and financial performance of the
group and each of its divisions, including consideration of the
liquidity, funding and capital position of the group;
• oversight and discussion of the group’s operational and
technology planning for lockdown and, subsequently, the return
of employees to the workplace in line with government
guidance;
• monitoring the impact of the pandemic on employees, including
discussion of the results of, and actions taken by management
in response to, all-employee wellbeing surveys throughout the
pandemic;
• consideration of customer, client and partner matters, including
oversight of the Banking division’s approach to customer
forbearance through regular reviews of management
information and dashboards;
• the Banking division’s participation in HM Government’s
Coronavirus loan schemes;
• monitoring and oversight of the group's control and risk
framework, including consideration of issues arising from
home working by employees;
• updates on guidance published by, and on management’s
engagement with, regulators;
• the decision to cancel the 2020 interim dividend, further
information on which can be found on page 22 of this Annual
Report; and
• the review and approval of scheduled trading updates to the
market, and discussion of associated disclosure
considerations.
In addition, the non-executive directors have continued to meet
via video conference with senior management outside formal
board meetings to discuss the group’s response to the pandemic
and relevant developments. These meetings have included,
among others, regular sessions between the chairman and the
chief executive, the group finance director and the chair of the
Audit Committee, and the group chief risk officer and the chair of
the Risk Committee.
During the pandemic the regular flow of high-quality information to
the board has been maintained. As the group's response to the
pandemic has evolved, additional metrics and reporting have
been provided to the board to ensure that it has access to all
relevant information to enable it to effectively oversee the group's
response and to assess the impact of the pandemic on the
group's performance. Examples of additional information provided
to the board have included regular reporting and data on
customer forbearance and updates on the group's approach to
home working and, subsequently, the gradual return to the
workplace.
The effectiveness of the board during the pandemic was
specifically considered as part of this year’s board and committee
evaluation. The evaluation concluded that the board continued to
perform effectively throughout the pandemic. Further detail on the
evaluation can be found on page 76.
Further information on the group’s response to Covid-19 can be
found on page 11 of this Annual Report.
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 https://www.closebrothers.com/investor-
relations/investor-information/corporate-governance. This year,
each committee’s terms of reference were updated to reflect,
among other things, recent industry guidance, best practice and
changes arising from the application of the Code. The chair 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.
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. The board discusses performance,
strategic initiatives and developments in each of the group’s
divisions, including updates from divisional chief executives on
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.
Board Committee Structure
THE BOARD
AUDIT
COMMITTEE
REMUNERATION
COMMITTEE
RISK
COMMITTEE
NOMINATION AND
GOVERNANCE
COMMITTEE
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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 scheduled board meeting includes time for discussion
between the chairman and the 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 group’s response to, and the impact of, the
Covid-19 pandemic;
• 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 requirements in relation to operational resilience;
• strategic projects affecting the group and individual
businesses, including the Motor Finance transformation
programme, the group’s LIBOR transition programme and the
project to develop the models, systems and processes
required to use the Internal Ratings Based approach for the
calculation of regulatory capital requirements for credit risk;
• updates on the progress of discrete workstreams arising out
of the board’s annual strategy days;
• discussions in relation to dividend payments in 2020;
• IT and cyber matters, 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;
• review of the group’s financial lines insurances as part of the
annual renewal process;
• engagement with regulators and regulatory developments
during the year, including matters arising out of the Covid-19
pandemic;
• 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.
Chairman and chief executive
In line with the Corporate Governance Code, the role of the
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 biography can be found on
page 60. 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 Adrian Sainsbury, who succeeded Preben
Prebensen at the end of the board’s meeting held on
21 September 2020. His biography can be found on page 60.
Adrian 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.
Adrian 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 62.
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,
Bridget Macaskill and Sally Williams. Sally joined the board
on 1 January 2020.
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.
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A description of the responsibilities of the senior independent
director, as approved by the board, can be found on the
company's website at https://www.closebrothers.com/
investorrelations/investor-information/corporate-governance. After
many years' dedicated service on the board, Geoffrey will not be
seeking reappointment at the company's AGM in 2020. Further
information on the board's search to identify a successor to
Geoffrey can be found in the Nomination and Governance
Committee's report. The board has appointed Oliver Corbett to take
on the additional role of senior independent director on an interim
basis during the period between Geoffrey stepping down from the
board at the AGM and the appointment of a permanent successor.
Non-executive directors’ independence and time commitment
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 has been a non-executive
director for more than nine years. 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.
The chairman, Mike Biggs, was considered to be independent on
appointment in line with the provisions of the Code.
The company has 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 require them to seek prior approval before they take
on additional commitments.
Peter Duffy joined the board of Moneysupermarket.com Group
PLC as chief executive officer in September 2020. As required by
the Code, following a review of his time commitments prior to his
appointment by Moneysupermarket.com Group PLC, the board
was satisfied that Peter’s new role would not restrict him from
carrying out his duties and responsibilities as a director of the
company, and accordingly approved the appointment.
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
2019 AGM. Further detail regarding these authorisations is set out
on pages 63 and 64.
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 non-executive directors’ letters of
appointment were reviewed by the Nomination and Governance
Committee during the year to ensure compliance with the Code
and best practice.
The articles of association provide that in addition to any power to
remove directors conferred by the Companies Act 2006, the
company’s shareholders can pass a special resolution to remove
a director from office.
Reappointment of directors at the 2020 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 2020 AGM be
reappointed by shareholders. As described above, Geoffrey
Howe will not be seeking reappointment this year and will be
standing down from the board at the conclusion of the AGM.
Induction and professional development
On appointment, all new directors receive a comprehensive and
personalised induction programme to familiarise them with the
group and the regulatory framework within which it operates, and
to meet any specific development requirements identified during
the recruitment process. The company also provides bespoke
inductions for directors when they are appointed as a committee
chair 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.
Sally Williams’s induction programme included detailed meetings
and briefings with members of the board and the Executive
Committee, the head of compliance, the head of group internal
audit, the chief credit risk officer, the director of investor relations
and the group’s external auditor. Sally also met other senior
managers from across the central and control functions (including
risk, finance and IT). 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, Sally 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.
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Adrian Sainsbury has also undertaken a tailored induction
following the announcement of his appointment to the board. The
induction provided to Adrian reflected his existing extensive
knowledge and understanding of the group developed since
joining the group in 2013, including as a director of its principal
Banking subsidiary, Close Brothers Limited, and through his
previous role as managing director of the Banking division.
Culture
The board recognises the importance that culture and values play
in the long-term success and sustainability of the group, and the
role of the board in monitoring and assessing culture. The board
also acknowledges the importance of individual directors, and the
board as a whole, acting with integrity, leading by example and
promoting the desired culture.
Adrian’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. Adrian also received a briefing 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.
There is a central training programme in place for the directors,
which is reviewed at least annually 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, attendance at
external seminars and dedicated briefings from management and
external advisers covering topics such as regulatory
developments and horizon-scanning, anti-bribery, corporate
governance changes, accounting updates, the group’s personal
dealing rules applicable to directors, changes in remuneration
regulation and practice, and the Internal Ratings Based approach
for the calculation of regulatory capital requirements for credit
risk. 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.
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.
Confli cts 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.
The ongoing assessment of the contribution of culture and values
to the group’s long-term success remains a key focus for the
board. The board also spends time monitoring, and satisfying
itself as to, the alignment of the group’s purpose, values and
strategy with its culture. During the year, the board monitored,
assessed and promoted the group’s culture, including in the
following ways:
• review and discussion by the board of a quarterly culture
dashboard, setting out an assessment of culture, and culture
and conduct metrics, across the group and each of its divisions
from the perspective of customers, people and control issues;
• regular updates to the board on external guidance and insight
on culture, including from regulators and industry bodies,
which are used by the board to benchmark the group’s
approach and plans;
• discussing feedback received from employees across the
group in regular employee opinion surveys. This year, surveys
included specific questions in the areas of culture and
inclusivity, together with discrete surveys during the Covid-19
pandemic on employee wellbeing;
• updates on activities across the group in relation to culture and
values, including employee training programmes, activities in
relation to the group code of conduct, the Close Brothers Way,
and other initiatives;
• following the activities of employee working groups considering
discrete areas in relation to diversity and inclusion, including
gender, ethnic diversity, LGBTQ+, disability, working parents
and carers, mental wellbeing and social mobility;
• inclusion of culture-related objectives as part of the executive
directors’ balanced scorecard assessed by the Remuneration
Committee, further detail on which can be found in the
Directors’ Remuneration Report later in this Annual Report;
• continuing to focus on rewarding and investing in the group’s
employees, including discussions by the Remuneration
Committee in relation to gender pay reporting and a strong
focus on employee considerations as part of board decision-
making and oversight;
• consideration of culture, behaviour and conduct issues by the
Remuneration Committee;
• discussion of cultural and behavioural attributes by the
Nomination and Governance Committee as part of regular
talent reviews and succession planning;
• reviewing the group’s whistleblowing arrangements by
which employees can raise concerns in confidence and, if
they wish, anonymously;
• the Risk Committee’s regular review of a conduct risk
dashboard covering an assessment of relevant issues and
developments for each of the group’s divisions;
• considering the impact of Covid-19, including for employees
working from home during the UK lockdown, on the group’s
culture and on the wellbeing of employees, together with
oversight of actions taken by management to support
employees;
• discussing culture and conduct issues arising out of specific
activities and programmes being undertaken by the group,
including the conduct implications of the group’s activities in
relation to the transition away from LIBOR and the cultural
implications of significant transformation programmes and
other strategic initiatives;
• regular direct engagement with employees as part of the
board’s employee engagement programme, including site visits
and participation in employee meetings;
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• supporting and participating in training and development
programmes for employees; and
• encouraging and enabling eligible employees to participate in
schemes to promote share ownership. Eligible employees are
able to participate in the group’s Save As You Earn (“SAYE”)
and Buy As You Earn (“BAYE”) schemes, which provide
cost-effective opportunities for employees to acquire shares in
the company.
The activities described above have allowed the board to
effectively monitor the group's culture during the year and to
ensure that culture continues to be aligned with the group's
purpose, values and strategy.
Whistleblowing
The board has responsibility for oversight of the group’s
whistleblowing arrangements. It monitors the operation and
effectiveness of these arrangements and ensures that processes
are in place for the proportionate and independent investigation of
matters raised through the mechanisms available to the
workforce and for follow-up action. In the 2020 financial year, in
line with the Code, oversight of whistleblowing was transferred
from the Audit Committee to the full board.
Among other things, the board discharges this responsibility
through the provision of at least half-yearly updates by the group
head of compliance. These updates include:
• an overview of the group’s whistleblowing arrangements and
an assessment of their effectiveness;
• information on steps taken by the group to ensure the
protection of those using the group’s whistleblowing
arrangements; and
• a summary of whistleblowing events, including outcomes and
any follow-up actions.
In addition, the board appoints one of the directors to act as the
group’s whistleblowing champion. This is currently Oliver Corbett.
As part of his role, Oliver engages with the group head of
compliance regularly in relation to whistleblowing matters during
the course of the year.
Board and Committee Effectiveness
Annual board and committee evaluation
The board undertakes a formal and rigorous 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.
During the 2020 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 2019 internal evaluation.
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 2020 financial year. In each part of the
assessment, directors were invited to provide general comments
and observations in addition to responding to specific questions.
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;
• board behaviours; and
• the operation of the board during the Covid-19 pandemic.
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 2020.
The overall conclusion of the evaluation was that the board and its
committees continue to operate effectively, that they are well led
with strong participation from all members and that good progress
has been made against each of the recommendations made in the
internal evaluation undertaken in the previous year. The evaluation
also confirmed that the positive features and attributes of the board
identified in the 2019 evaluation had remained present in the
workings of the board in the 2020 financial year.
Among other things, the evaluation demonstrated the
effectiveness of the board during the challenges presented by the
Covid-19 pandemic, and 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).
Other areas of strength identified by the evaluation include the
effective recruitment process for the new chief executive and the
board’s oversight of culture. 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, including capturing
and carrying forward positive learnings from the operation of the
board during the pandemic, finding additional opportunities for
informal board and non-executive director-only sessions and
continuing to embed best practice guidance for the preparation of
papers and presentations. In addition, when safe to do so in line
with government guidance, the board will explore further
opportunities for non-executive directors, whether individually or
in small groups, to visit the group’s office locations to facilitate
engagement and interaction between the board and employees.
The board anticipates that, in line with the Code, an external
evaluation of the effectiveness of the board and its committees
will be undertaken during the 2021 financial year. Further details
will be set out in next year’s Annual Report.
Directors’ performance
During the financial year, the chairman holds regular meetings
with individual directors at which, among other things, their
individual performance is discussed. Informed by the chairman’s
continuing observation of individual directors during the year,
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.
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.
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Directors’ fitn ess 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, Audit and Internal Control
An explanation of how the board and the group comply with the
requirements of the Code in relation to risk and control matters is set
out in the Risk Report on pages 48 to 59 of this Annual Report.
The report of the Risk Committee setting out further information
on its role, responsibilities and key activities during the year starts
on page 79.
Acting under delegated authority from the board, the Audit
Committee oversees matters relating to audit and financial
control, including accounting policies, the board’s relationship
with the external auditor and oversight of the group’s internal audit
function. Further details on the Audit Committee’s role, activities
and its relationship with the external and internal auditors can be
found in the Committee’s report on pages 81 to 83 of this Annual
Report. Further information on financial control matters can also
be found in the Risk Report on page 51.
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
Royal London Asset Management
M&G Investment Management
Aviva plc and its subsidiaries
18 September 2020
Voting rights
14.05%
5.75%
5.73%
4.99%
31 July 2020
Voting rights
14.05%
5.75%
5.73%
4.99%
Substantial shareholders do not have different voting rights from
those of other shareholders.
Engagement with 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.
Further detail on the company’s stakeholders and examples of
how the board has considered stakeholder interests, as well as
the company’s s.172 statement, can be found in the Strategic
Report on pages 18 to 23.
The sections below describe the board’s approach to
engagement with employees and shareholders. Further
information about how the directors have engaged with
employees, and had regard to employee interests, and how the
directors have had regard to the need to foster the company’s
business relationships with suppliers, customers and others, and
the effect of this on the principal decisions taken by the company
during the financial year, can be found in the Strategic Report on
pages 18 to 31.
Engagement with Employees
As permitted by the Code, the board has 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 Code. The
board believes that there is 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
is managed 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.
The board acknowledges the benefits of meaningful "two-way"
engagement between the directors and senior management (on
the one hand) and employees (on the other hand). To this end,
the board and senior management provide employees with
regular information on matters of interest or concern to them and
consult with them or relevant representatives in order to take their
views into account when making relevant decisions which are
likely to affect their interests. Examples of engagement and
consultation in the year have included considerations in relation to
the group’s preparations for the entry of the UK into lockdown
during the Covid-19 pandemic and planning for the subsequent
return of employees to the workplace in line with government
guidance.
The directors undertake a range of direct and indirect employee
engagement activities during the year to ensure that they are
aware of relevant issues and considerations as part of their
decision-making and oversight activities. The directors have
opportunities throughout the year to discuss their own
observations following engagement activities and also to
feed back comments raised with them by employees. The board
considers that its employee engagement activities during the year
have been effective.
Employee engagement activities undertaken by the board in the
2020 financial year included:
• detailed discussion of the results, themes and next steps
arising out of the group’s employee opinion survey,
including pulse surveys conducted during the Covid-19
pandemic with a particular focus on employee wellbeing
and health considerations;
• attendance at committees and other forums below board level
to understand employee-related issues and priorities;
• reviewing the quarterly culture dashboard;
• site visits by non-executive directors to meet employees at
different levels of the group’s operations. Whilst fewer site visits
have taken place this year due to the Covid-19 pandemic, the
board looks forward to resuming its programme of visits when
it is safe to do so in line with government guidance;
• participation by directors in programmes and initiatives
operated for different groups of employees, including training
and development programmes;
• participation by executive and non-executive directors in Q&A
sessions with employees;
• attendance or participation in business and other functional
Town Hall sessions; 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 and
updates on the impact of Covid-19 planning and the group’s
chief executive succession.
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The board recognises that the activities above are important in
helping to achieve a common awareness on the part of all
employees of the financial and economic factors affecting the
performance of the company, and in contributing to a better
understanding of the group’s activities, purpose and strategic
aims, and ultimately, the long-term success of the company.
The board supports and encourages the involvement of
employees in the company’s performance through two types of
share benefit operated by the group: a sharesave scheme (SAYE)
and a share incentive plan (BAYE). Both schemes are open to
eligible employees who have completed six months’ continuous
employment with the group.
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 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. In the 2020 financial year, the chairman’s
meetings included engagement with shareholders following the
announcement of the appointment of Adrian Sainsbury as the
group’s new chief executive. 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 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 chair of the Remuneration Committee
takes part in consultations with major institutional shareholders
on remuneration issues from time to time, including an extensive
consultation in recent months with the company’s major
shareholders as part of the Committee’s review of the Directors’
Remuneration Policy to be submitted to shareholders for approval
at this year’s AGM. The chairs of the board's other committees
will periodically seek engagement with shareholders on significant
matters that arise relating to their areas of responsibility and are
available for engagement with shareholders at other times.
Periodically, the group runs seminars covering different parts of
its business to provide additional detail to investors and analysts.
Relevant presentations, together with all results announcements,
Annual Reports, regulatory news announcements and other
relevant documents, are available on the IR section of the
company’s website (www.closebrothers.com/investor-relations).
The group engages with leading institutional shareholder bodies
and proxy advisers during the year. Once again throughout the
year, the IR team has responded to a range of enquiries and
points of feedback raised by shareholders, including in relation to
ESG issues.
Annual General Meeting
The directors regard the company’s AGM as an important
opportunity for all shareholders to engage directly with the board.
In previous years, shareholders have had 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 2019 AGM. In prior years, the chairman and the chief executive
have presented 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 company’s 2020 AGM is scheduled to take place on
19 November 2020. The board recognises the importance to
shareholders of the business to be dealt with at the AGM and
intends to proceed with the meeting on this date. However, at the
date of this Annual Report, the potential impact of Covid-19 on
attendance at this year’s AGM remains uncertain. The board
continues to monitor developments closely, including relevant
government guidance applicable to the AGM. The board’s priority
is to protect the wellbeing of employees, shareholders and the
wider community and, as such, it will take all necessary and
appropriate steps to ensure their safety.
The board’s current expectation is that government guidance
will not allow shareholders to attend the AGM in person. If that
is the case, the proceedings will be restricted to formal
business only and any shareholder seeking to attend (other
than those forming the quorum, which will be facilitated by the
company) will not be admitted. The board encourages
shareholders to vote on the resolutions to be proposed at the
AGM by submitting their proxy forms in advance of the
deadline to be set out in the Notice of AGM.
The board acknowledges the importance of shareholders being
able to ask questions on the business of the AGM. If shareholders
cannot be admitted to the meeting, the company will provide a
means for shareholders to submit questions on the business of
the AGM and for a written response to be provided.
Further detail on the arrangements for the AGM will be set out in
the Notice of AGM to be distributed to shareholders in due
course. Shareholders are encouraged to watch for updates about
the AGM on the company’s website (www.closebrothers.com/
investor-relations/shareholder-information/annual-general-
meeting) and regulatory news services.
By order of the board
Alex Dunn
Company Secretary
22 September 2020
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79
Lesley Jones Chair of the Risk Committee
The Risk Committee’s principal roles and responsibilities are to
support the board in its oversight of risk management across the
group. The identification, management and mitigation of risk is
fundamental to the success of the group. The following sections set
out the Committee’s membership, its key responsibilities and the
principal areas of risk upon which we have focused during the year.
The Committee plays an important role in setting the tone and
culture that promotes effective risk management across the group.
Risk Committee
Chair's overview
As I look back over the last 12 months and reflect upon our risk
management performance over that period, I am reminded that
FY20 has indeed been a year of two halves. Our Committee
began the financial year with another clearly defined plan to
embed the improvements that we have made, and continue to
make, in our risk management infrastructure, systems and skills.
In addition, we agreed a number of actions to broaden our
response to the growing regulatory agenda on climate change,
operational resilience, cyber risk and stress testing.
In the first half of the year, all businesses and control functions took
part in our first group-wide credit downturn simulation exercise,
with a view to improving our state of operational readiness for any
future market deterioration. The output from this was the
compilation of a series of practical action steps, or “playbooks”,
tailored to the specifics of the businesses and providing
management with a head start in the early days of a crisis.
The exercise was to prove very timely. In March 2020, the
government announced a nationwide lockdown in response to
the emerging Coronavirus threat and our playbooks have proved
to be invaluable tools in the management of the economic
deterioration that has followed. Despite the operational challenges
posed by equipping our colleagues to work from home, the
reorganisation of customer call centres and the need to continue
to support our customers with forbearance or new loans, I am
pleased to report that our response has been swift, efficient and
robust. We are also seeing the clear benefits of the investment
made in recent years in enhanced risk management systems,
cyber defences and management information. Throughout the
crisis the Committee and the group board have received regular
and timely updates on our operations, liquidity and balance sheet
and I remain confident that we are well placed to meet the
challenges and uncertainties ahead.
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).
The Committee undertakes a robust assessment of both the
principal and emerging risks facing the group over the course of the
year, and reviews reports from the risk function on the processes
that support the management and mitigation of those risks.
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Risk Committee Report continued
As part of the ongoing review process a specific assessment of
the principal risks and emerging risks and uncertainties facing the
group is also carried out by the board, including those that would
threaten its business model, future performance, solvency or
liquidity. A summary of the group’s principal risks and emerging
risks and uncertainties is provided on pages 53 to 59.
Membership and meetings
The Committee comprises all Close Brothers Group independent
non-executive directors and myself as chair.
In addition to the regular updates received by the Committee during
the Covid-19 lockdown, seven meetings were held during the year
(six scheduled and one ad hoc). Full details of attendance by the
non-executive directors at these meetings are set out on page 71.
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 page 76, an evaluation of the
effectiveness of the board and its committees was undertaken
during the year in line with the requirements of the UK Corporate
Governance Code.
The Committee considers that during the year it continued to
have access to sufficient resources to enable it to carry out its
duties and has continued to perform effectively.
Activity in the 2020 fi nancial year
The risk function continues to evolve with the three lines of
defence model now well established and a mature and effective
risk management framework in place. The risk design has been
strengthened further with both the recruitment and development
of additional skills and resource, particularly in the area of
operational resilience.
Notwithstanding the demands of the Covid-19 crisis, the
Committee has delivered on all of its planned objectives for the
year. In particular, the risk appetite framework continues to evolve,
as does the quantitative analysis that 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, Invoice and Novitas portfolios which
have all benefited from deep dives by the Committee.
The group’s use of finance and risk models continues to evolve at
pace with the ongoing development of credit scorecards and
quantitative grading models in support of our IRB application for
which our submission model suite is now complete. In addition,
we have seen the continued 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. Risk infrastructure is either in place or
being developed to support this, including a data warehouse,
model hosting platform and RWA calculator.
We remain alert to cyber crime as we continue to upgrade our
detection and monitoring capabilities and our overall posture.
Also, we have increased our focus on climate risk via a dedicated
working group as we evolve our thinking in line with industry and
regulatory standards.
The potential impacts of Brexit continue to receive focus
recognising that, given the group’s footprint, these are likely to be
secondary in nature. Nevertheless, until we have a clearer idea of
the outcome, they will merit regular scrutiny given the additional
complications posed by the concurrent pandemic.
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. This is of particular
importance in our retail businesses where customer conduct and
affordability rules are extending their reach. During the year, the
Senior Managers and Certification Regime (“SMCR”) was
successfully implemented across all of the group’s divisions.
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 2021
The year ahead promises to be a challenging one for the
Committee. The long-term evolution and impacts of Covid-19 have
yet to be felt and the speed of economic recovery is unpredictable.
The Committee will undoubtedly continue to dedicate much of its
time to ensuring that the impacts of the pandemic upon our credit
portfolios and operations are well understood and managed, but we
will not lose sight of the longer-term plans that we have for
continuous improvement, namely:
• 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.
• Refinement and advancement of the group’s operational
resilience framework.
• Enhancement of the affordability assessment processes
across the lending businesses.
• Evolution of the group’s culture framework and further
refinement of the conduct risk reporting framework.
Lesley Jones
Chair of the Risk Committee
22 September 2020
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81
Oliver Corbett Chair of the Audit Committee
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. The Audit Committee
has a key role in maintaining and challenging the quality of
financial reporting and the control environment.
Chair’s Overview
I am pleased to present the Audit Committee Report describing the
work undertaken by the Committee to discharge its responsibilities.
It has once again been a busy year, the Committee has continued
to focus on the key issues relevant to the group’s financial
reporting, including consideration of key accounting judgements,
and ensuring the integrity of the Annual Report.
The Committee has also spent a significant proportion of its time
considering the additional accounting and auditing judgements,
particularly IFRS 9, as a result of Covid-19. This has also included
monitoring the effectiveness of the control framework, as the
group has adapted to working remotely.
Alongside this, the Committee’s time has been focused 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 work in respect of these and other key areas 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. In
January 2020 the Committee welcomed Sally Williams as an
independent non-executive director.
The qualifications of each of the members are outlined in the
biographies on pages 60●and 61. The Committee brings a diverse
range of experience in finance, risk, control and business, with
particular experience in the financial services sector. The
composition of the Committee satisfies the relevant requirements
of the UK Corporate Governance Code. The board has confirmed
that the members of the Committee have the necessary expertise
required to provide effective challenge to management. The
board also considers that I have the appropriate recent and
relevant experience.
The Committee met formally five times during the year with
meetings aimed to coincide with the group’s financial reporting
schedule. Additional informal meetings and discussions were
held as appropriate. Details of members’ attendance are set out
on page 71.
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. Additional meetings were also held to discuss the
ongoing formation of accounting judgements regarding Covid-19.
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.
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Audit Committee Report continued
Committee Effectiveness
As described in more detail on pages 76●and 77, the performance
of the Committee was assessed internally through a formal and
rigorous annual effectiveness evaluation. This was undertaken
during the year as part of the broader evaluation of the
effectiveness of the board and its committees, the process involved
completion of a tailored questionnaire by Committee members.
The results confirm that the Committee is operating effectively,
and it continued to have access to sufficient resources to enable
it to carry out its duties. I discussed the specific conclusions of
the evaluation relating to the Committee with the group finance
director and the company secretary, and we will explore
opportunities for incremental enhancements in the way the
Committee operates during the 2021 financial year.
Activity in the 2020 Financial Year
Key accounting judgements
The Committee spent considerable time reviewing the interim
report and full-year Annual Report. The Committee discussed
and challenged the key areas of accounting judgement taken by
management in preparing the financial statements and the
external auditor’s work.
The key judgement areas were largely unchanged from the prior
year, reflecting the group’s adherence to its business model and
consistency of its approach to financial reporting; however, Covid-19
has required the Committee to discuss at length with management
the continued appropriateness of the conclusions reached.
The main areas of focus are outlined below. Each of these
matters was discussed with the external auditor and, where
appropriate, have been addressed in the external auditor’s report.
IFRS 9
This year IFRS 9 continued to be a major focus for the Committee
as models were further embedded, validated and refined. At all
Committee meetings updates were provided by management on
the group’s expected credit loss (“ECL”) models and the related
IFRS 9 judgements and disclosures.
During the year, and with consideration to Covid-19, the Committee
challenged the level of provisions held by the group, and the
judgements and estimates used to calculate these provisions.
Particular focus was given to:
• the impact and implications of Covid-19, lockdown and the
related economic shock being the first time the group’s IFRS 9
models and judgements have operated under stress. As a result,
the Committee has reviewed the group’s IFRS 9 models in detail;
• the use and approval of post-model adjustments where it was
inappropriate to apply existing ECL methodologies
mechanistically;
• the need to ensure that application of IFRS 9 met regulatory
guidance, and took account of the extensive government
support measures and the specific circumstances of our
businesses and customers. These and other factors were
considered in arriving at reasonable and supportable
provisions; and
• the high level of estimation uncertainty in setting forward-
looking macroeconomic assumptions due to Covid-19.
The Committee will continue to pay close attention to how
post-model adjustments, underlying models and
macroeconomic scenarios perform over time.
In addition, the Committee has overseen the enhancement of
credit risk disclosures in the context of Covid-19. In the next
financial year, the Committee will still continue to monitor IFRS 9
processes and further enhancements to our disclosures.
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. The Committee also considered
management's approach in respect of modification losses as a
result of Covid-19.
Standards adopted during the year
IFRS 16
The Committee also oversaw the successful implementation of
IFRS 16, which was adopted by the group on 1 August 2019, and
was satisfied that the disclosures made in respect of IFRS 16 in
the financial statements were appropriate.
Other Financial Reporting
Financial Reporting Council review of 2019 Annual Report
In May 2020, the Financial Reporting Council’s (“FRC”) Conduct
Committee wrote to the group confirming an ordinary course
review of the Annual Report for the year ended 31 July 2019 was
being performed. As is its custom and practice, the FRC’s review
was based solely on the 2019 report and accounts with no
detailed knowledge of the group or underlying transactions
entered into.
At the end of its review, the FRC raised no questions or queries
and required no formal response from the group. The FRC made
a number of detailed suggestions to improve certain disclosures.
We welcome the FRC’s feedback and these points have been
considered by the Committee and as part of the drafting process
for this year’s Annual Report.
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 proven stability of the group’s
business model which is supported by a diverse portfolio of
businesses, its successful track record, the results of internal
stress testing, and that the group is strongly capitalised, soundly
funded and has adequate access to liquidity. The Committee
discussed the group’s principal risks such as its lending
exposures, economic factors including the Covid-19 pandemic
and operational risk which may affect future development,
performance and financial position. It also considered in detail the
implications of Covid-19 given the nature of the business and the
group’s financial structure and position.
Overall the Committee concluded that it remained appropriate to
prepare the accounts on a going concern basis and
recommended the viability statement to the board for approval,
set out on pages 66 and 67.
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. During this review the Committee carefully considered the
clarity and coherence of disclosures made in respect of the impact
of Covid-19. This included the extended quantitative and qualitative
disclosures on expected credit loss provisions, and also the
consistency of narrative covering the wider impacts of Covid-19 on
business performance, operational resilience and sustainability.
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The Committee considered the overall presentation of the financial
statements and 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.
Whistleblowing champion
I act as the group’s Whistleblowing 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. Historically, the Committee has overseen the group’s
whistleblowing arrangements but in the 2020 financial year this
responsibility was transferred to the full board in line with the new
Corporate Governance Code. Further information on the board’s
activities in this area can be found on page 76 of the Corporate
Governance Report.
Other policies
The Committee has also reviewed and approved the 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 for the year, and supported the introduction of a more
agile audit planning approach. This approach has facilitated
flexibility to provide assurance over controls impacted by
Covid-19 and the internal audit function’s ability to meet ad hoc
requests from the Committee, business or regulator.
In reviewing the audit plan, the Committee continued to assess
the level of internal audit resource and the appropriateness of the
skills and experience of the internal audit function. Ongoing
feedback on the performance of the co-source provider was
presented to the Committee throughout the year.
The Committee received regular reports on internal audit activities
across the group detailing areas identified during audits for
strengthening across the group’s risk management and internal
control framework. Thirty audits were delivered during the period
under review. These were summarised by the group head of
internal audit at each of the Committee’s meetings.
The Annual Internal Audit Assessment, which found the
governance and risk and control framework of the group to be
generally effective, was received by the Committee in accordance
with the Chartered Institute of Internal Auditors’ guidance.
Per its policy, the Committee reviews annually the effectiveness of
the internal audit function and its level of independence. The
evaluation for the year under review was completed internally and
supported by feedback from stakeholders across the group. The
internal audit function was found to be working to all applicable
internal auditing standards.
The Committee welcomed the new group head of internal audit
in November 2019.
External Audit
The Committee oversees the relationship with
PricewaterhouseCoopers LLP (“PwC”), its external auditor,
covering engagement terms, fees and independence. Both the
Committee and the external auditor have policies and procedures
designed to protect the independence and objectivity of the
external auditor. 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.
During the year the Committee reviewed the external audit plan
including the underlying methodologies PwC follow and their risk
identification processes along with the findings from their audit.
Principal matters discussed with PwC are set out in their report
on pages 115 to 121.
The company has complied with the provisions of the Statutory
Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014 for the year to 31 July 2020.
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 it was satisfied
with the auditor’s performance and recommended to the board
a proposal for the re-appointment of the auditor at the
company’s AGM.
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 total non-audit fees including those relating to
services required by legislation amounted to £0.5 million and
represented 25% of the audit fee.
Assurance work on systems and controls
£ million
0.5
The corresponding amounts for the prior year were £0.6●million
and 43%. 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
Chair of the Audit Committee
22 September 2020
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Nomination and Governance Committee Report
Chair’s Overview
This report sets out an overview of the Committee’s roles and
responsibilities, and its key activities during the year.
A considerable proportion of the Committee's time this year has
been spent on considering and recommending changes to the
composition of the board, both for executive and non-executive
roles. The Committee oversaw the process to select the group's
new chief executive, recommending the appointment of Adrian
Sainsbury who took up his new role on 21 September 2020. It
also led the recruitment of Sally Williams as an independent
non-executive director as well as the ongoing search to identify a
successor for Geoffrey Howe, the company's senior independent
director (“SID”), who has decided to step down from the board at
the conclusion of the AGM in November 2020. A description of
the processes that resulted in the appointments of Adrian and
Sally to the board can be found below, together with an update
on the SID search. 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 continued to be an important focus for the Committee.
Once again this year, it has monitored activities and initiatives to
develop the group’s talent pipeline and improve gender and other
diversity among senior management. The Committee reviewed the
skills and experience of the non-executive directors to ensure that
the board continues to be able to perform its role effectively.
The Committee has followed sustainability and environmental,
social and governance (“ESG”) developments in the year, and has
monitored the implications for the group of corporate governance
reforms including the new UK Corporate Governance Code and
enhanced disclosure requirements for subsidiaries across 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;
• oversight of the internal board and committee evaluation
undertaken during the year;
• monitoring sustainability and ESG 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, including
new disclosure requirements for large private companies;
• 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; and
• reviewing the non-executive directors’ time commitment,
independence and letters of appointment.
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 chair. 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 71.
In addition, four ad hoc meetings were held to consider matters
relating to specific board appointments during the year, including
meetings to consider the nomination of Adrian Sainsbury and
Sally Williams as members of the board.
Overview of Main Activities During the Year
CEO succession
During the year, the Committee oversaw the thorough and
extensive process that culminated in the decision by the board to
appoint Adrian Sainsbury as chief executive and an executive
member of the board, following the announcement in September
2019 of Preben Prebensen’s planned departure.
The Committee approved a detailed specification for the role of
chief executive and engaged external search firm, MWM
Consulting (“MWM”), which is a signatory to the Voluntary Code
of Conduct for Executive Search Firms, to find appropriate
candidates. The firm is not connected to the company in any way.
• 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
The search process included consideration of both external and
internal candidates and, at all stages, the Committee took steps
to ensure that all candidates were treated equally.
• assessing the contribution and time commitment of the
non-executive directors.
The Committee’s full role and responsibilities are set out in written
terms of reference and are available at www.closebrothers.com.
Key Activities in the 2020 Financial Year
During the year the Committee’s activities included:
• considering board composition and succession, including
searches for a new chief executive and non-executive roles;
• reviewing talent and executive management succession planning,
including oversight of activities to support and encourage the
development of a diverse and inclusive talent pipeline;
• the annual review of the board diversity and inclusion policy;
MWM prepared a long-list of candidates from a diversity of
backgrounds and representing a breadth of talent and experience. A
shortlist of external and internal candidates was agreed by the
Committee and candidates were interviewed by the Chairman and
other non-executive directors. Following an extensive interview and
assessment process (including presentations by a small number of
candidates to non-executive directors) and having obtained
regulatory approval, the Committee recommended Adrian Sainsbury
to the board as its preferred candidate. The board considered and
accepted the recommendation and agreed to appoint Adrian as
chief executive and a director with effect from the end of the board's
meeting held on 21 September 2020. The decision was announced
on 22 June 2020.
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Talent development, 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. Activities included a formal review
by the Committee of senior management succession planning,
looking at the capability and potential of incumbents in key roles
and the succession pipeline. The Committee also considered
specific appointments to senior management roles at both group
and divisional level. The Committee recognises the importance of
talent development and ensuring that the group continues to
attract, retain and develop skilled, high potential individuals, and
this will remain an important focus in the year ahead.
During the first part of the financial year, the Committee oversaw
the formal and rigorous process that resulted in the appointment of
Sally Williams as an independent non-executive director on
1 January 2020. The Committee approved a detailed description
for the role and 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
and is a signatory to the Voluntary Code of Conduct for Executive
Search Firms. 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 Sally’s appointment to the board.
As part of its ongoing consideration of non-executive succession
planning, the Committee has led the search to identify 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 and inclusion policy, been instructed to consider
candidates from a diverse range of backgrounds and experience.
The search is well-advanced and, subject to completion of the
regulatory approval process, the board anticipates being in a
position to announce its final decision on an appointment in due
course following the AGM in November. On the recommendation
of the Committee, the board has appointed Oliver Corbett to take
on the additional role of senior independent director on an interim
basis during the period between Geoffrey stepping down from the
board at the AGM and the appointment of a permanent successor.
Sustainability
The Committee acknowledges the ongoing focus on
sustainability and the contribution that business makes to the
wider community. On behalf of the board during the year, the
Committee regularly discussed sustainability considerations
across a range of different areas, including diversity and inclusion,
and ESG. Further details on each of these areas is set out below.
Diversity and inclusion
Diversity and inclusion continue 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 and inclusion have
been topics 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 undertook its annual
review of the board diversity and inclusion policy, and
recommended a number of incremental enhancements. The
updated policy was subsequently approved by the board. Further
information on the policy (including its objectives and progress
against them) can be found on page 70 of this Annual Report.
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 31 July 2020, three of the company’s nine
directors were women, in line with the recommendation of the
Hampton-Alexander Review. The board supports the
recommendations set out in the Parker Review and will aim to
have at least one director of colour by 2024.
The Committee acknowledges its role in overseeing the
development of a diverse pipeline for senior management
positions and the link between diversity and inclusion and delivery
of the company’s purpose and strategic aims. To that end, it
considered updates during the year in relation to diversity and
inclusion initiatives in place across the group. Among other things,
the Committee discussed the group’s approach to recruitment,
training and development programmes for employees across the
group, management’s work with diversity and inclusion campaign
groups, and activities of discrete employee working groups
including in the areas of gender, ethnic diversity, disability,
LGBTQ+, mental wellbeing and social mobility. The Committee
recognises the importance, and the benefits to the group, of
developing a diverse pipeline and it will continue to work with
senior management in this area.
In line with the UK Corporate Governance Code, the Committee
discloses that the gender balance of those in senior management
(being the members of the Executive Committee and the
company secretary) and their direct reports at 31 July 2020 was
35% female and 65% male. More detail on the group’s approach
to diversity and inclusion can be found in the Sustainability Report
on pages 25 to 27.
Environmental, social and governance issues
Throughout the year, the Committee received and considered
dedicated updates on ESG issues relevant to the group. These
updates covered items across a wide range of areas and were
informed by, among other things, engagement with shareholders
and other stakeholders, legislative and regulatory initiatives and
wider market developments. Areas of discussion included the
group's sustainability targets (including progress in the year and
future plans), the impact of Covid-19 on the broader sustainability
agenda and sustainability themes arising from my annual
corporate governance meetings with shareholders. The
Committee will continue to consider ESG and broader
sustainability matters in the year ahead and make such
recommendations to the board as it considers necessary.
Further information on the group's approach to sustainability can
be found in the Sustainability Report starting on page 24 of this
Annual Report.
Non-executive directors’ skill sets
The Committee has considered and reaffirmed the skill sets and
experience of the company’s non-executive directors, including
their extensive experience within financial services and in
regulated and listed companies. Further information on the
background and experience of each of the non-executive
directors can be found in their biographies on pages 60 and 61.
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,
suitability, time commitment and ability to continue to contribute
to the board. Following this year’s review in advance of the 2020
AGM, the Committee has recommended to the board that all
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86
Nomination and Governance Committee Report continued
serving directors be reappointed at the AGM with the exception of
Geoffrey Howe who has decided not to seek reappointment at
the AGM following more than nine years’ service on the board.
Oliver Corbett, Lesley Jones and Bridget Macaskill 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 as a committee
chair. The Committee values the knowledge, experience and
continuity that their continued appointments would bring.
Corporate governance reform
The Committee has monitored the implementation of corporate
governance reforms that began to apply to the group in the financial
year that ended on 31 July 2020. These reforms included the new
UK 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,
together with new requirements for larger subsidiaries in the group.
Committee Effectiveness
As described in more detail on page 76, 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
Chair of the Nomination and Governance Committee
22 September 2020
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87
Bridget Macaskill Chair of the Remuneration Committee
This report sets out our approach to remuneration
for the group’s employees and directors for the 2020
financial year, and new policy for the next three years.
The Directors’ Remuneration Report is divided into three
sections:
• Annual statement from the Remuneration Chair Committee
Chair, pages 87 to 90;
• Directors Remuneration Policy, pages 91 to 101; and
• Annual Report on Remuneration, pages 101 to 114.
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
2020 financial year.
This year we are presenting both our decisions for the 2020
financial year and our policy for the next three years.
How the group performed during the 2020 fi nancial year
As described in the Chairman’s and Chief Executive’s
Statements, this has been an extraordinary year, formed of two
very different periods; a pre-Covid-19 first half, followed by a
second half dominated by the crisis.
Performance in the first half of the year was set against a weak
UK economy with low levels of activity, at least until the UK
general election. For this period, all divisions of the group were
performing in line with expectations and in the first half we
reported an RoE, our key financial measure, of 13.6%; below the
previous year but well above the bonus threshold level of 12%.
Other financial and risk metrics in the Banking division were on
track, the Asset Management business showed strong growth
with 9% net inflows and Winterflood executed a rising number of
trades following the election, with no loss days. A detailed
consideration of the strategic scorecard objectives at this stage
would have shown very strong progress against all the objectives
set for the year.
Importantly, in the first half, the executive team devoted
considerable effort and energy to reviewing and testing a series of
“playbooks” designed to act as a roadmap to guide the company
in the event of an economic downturn.
Then the Covid-19 crisis struck in March, the group entered this
challenging and unprecedented period with some important
advantages: the quality of the loan book, the strength of the
balance sheet, and a clear sense of purpose which continues to
be embraced by employees throughout the company, leading to
high levels of employee engagement. The group moved quickly to
ensure the safety and wellbeing of our colleagues and enable
working from home for the vast majority of our staff within
government and regulatory guidelines.
All our divisions remained open for business throughout the UK
lockdown. The Banking division maintained its high customer
service levels, granted forbearance widely but thoughtfully and
continued to lend, with accreditation for UK government support
schemes enabling many customers to be offered additional
facilities under these schemes. Winterflood successfully managed
a huge increase in trading volumes and Asset Management
produced good relative investment performance and continued
to generate good new business inflows.
The playbooks mentioned previously proved instrumental in
facilitating timely decision-making, high levels of cooperation and
rapid reallocation of resources to meet new challenges. In
addition, the development of a long-term capital investment
roadmap and prioritisation framework allowed for appropriate
decisions to be made to reprioritise projects and allocate
resources to critical areas for maintaining the effective and secure
functioning of the business. The group’s prudent funding model
was strengthened with growing customer deposits throughout
this period, and an already high level of liquidity was increased
further in light of the pandemic.
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Throughout this time the group’s resilient business model has
continued to perform as expected in light of the external
environment. Although some key financial numbers have been
impacted by forbearance measures and higher IFRS 9 provisions,
as a result of Covid-19, most of the group’s key numbers remain
well within risk tolerances and in line with normal expectations.
The Committee also recognises that decisions taken in response
to Covid-19, including the offering of payment holidays, were the
right course of action to support the group’s customers during
this period, despite being detrimental to certain key metrics such
as net interest margin and RoE.
During this period the group’s financial and operational
performance has remained resilient, and we have seen an
encouraging increase in activity levels in June and July,
supporting loan book growth and a partial recovery in the net
interest margin. The board is now proposing payment of a 40p
per share dividend in respect of the 2020 financial year, reflecting
our confidence in the group’s business model and strong financial
position.
The table below sets out an overview of our one-year and
three-year key performance indicators which provide context for
the Remuneration Committee’s decisions taken this year.
Key performance indicator
Return on opening equity
Return on opening equity over three
years1
Adjusted operating profit (£ million)
Adjusted earnings per share growth
over three years1
Distributions to shareholders (£ million)2
2020
8.0%
13.6%
144.0
(43.4)%
59.8
2019
15.7%
16.9%
270.5
6.5%
98.5
1 For the three-year periods ended 31 July 2020 and 31 July 2019.
2 For the 2020 financial year, proposed final dividend. The interim dividend was
cancelled due to the Covid-19 crisis.
Executive director remuneration outcomes in 2020 fi nancial year
At the end of the financial year in July, the Remuneration
Committee at Close Brothers wrestled with the familiar questions
that we consider every year: how to maintain a fair balance
between the interests of different stakeholders, including
shareholders, the entire employee universe and management;
how to encourage and reward the behaviours that reflect our
purpose and culture; where to stick rigidly to formulaic outcomes
and where to use discretion and how to judge performance
against a clear set of objectives. In our deliberations this year, we
face the same additional challenge that is confronting
remuneration committees around the country and the world: how
do we take account of the unprecedented challenge posed by
the ongoing Covid-19 pandemic, and how to judge performance
against the “clear set of objectives” set at the beginning of the
year, when they have had to be re-evaluated and reprioritised
under these very unusual circumstances?
After due consideration, the Committee made the decision that the
targets that were set for the year, both formulaic and strategic, should
be respected and not revised, while a sensible degree of judgement
should be used in evaluating the outcomes of the strategic scorecard
to take account of the very changed circumstances which affected
the second half of the company’s financial year.
The year-end review of performance against the strategic
scorecard (as detailed on pages 105 and 106) showed a very
high level of continuing progress against the specified goals,
despite the crisis. All key goals have been achieved or are well on
track, with only minor delays caused by the reprioritisation and
reallocation of resources discussed above, and fully supported by
the board. This resulted in high performance scores against the
strategic scorecard.
Maintaining the same financial metrics means that the financial
element of the executive directors’ bonus, which is linked to return
on opening equity, pay out zero per cent of the maximum. This
results in materially lower annual bonuses for the executive
directors, which are, regrettably, in no way reflective of the energy,
effort and effectiveness of these individuals, but are aligned with
the experience of shareholders who have also been subject to a
decline in their dividends for the first time since Close Brothers
became a listed company. The Committee commends the
responsible attitude of the Directors concerned and their
unequivocal support for the Committee’s decision regarding the
formulaic outcomes, on top of voluntarily donating a portion of
their fixed compensation to charity.
The financial targets within the Long-Term Incentive Plan (“LTIP”)
grants awarded in 2017 have also proven highly demanding given
the current market conditions. Adjusted EPS growth over the
three-year period remained under the minimum threshold and did
not vest. Average annual return on equity over the performance
period was above the threshold target. The continued prudent
approach to capital management combined with a good
performance in risk, compliance and controls mean that the risk
management objectives element scored highly. The overall level
of the vesting of the LTIP has increased from the previous year’s
award. The vesting outcomes are set out on pages 107 to 109.
Directors’ Remuneration Policy
Our current Directors’ Remuneration Policy (“Policy”) was
approved by shareholders at the 2017 AGM, with over 97% of the
shareholders’ votes cast in favour, and expires at the 2020 AGM.
The current Policy has worked well over the past three years. In
particular, it has consistently delivered incentive payouts that
have been well aligned to group and individual performance, and
to the experience of our shareholders. Nonetheless, the
Committee undertook a detailed review to ensure that the Policy
continues to meet the needs of the business and its stakeholders
and that it remains consistent with market, regulatory and
governance developments.
In light of the review, the Committee has concluded that the new
Policy should remain largely unchanged from our current Policy
other than a number of governance and administrative updates.
The principal updates are as follows:
• Pension provision – under the new Policy, pension provision for
both incumbent and new executive directors will be aligned
with the benefit available to the general workforce (currently
10% of salary).
• Post-employment shareholding guideline – under the new
Policy, executive directors will be required to maintain a
meaningful shareholding for two years after stepping down as
a director (currrently shares worth 200% of their base salary for
two years).
• Discretion - the new Policy clarifies that the Committee has
discretion to override formulaic performance conditions in the
incentive plans to avoid inappropriate outcomes.
• Annual bonus payout schedule - the level of annual bonus
payout for “target” performance for financial measures has
been reduced from 67% to 50% of maximum.
• Malus and clawback provisions - malus and clawback
provisions have been updated to ensure alignment with
corporate governance and regulatory requirements.
We have discussed these proposed updates with our major
shareholders and I would like to thank them for the helpful
feedback that they provided.
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The proposed Policy will apply for a three-year period until the
2023 AGM. However, in the event we need to revise this in
advance of that we may seek earlier shareholder approval for a
revised Policy in 2021 or 2022. For example, an accelerated
process could be required if CRD V were to be fully adopted by
the UK, which would require material amendments to our
executive remuneration structure by 2021/2022.
The average salary increase awarded across the group was 1%,
with an emphasis on supporting pay levels for junior employees.
The majority of the staff within our group however, have seen their
annual bonus reduced. The remuneration committee have
devoted time to review the pay of junior employees to ensure that
any reductions in total compensation were limited, and less than
for senior staff.
Implementation of the Policy in 2021 fi nancial year
Throughout the last three-year Policy cycle, we used a consistent
set of financial performance measures, ranges and targets in our
annual bonus and LTIP plans. In light of the current economic
environment, we do not believe that it is appropriate to continue
this approach in the new Policy cycle and instead we will move to
a more market standard model of flexing performance measures
and targets so that they are relevant and appropriately
challenging for each individual performance period.
Specifically, in relation to the financial year 2021, we will:
• broaden the financial performance measures used in the
annual bonus by the addition of a second metric: a CET1
capital ratio, with targets set significantly above the regulatory
minimum capital requirement of 8%, will be introduced as a
new measure to complement RoE, with both having equal
weighting (30% of the bonus). We believe it is particularly
important in the current circumstances that our executives are
focused on and rewarded for a combination of maintaining a
strong capital position (CET1) as well as the profit generated
from that capital (RoE);
• maintain the financial performance measures used in the LTIP
(RoE and EPS); and
• set financial performance targets for both the 2021 annual
bonus and 2020 LTIP award that are aligned to our internal
budget and business plans, taking into account external
market conditions. Financial measures within the annual bonus
and LTIP are set out on pages 109 and 110 respectively. Details
of the strategic scorecard will be disclosed in next year’s
Directors’ Remuneration Report, in line with standard market
practice.
Changes to the board of directors during the year
As announced last September, Preben Prebensen decided to
step down as chief executive after 11 years in the role. Following
an extensive search that considered both internal and external
candidates, Adrian Sainsbury has been appointed as Preben’s
successor effective from 21 September 2020.
Adrian’s maximum annual bonus and LTIP opportunities have
been initially set at 225% and 275% of salary respectively, well
within the 300% and 350% of salary maximums respectively
permitted within the Policy. The remainder of Adrian’s
remuneration package for the 2021 financial year comprises a
salary of £550,000, 10% of salary pension allowance and
£18,000 car allowance and other regular benefits.
Preben will be eligible for a time-prorated bonus for the period of
the 2021 financial year that he had been chief executive, which
will be disclosed in next year’s Directors’ Remuneration Report.
Preben will not receive a 2020 LTIP award, recognising he will not
be in the business for the majority of the long-term performance
period. Full details of his remuneration arrangements are
disclosed on pages 112 and 113.
Group-wide employee remuneration
The responsibility for determining the reward practices on a
group-wide basis lies with the Remuneration Committee.
As in previous years, the Committee continues 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 102.
The disciplined approach to pay the group has adopted for many
years, contributed to ensuring that the company has not had to
utilise the UK government’s job retention scheme. 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 third gender pay gap report, which is published
on our website at https://www.closebrothers.com/sites/default/
files/CBG_Gender_Pay_Gap_Report_2019_2020.pdf. We are
confident that men and women are paid equally for performing
equivalent roles across our businesses and are committed to
taking steps to reduce our gender pay gap, which is primarily
driven by a lower proportion of women in senior and front office
roles where market rates are higher. Our focus on closing the
gender pay gap is through increasing female representation at all
levels by setting representation targets and supporting
development programmes. As signatories of the Women in
Finance Charter we set a target of 30% of senior manager roles
being held by a female by July 2020 and are pleased to have met
that target by reaching a new level of 33%. At the end of the
financial year we also exceeded the government’s target for 33%
of board members to be women and remain broadly in line with
Hampton-Alexander gender targets for executives and their direct
reports.
Whilst gender pay provides the most direct link to remuneration,
we have a broad focus and ambitions around inclusion matters
and are committed to fairness and equality. We are signatories of
the Social Mobility pledge and this year we also became
signatories of the Race at Work Charter to help direct our actions
around race equality. Objectives to support inclusion are linked to
executive pay through risk management objectives within our
executives’ long-term incentive plan.
We are pleased that our employees continue to feel that we are
an inclusive organisation, 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.
UK Corporate Governance Code
The updates in our proposed new Policy mean that we will be
fully compliant with the executive pay provisions of the 2018 UK
Corporate Governance Code. Our pay arrangements are also
consistent with the following principles set out in the Code:
• Clarity – this Directors’ Remuneration Report provides open
and transparent disclosure of our executive remuneration
arrangements for our internal and external stakeholders.
• Simplicity and alignment to culture - incentive arrangements for
our executives are straightforward with individuals eligible for an
annual bonus and, at more senior levels, a single long-term
incentive plan. Performance measures used in these plans are
designed to support delivery of the group’s key strategic
priorities and our commitment to adopt a responsible,
sustainable business model, in line with our purpose and
values.
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• Predictability - our incentive arrangements contain maximum
opportunity levels with outcomes varying depending on the
level of performance achieved against specific measures. The
charts on page 98 provide estimates of the potential total reward
opportunity for the executive directors under our Policy.
• Proportionality and risk - our variable remuneration
arrangements are designed to provide a fair and proportionate
link between group performance and reward. In particular,
partial deferral of the annual bonus into shares, five-year
release periods for LTIP awards and stretching shareholding
requirements that apply during and post-employment provide a
clear link to the ongoing performance of the group and
therefore long-term alignment with stakeholders. We are also
satisfied that the variable pay structures do not encourage
inappropriate risk-taking. Notwithstanding this, the
Remuneration Committee retains an overriding discretion that
allows it to adjust formulaic annual bonus and/or LTIP
outcomes so as to guard against disproportionate out-turns.
Malus and clawback provisions also apply to both the annual
bonus and LTIP and can be triggered in circumstances outlined
in the Policy.
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
Chair of the Remuneration Committee
22 September 2020
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Directors’ Remuneration Policy
This section of the report sets out the group’s proposed Remuneration Policy for directors and explains each element and how it will
operate. This Directors’ Remuneration Policy will be subject to a binding shareholder vote at our AGM in November 2020 and, if
approved, will apply from the date of the AGM.
The Remuneration Committee (“the Committee”) discussed the detail of the Policy over a series of meetings which considered the
strategic priorities of the business and evolving market and regulatory practice. Input was sought from the management team, while
ensuring that conflicts of interest were suitably mitigated. An external perspective was provided by our major shareholders and
independent advisers.
As noted in the Committee Chair’s Annual Statement, this Policy remains largely unchanged from the previous policy approved by
shareholders in 2017 other than the following governance and administrative updates:
• Alignment of pension provision for executive directors (“EDs”) with the pension benefit available to the wider workforce (currently 10%
of salary).
• Introduction of a post-employment shareholding policy.
• Clarification that the Committee has discretion to override formulaic vesting outcomes under the LTIP (for awards granted on or after
15 November 2018), where it considers the application of formulaic performance conditions to be inappropriate.
• Reduction in the level of annual bonus payout for “target” performance for financial measures from 67% to 50% of maximum
opportunity.
• Extension of malus and clawback triggers to ensure alignment with corporate governance guidelines and regulatory requirements.
• Administrative changes to align the wording of the incentive plan leaver provisions in this Policy with the existing incentive plan rules
and to provide flexibility to increase the proportion of incentives that are based on financial measures.
The reward structure aims to:
• attract, motivate and retain high calibre EDs;
• reward good performance;
• promote the achievement of the group’s annual plans and its long-term strategic objectives;
• align the interests of EDs with those of all key stakeholders, in particular our shareholders, clients and regulators; and
• support effective risk management and promote a positive corporate culture and appropriate conduct to both employees and clients.
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Remuneration Policy for executive directors
Element and how it supports the
group’s short-term and long-term
strategic objectives
Base salary
Attracts and retains high
calibre employees.
Reflects the employee’s
role and experience.
Operation and maximum payable
Salaries are based on the individual’s role and experience
and external factors, as applicable.
Paid monthly in cash.
Salaries will be reviewed annually or when there is a
change in role or responsibility. Any changes normally take
effect from 1 August and will generally not exceed those
for the broader employee population. Increases may be
made above this level in certain circumstances, such as:
• progression within the role;
• increase in scope and responsibility of the role;
• increase in experience where an individual has been
recruited on a lower salary initially; and
• increase in size and complexity of the company.
Performance framework, recovery and withholding
Not applicable.
Changes from previous policy
A description has been provided of the considerations that the Committee will take into account for increasing salaries above the
average for all employees during the remuneration policy period.
Benefi ts
Enables the EDs to
perform their roles
effectively by contributing
to their wellbeing and
security.
Provides competitive
benefits consistent with
the role.
Any benefits allowances will be paid monthly and will not
form part of pensionable salary.
Not applicable.
Benefits may include:
• Private medical cover.
• Health screening.
• Life assurance cover.
• Income protection cover.
• Directors’ and Officers’ Liability Insurance.
• Allowance in lieu of a company car. The maximum
allowance is £18,000 for the chief executive and £12,000
for other EDs.
• Other benefits or payments in lieu of benefits may also
be provided in certain circumstances (such as relocation
expenses).
Changes from previous policy
None.
Pension
Provides an appropriate
and competitive level of
personal and dependant
retirement benefits.
Changes from previous policy
EDs will receive a level of pension contribution (in the form
of a cash allowance or contribution to a pension
arrangement) that is in line with the wider workforce.
Not applicable.
Reduction in maximum pension contribution from 22.5% of salary to up to 10% of salary, to bring this fully in line with the level currently
offered to the wider workforce.
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Element and how it supports the
group’s short-term and long-term
strategic objectives
Annual bonus
Rewards good
performance.
Motivates employees to
support the group’s
goals, strategies and
values over both the
medium and long term.
Aligns the interests of
senior employees and
executives with those of
key stakeholders,
including shareholders,
and increases retention
for senior employees,
through the use of
deferrals.
93
Operation and maximum payable
60% of the annual bonus will usually be deferred into
shares (in the form of nil cost options or conditional
awards) and will usually vest in equal tranches over three
years, subject to remaining in service. The remaining
annual bonus will be delivered immediately in cash.
The annual bonus is capped at 300% of base salary.
Performance framework, recovery and withholding
Individual bonuses are determined based on
both financial and non-financial performance
measures in the financial year, including
adherence to relevant risk and control
frameworks. At the Committee’s discretion, an
element of the bonus may also be based on
personal performance.
At the Committee’s discretion, dividend equivalents will
usually be paid in cash or additional shares when the
deferred awards vest.
Weightings
At least 60% of the annual bonus opportunity
will be based on financial performance.
The non-financial element will be determined
based on performance measured against a
balanced scorecard, including (but not limited
to):
• strategic objectives; and/or
• people and customer metrics; and/or
• risk, conduct and compliance measures.
The Committee maintains discretion to vary
the measures and their respective weightings
within each category.
The actual performance objectives will be set
at the beginning of each financial year but will
not be disclosed prospectively due to
commercial sensitivity reasons. They will be
designed to align the interests of EDs with the
key stakeholders over the medium term, be
challenging and also provide an effective
incentive for the EDs.
Performance against the objectives that
comprise the balanced scorecard and their
weightings will be disclosed retrospectively on
an annual basis as part of the Annual Report
on Remuneration.
Amount payable for threshold performance
No more than one third of maximum.
Amount payable for target performance
No more than 50% of maximum.
Recovery and withholding
The cash element is subject to clawback and
the deferred element is subject to malus and
clawback conditions, as outlined on pages 96
and 97.
Changes from previous policy
Our previous Policy contained a different bonus cap and deferral proportion for the role of group head of legal and regulatory affairs. As
that role is no longer a Board position, references to it have been removed in this new Policy.
Also, the level of annual bonus payout for “target” performance for financial measures has been reduced from 67% to 50% of maximum
opportunity. Also, the Committee now has flexibility to increase the proportion of the annual bonus which is based on financial
measures (provided that the proportion is at least 60%).
The Company’s intention is to extend the malus and clawback conditions which apply to the annual bonus to cover additional triggers
as described on pages 96 and 97 for 2021 grants onwards.
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Element and how it supports the
group’s short-term and long-term
strategic objectives
Long-Term Incentive Plan
Motivates executives to
achieve the group’s
longer-term strategic
objectives.
Aids the attraction and
retention of key staff.
Operation and maximum payable
Awards are made in the form of nil cost options or
conditional awards and usually vest after three years
subject to achieving performance conditions and
remaining in service.
Performance framework, recovery and withholding
Measures and weightings
Individual awards vest based on performance
against both financial and non-financial
performance measures.
On vesting, awards will usually be subject to a further
two-year post-vesting retention period before options can
be exercised by, or conditional awards paid to, EDs.
Aligns executive interests
with those of
shareholders.
At the Committee’s discretion, dividend equivalents will
usually be paid in cash or additional shares when LTIP
awards are released.
EDs are eligible to receive an annual award of shares with
a face value of up to 350% of base salary, excluding
dividend equivalents.
At least 70% of the award will be based on
performance against financial measures. The
remainder will be based on non-financial
performance.
The Committee maintains discretion to vary
the measures and their respective weightings
within each category.
The choice of measures and their respective
weightings will be disclosed annually as part of
the Annual Report on Remuneration.
The Committee has an overriding discretion, in
respect of awards granted on or after
15 November 2018, to adjust vesting outcomes
where it considers the application of formulaic
performance conditions to be inappropriate.
Amount payable for threshold performance
For each element of the award, vesting starts
at 25% for threshold performance, rising on a
straight-line basis to 100% for maximum
performance.
The target ranges set for the financial
measures in each grant and performance
against the targets at vesting will be reported in
the Annual Report on Remuneration for the
relevant financial years.
Recovery and withholding
LTIP awards are subject to malus and clawback
provisions, as outlined on pages 96 and 97.
Changes from previous policy
Updated to clarify that, in respect of awards granted on or after 15 November 2018, the Committee has an overriding discretion to
adjust vesting outcomes where it considers the application of formulaic performance conditions to be inappropriate.
The Committee also now has the flexibility to increase the proportion of awards which are based on financial measures (provided that
the proportion is at least 70%).
The malus and clawback conditions which apply have been expanded to cover additional triggers as described on pages 96 and 97 for
grants made on or after September 2020.
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Element and how it supports the
group’s short-term and long-term
strategic objectives
Save As You Earn
(“SAYE”)
Aligns the interests of
executives with those of
shareholders through
building a shareholding.
Operation and maximum payable
Performance framework, recovery and withholding
EDs have the option to save a fixed amount per month over
a three or five-year timeframe.
Not applicable, as this is a voluntary scheme
where EDs have invested their own earnings.
At the end of the period employees can withdraw all of their
savings, or use some or all of their savings to buy shares at
the guaranteed option price.
The option price is set at the beginning of the participation
period and is usually set at a 20% discount to the share
price at invitation.
EDs can make total maximum contributions of up to £6,000
per annum, or up to the maximum permitted by HMRC
rules at any given time.
The Committee reserves the discretion to increase the
maximum contributions in line with any HMRC rule
changes during the period of the Policy.
Changes from previous policy
None.
Share Incentive Plan
(“SIP”)
Aligns the interests of
executives with those of
shareholders through
building a shareholding.
EDs are able to contribute up to a maximum of £1,800 per
annum from pre-income tax and national insurance
earnings to buy Partnership Shares.
Not applicable, as this is a voluntary scheme
where EDs have invested their own earnings.
At present the Committee has determined that EDs have
the ability to buy Partnership Shares. Currently there is no
match but the Committee retains the discretion to offer
Matching Shares of up to twice the number of Partnership
Shares and or award free shares. This will be on the same
basis for all employees should the Committee exercise this
discretion.
Dividends paid on shares held in the SIP are reinvested to
acquire further Dividend Shares.
The Committee reserves the discretion to increase the
maximum contributions in line with any HMRC rule
changes during the period of the Policy.
Changes from previous policy
None.
Shareholding
requirement
Aligns the interests of
executives with those of
shareholders.
EDs are expected to build and maintain a holding of
company shares equal to at least 200% of base salary.
Not applicable.
EDs will normally be expected to maintain a minimum
shareholding of 200% of base salary for the two years after
stepping down as an ED. This post-employment guideline
will apply from the date of adoption of the Policy.
The Committee retains discretion to waive this guideline if it
is not considered appropriate in the specific
circumstances.
Changes from previous policy
Introducing a post-employment shareholding requirement for the EDs in line with the 2018 Code requirements.
Other
The group will pay legal, training and other reasonable and
appropriate fees, including any relevant tax liabilities,
incurred by the EDs as a result of doing their job.
Not applicable.
Changes from previous policy
None.
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Additional details on the Directors’ Remuneration Policy
The Committee may amend the performance condition applying to an LTIP award if an event or a series of events happens as a result
of which the Committee considers it fair and reasonable to make the change, provided that the performance condition is not made
either materially easier or materially more difficult to achieve than when the award was originally granted. The power to change includes
the power to adjust the existing performance condition or to impose a new performance condition or objective condition. The
Committee will make full and clear disclosure of any such adjustments within the Annual Report on Remuneration for the relevant
financial year.
The Committee has an overriding discretion (in respect of awards granted on or after 15 November 2018), notwithstanding any
performance conditions, to adjust vesting outcomes where it considers the application of formulaic performance conditions to be
inappropriate. The Committee will make full and clear disclosure of any such adjustments within the Annual Report on Remuneration for
the relevant financial year.
The Committee may make minor amendments to this Policy (for regulatory, exchange control, tax or administrative purposes, to correct
clerical errors or to take account of a change in legislation) without obtaining shareholder approval for that amendment.
In the event of a variation of share capital, demerger, special dividend, distribution or any other corporate event which may affect the
current or future value of a share award, the Committee may adjust an award as appropriate.
Rationale for choice of performance conditions
The Committee selects financial and non-financial performance measures that strengthen the alignment of the remuneration
arrangements to the business model and the interests of our shareholders.
At maximum performance, the ratio of financial to non-financial measures for the group chief executive and group finance director
across the annual bonus and LTIP is approximately two-thirds. The Committee believes this combination provides a good balance of
financial and non-financial measures, supports the medium and long-term strategic objectives of the group, is consistent with regulatory
requirements and provides alignment with shareholders’ interests.
The actual performance targets will be set at the beginning of each financial year based on prior year performance, expected
performance, strategic priorities for the year and other internal and external factors as appropriate. All targets will be set at levels that are
stretching but remain achievable within the context of this model and the broader external environment.
Malus and clawback
The LTIP rules and the rules which apply to the deferred element of the annual bonus contain malus and clawback provisions that allow
the Remuneration Committee to reduce or recover a payment or an award. The cash element of the annual bonus is also subject to
clawback provisions.
Malus is the adjustment of LTIP awards or the deferred element of the annual bonus because of the occurrence of one or more
circumstances listed below. The adjustment may result in the value being reduced, including to nil.
Clawback is the recovery of the cash element of the annual bonus, vested LTIP awards (including adjustments in respect of dividends)
and/or vested awards over the deferred element of the annual bonus (including adjustments in respect of dividends) as a result of the
occurrence of one or more circumstances listed below. Clawback may apply to all or part of a payment and may be effected, among
other means, by requiring the transfer of shares, payment of cash or reduction of other awards or bonuses.
The circumstances in which malus and clawback can be applied currently differ between the LTIP and the annual bonus (the cash
element and the deferred element). The company has extended the circumstances in which malus and clawback can be applied and is
intending to align the position between the LTIP and annual bonus (cash and deferred elements) in the future. The company intends to
apply the extended malus and clawback conditions for LTIP awards for 2020 grant onwards and for the annual bonus awards from
2021 onwards. Please refer to the previous directors’ remuneration policy for details of the current malus and clawback triggers which
apply to bonus awards and LTIP awards made prior to these dates.
In determining whether to exercise its discretion to apply malus and clawback, the Remuneration Committee will have regard to all
relevant circumstances, which will usually include (where relevant) whether, and if so, the extent to which, the ED was responsible for
the events in question.
The cash element of the annual bonus is subject to clawback for a period of three years from award. The deferred element vests in
equal tranches over three years, and is subject to malus prior to vesting and clawback for three years from the date of grant. LTIP
awards are subject to malus for the three-year period to the point of vesting, and are subject to clawback for five years from the date of
grant (two years after vesting).
If an investigation into the ED’s conduct or actions has started before, but not ended by, the end of the relevant clawback period, the
Remuneration Committee may extend the period until a later date to allow that investigation to be completed.
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97
Malus triggers
The Remuneration Committee may apply malus to unvested LTIP awards granted on or after 21 September 2020 in the following
circumstances:
• The assessment of any performance target or condition, the related bonus and/or the number of shares subject to an award was
based on material error, or materially inaccurate or misleading information;
• The ED’s employment is terminated for misconduct, or if the ED has been issued with a formal disciplinary warning for misconduct
under the company’s disciplinary policy (or, if the ED has left employment, the Remuneration Committee becomes aware of
circumstances that would have led to their employment being terminated for misconduct or to the issue of a formal disciplinary
warning for misconduct had the ED still been in employment);
• The company or a material proportion of the group become(s) insolvent or suffer(s) a corporate failure so that ordinary shares in the
company no longer have material value, and for which the Remuneration Committee determines the ED was wholly or partly
responsible;
• An event has occurred which has caused, or in the opinion of the Remuneration Committee is reasonably likely to cause, serious
reputational damage to the company or any member of the group, and for which the Remuneration Committee determines the ED
was wholly or partly responsible;
• The company suffers a material loss, financial or otherwise, where the ED has operated outside the risk parameters or risk profile
applicable to their position and for which the Remuneration Committee determines the ED was wholly or partly responsible; and
• The payment of the award in whole or in part is not sustainable when assessing the overall financial viability of the company.
Clawback triggers
The Remuneration Committee may apply clawback to LTIP awards granted on or after 21 September 2020 in the following
circumstances:
• Discovery of a material misstatement resulting in an adjustment in the audited consolidated accounts of the group, or the audited
accounts of any material subsidiary;
• The assessment of any performance target or condition, the related bonus and/or the number of shares subject to an award was
based on material error, or materially inaccurate or misleading information;
• Action or conduct which, in the reasonable opinion of the board, amounts to fraud or gross misconduct (or, if the ED has left
employment, the Remuneration Committee becomes aware of circumstances that would have amounted to fraud or gross
misconduct had the ED still been in employment);
• The company or a material proportion of the group become(s) insolvent or suffer(s) a corporate failure so that ordinary shares in the
company no longer have material value, and for which the Remuneration Committee determines the ED was wholly or partly
responsible;
• An event has occurred which has caused, or in the opinion of the Remuneration Committee is reasonably likely to cause, serious
reputational damage to the company or any member of the group, and for which the Remuneration Committee determines the ED
was wholly or partly responsible; and
• The Company suffers a material loss, financial or otherwise, where the ED has operated outside the risk parameters or risk profile
applicable to their position and for which the Remuneration Committee determines the ED was wholly or partly responsible.
Consistency of ED remuneration with wider employee population
The pay and terms and conditions of employment of employees within the group were taken into consideration when setting the Policy
and pay of the EDs. The Committee does not formally consult with employees when setting the Policy, although the employee opinion
survey conducted every two years includes remuneration as one of the topics surveyed.
The principles of remuneration are applied throughout the group and are designed to support the group’s key attributes across our
businesses, which are expertise, service and relationships. Remuneration structures and arrangements for all employees are based on
the individual’s role, experience, performance and relevant market practice.
Annual bonuses are based on role, business performance, market conditions and individual performance. These bonuses are not
capped; except for EDs. All highly remunerated employees have a portion of their bonuses deferred.
A limited group of senior employees receive LTIP awards, generally on the same basis as the EDs, but the maximum face value of these
awards is generally materially lower as a percentage of base salary.
Members of the group Executive Committee who are not EDs are required to build and maintain shareholdings of at least one times
base salary.
All UK employees are eligible to participate in the SAYE and SIP plans.
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Illustrations of application of Remuneration Policy for EDs
The scenario charts below provide illustrations of potential remuneration outcomes for our EDs in 2021, based on the 2020
Remuneration Policy set out on pages 92 to 95 based on the assumptions provided in the table below.
CEO: Adrian Sainsbury
£’000
5,000
4,000
3,000
2,000
1,000
0
£2,012
37%
31%
32%
£637
100%
Minimum
On target
CFO: Mike Morgan
£’000
3,000
2,000
1,000
0
£1,142
31%
31%
38%
£442
100%
£3,387
45%
36%
19%
Maximum
£1,842
38%
38%
24%
£4,143
18%
37%
30%
15%
Maximum +
share price
growth
£2,192
16%
32%
32%
20%
Maximum +
share price
growth
Minimum
On target
Maximum
Fixed remuneration
Annual bonus
Performance awards
Share price growth
Element
Fixed remuneration
Minimum
On target
Maximum
Assumptions used
Consists of 2021 base salary (group chief executive £550,000; group finance director £400,000,
2020 benefits and 2021 pension allowance (10% of salary))
No variable elements are awarded
Annual bonus: Awarded at 112.5% of base salary for the group chief executive and 87.5% of
salary for the group finance director (50% of maximum potential for 2021)
LTIP: Awards with face value of 275% of salary for the group chief executive and 175% of salary
for the group finance director and assumed 50% vesting
Annual bonus: Awarded at 225% of base salary for the group chief executive and 175% of salary
for the group finance director (100% of maximum potential for 2021)
Maximum (with share price growth) Maximum scenario with assumed 50% share price growth over the LTIP performance period
Other
No adjustment for dividends equivalents
LTIP: Awards with face value of 275% of salary for the group chief executive and 175% of salary
for the group finance director and assumed 100% vesting
Approach to recruitment remuneration
The remuneration package for new EDs will comply with the Policy for EDs outlined on pages 92 to 95 and the following paragraphs.
The Committee will seek to pay no more than is necessary to secure the right candidate.
The Committee may, to the extent permitted by the Listing Rules, seek to “buy out” remuneration or any other compensation
arrangements with another employer that the ED forfeits as a result of joining the group. In such cases, the Committee will seek to
replace this with awards that match the quantum and terms of the forfeited awards as closely as possible. There may be situations
where a new director has to relocate in order to take up the post with the group. In such situations reasonable financial and/or practical
support will be provided to enable the relocation. This may include the cost of any tax that is incurred as a result of the move.
In the event that an internal appointment is made, or where an ED is appointed as a result of transfer into the group on an acquisition of
another company, the Committee may continue with existing remuneration provisions for any such individual where appropriate.
If considered appropriate the Committee may apply different performance measures and/or targets to an ED’s first incentive awards in
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their year of appointment.
Legacy awards
The Committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any
discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above where
the terms of the payment were agreed (i) before this Policy came into effect, provided that the terms of the payment were consistent
with the shareholder-approved policy in force at the time they were agreed; or (ii) at a time when the relevant individual was not a
director of the company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a
director of the company. For these purposes “payments” includes the Committee satisfying awards of variable remuneration and, in
relation to an award over shares, the terms of the payment are “agreed” at the time the award is granted.
Policy for payment on loss of offi ce
Standard provision
Notice period
Policy
12 months’ notice from the company.
12 months’ notice from the ED.
Compensation for loss of
office in service contracts
No more than 12 months’ salary, pension
allowance and benefits.
Treatment of annual bonus on
termination
No bonus is paid unless the ED is employed
on date of payment (unless the Committee
determines otherwise).
Treatment of unvested
deferred awards under the
annual bonus plan
Deferred awards will usually be released on
the normal release date, unless the
Committee elects to release the shares on an
earlier date.
Treatment of the LTIP awards
Vested awards will usually be released on the
normal release date, unless the Committee
elects to release the shares on an earlier
date.
Unvested awards lapse unless the individual
is a “good leaver” (leaves employment
because of death, retirement, ill-health, injury
or disability, redundancy, their employing
company transfers out of the group or the
business for which the individual works
transfers out of the group or otherwise at the
discretion of the Committee).
Details
• EDs may be required to work during the notice period,
may be placed on garden leave or may be provided
with pay in lieu of notice if not required to work the full
period.
• All EDs are subject to annual re-election by
shareholders.
• Payment will be commensurate with the company’s
legal obligations and we will seek appropriate
mitigation of loss by the ED.
• The Committee may award a pro-rated bonus to EDs
who work for part of the year or are “good leavers” (as
determined by the Committee) in certain
circumstances, although there is no automatic
entitlement. “Good leaver” status may be granted in
cases such as death, disability or retirement.
• The Committee has discretion to reduce the
entitlement of a “good leaver” in line with
performance, the circumstances of the termination,
and the malus conditions applicable to the annual
bonus. In determining the level of bonus to be paid,
the Committee may, at its discretion, take into
account performance up to the date of cessation or
over the financial year as a whole based on
appropriate performance measures as determined by
the Committee. The bonus may, at the Committee’s
discretion, be paid entirely in cash.
• An ED’s deferred shares will lapse (unless the
Committee determines otherwise) if their employment
ends for cause or by reason of their bankruptcy or
because they join another financial services company
within 12 months of termination. In all other
circumstances, deferred shares will be released to a
departing ED on the normal release dates (unless the
Committee elects to release the shares on an earlier
date).
• The deferred shares are released in full in the event of
a change in control unless the Committee determines
otherwise in circumstances specified in the incentive
plan rules.
• For “good leavers”, unvested awards are pro-rated for
the period of employment during the performance
period. The extent of vesting will be based on the
original performance condition assessed over the full
performance period (unless the Committee elects to
assess performance over an alternative period).
• Unless the Committee determines otherwise in
circumstances specified in the incentive plan rules, in
the event of a change in control, unvested awards will
vest subject to time pro-rating and the achievement
against the performance targets at that point (or such
other date that the Committee determines). However,
the Committee retains the discretion to decrease the
extent to which any such unvested awards vest taking
into consideration other relevant factors, including the
circumstances of the change in control.
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Standard provision
Outside appointments
Policy
EDs may accept external appointments.
Details
• Board approval must be sought before accepting the
appointment.
• The fees may be retained by the director.
• All non-executive directors are subject to annual
re-election.
• No compensation is payable if required to stand
down.
Chairman and non-executive
directors
Engaged under letters of appointment for
terms not exceeding three years.
Other
Other notable provisions in
service contracts
Renewable by mutual agreement and can be
terminated on one month’s notice.
The Committee reserves the right to make
any other payments in connection with a
director’s cessation of office or employment
where the payments are made in good faith
in discharge of an existing legal obligation (or
by way of damages for breach of such an
obligation) or by way of a compromise or
settlement of any claim arising in connection
with the cessation of a director’s office or
employment. Any such payments may
include but are not limited to paying any fees
for outplacement assistance and/or the
director’s legal and/or professional advice
fees and/or reasonable relocation costs in
connection with cessation of office or
employment.
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.
Dates of EDs’ service contracts
Name
Preben Prebensen1
Adrian Sainsbury
Mike Morgan
Date of service contract
9 February 2009
1 May 2020
15 November 2018
1 Preben Prebensen stood down as chief executive and as a director at the conclusion of the board’s meeting held on 21 September 2020.
Remuneration Policy for the chairman and non-executive directors
Element and how it supports the group’s
short-term and long-term strategic
objectives
Fees
Attract and retain a chairman
and independent non-
executive directors who have
the requisite skills and
experience to determine the
strategy of the group and
oversee its implementation.
Operation and maximum payable
Fees are paid in cash and are reviewed periodically.
Fees for the chairman and non-executive directors are set by the board. The 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.
Additional fees may be payable for other additional board responsibilities.
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.
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Non-executive directors’ appointment letters
Name
Mike Biggs
Lesley Jones
Geoffrey Howe
Bridget Macaskill
Oliver Corbett
Peter Duffy
Sally Williams
Date of appointment
14 March 2017
23 December 2013
4 January 2011
21 November 2013
3 June 2014
1 January 2019
1 January 2020
Current letter of appointment start date
21 September 2020
21 November 2019
21 November 2019
21 November 2019
21 November 2019
21 November 2019
1 January 2020
Consideration of shareholders’ views
The chairman of the board consults our major shareholders on a regular basis on key issues, including remuneration. A formal
consultation exercise was undertaken during 2020 with our major shareholders and shareholder advisory bodies as part of the process
of reviewing this policy.
Annual Report on Remuneration
Remuneration Committee
Committee roles and responsibilities
The Committee’s key objectives are to:
• determine the overarching principles and
parameters of the Remuneration Policy on a
group-wide basis;
• establish and maintain a competitive remuneration
package to attract, motivate and retain high calibre
executive directors and senior management
across the group;
• align senior executives’ remuneration with 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.
• provide oversight of all the group’s remuneration
policies and practices, to ensure fair and equitable
pay for all employees.
The Committee’s main responsibilities are to:
• 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;
• approve the design and targets of any performance-related pay schemes
operated by the group;
• review the design of all-employee share incentive plans;
• ensure that contractual terms on termination and any payments made are fair
to the individual and the group, that failure is not rewarded and that a duty to
mitigate risk is fully recognised;
• review any major changes in employee benefits structures throughout the
group;
• 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 and Sally Williams. A record of the Committee members’ attendance at the five meetings held during the year is set out on
page 71. There were two additional ad hoc meetings to discuss executive director pay and the compensation package for the new chief
executive.
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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102
Membership activity in the 2020 fi nancial year
There were seven 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
2019
January
2020
February
2020
March
2020
April
2020
June
2020
July
2020
Remuneration policy and disclosures
Review and approval of Remuneration Policy
Statement for 2019
Review and approval of Directors’ Remuneration
Report for 2019
Review and approval of the remuneration section of
the Pillar 3 disclosure for 2019
Review of Directors’ Remuneration Policy for 2021
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 2020
awards
Final review and approval of EDs’ annual bonus
targets and objectives
Review of performance testing results for vesting
2016 LTIP and SMP awards
Review and approval of revised approach to
year-end compensation
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 2017 LTIP vesting
Review proposed 2020 compensation for Material
Risk Takers
Initial review of EDs’ annual bonus targets and
objectives for 2021
Review of sales incentive schemes and approval of
schemes for 2021
Regulatory and external developments
Review of Corporate Governance Code
Material Risk Takers identification
Gender pay gap review
Special business
Review and approval of the compensation package
for the new CEO
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 group chief executive, the group head of HR, the head of reward and HR operations, the group chief risk officer and the
company secretary. Where the Committee seeks advice from employees, this never relates to their own remuneration.
The Committee’s remuneration advisers are Deloitte LLP (a member of the Remuneration Consultants Group). During the year, separate
teams within Deloitte provided advice to the group on risk, cyber, IT, internal audit and related projects. 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.
Total fees paid to Deloitte were £161,000 during the 2020 financial year, calculated on a time and material basis.
Slaughter and May provided legal advice on the company’s equity scheme rules. Fees paid to Slaughter and May were £21,500,
calculated on a time and material basis.
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Directors’ Remuneration Report continuedClose Brothers Group plcAnnual Report 2020 103
Statement of voting on the Directors’ Remuneration Policy at the 2017 AGM
Directors’ Remuneration Policy
Statement of voting on the Directors’ Remuneration Report at the 2019 AGM
Annual Report on Remuneration
Implementation of the policy in 2020
Single total figure of remuneration for executive directors 2020 (Audited)
For
97.1%
Against
2.9%
Number of
abstentions
11,022
For
99.0%
Against
1.0%
Number of
abstentions
2,053,435
Salary
Benefits
Pension
Total fixed
remuneration
Annual Bonus1
Performance
awards2,3
Total variable
remuneration
Total
remuneration
Name
Preben Prebensen
Mike Morgan4
2020
£’000
550
400
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
£’000
550
285
£’000
19
2
£’000
20
1
£’000
124
35
£’000
124
29
£’000
693
437
£’000
694
315
£’000
£’000
660 1,356
341
218
£’000
699
395
£’000
£’000
£’000
£’000
720 1,359 2,076 2,052 2,770
685 1,050 1,000
344
613
£’000
1 60% of Preben Prebensen’s and Mike Morgan’s annual bonus is deferred into shares.
2 The figures for the performance awards for 2019 have been recalculated using the actual share price on the date of vesting for the LTIP and Matched SMP Shares of
£13.53. The three-month average to 31 July 2019 was used for the 2019 report given that the awards were vesting after publication of the report.
3 The figures for the performance award for 2020 have been calculated using the three-month average to 31 July 2020. As this share price is lower than the grant date share
price, none of this value relates to share price appreciation.
4 Mike Morgan’s performance awards were granted before he was appointed to the board. £157,133 of the above value relates to 12,276 vested LTIP shares that were subject
to the performance criteria outlined on page 107 and £237,714 of the above relates to 17,071 vested shares that were conditional on continued employment and positive
EPS growth between grant and vesting.
Link between reward and performance
The 2020 financial performance is a story of two halves. Strong returns in the first half of the year were followed by a period where we
felt the impact of Covid-19. Throughout this period the group’s financial and operational performance has remained resilient, and we
have seen an encouraging increase in activity levels in June and July, supporting loan book growth and a partial recovery in the net
interest margin. The board is now proposing payment of a 40p per share dividend in respect of the 2020 financial year, reflecting our
confidence in the group’s business model and strong financial position.
Overall the group reported a 46.8% reduction in adjusted operating profit to £144.0 million (2019: £270.5m), which still equated to a
solid return on opening equity of 8.0% (2019: 15.7%). Despite this solid performance in relation to RoE, in the current economic
conditions it is below the threshold level and the financial metrics will pay out at zero per cent of the maximum. The executive directors
did however show a very high level of continuing progress against specified objectives, and this resulted in high performance scores
against the strategic scorecard (see pages 105 and 106 for further details).
For the 2017 Long-Term Incentive Plan vesting this year, 70% of the vesting is based on financial goals and 30% is based on risk,
compliance and control objectives. For the financial goals, the AEPS reduction of 43.4% over the last three years was below the
threshold performance target of 10% growth and consequently the AEPS element of the LTIP has not vested. The average annual
return on equity of 13.6% per annum has exceeded the threshold target of 12.0% per annum, meaning the RoE element contributed
13.9% to the overall vesting. 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 94.2% contributing 28.2% to the overall vesting.
As a result, the LTIP vested at 42.1% overall this year (see page 107 for further details).
Despite the overall LTIP vesting level increasing year on year, the single total remuneration figure of Preben Prebensen has reduced
materially, down by 26% from the prior year as a result of a 51% reduction in bonus.
Additional disclosures on the single total remuneration fi gure 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 executive directors for the 2021 financial year, whilst
the average increase for the general employee population is 1%.
Benefits
Preben Prebensen received an £18,000 allowance in lieu of a company car. Mike Morgan does not receive an allowance in lieu of a
company car. 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 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.
Annual bonus
Maximum bonus potential for the 2020 financial year was 300% of salary for Preben Prebensen and 175% of salary for Mike Morgan.
The bonuses for executive directors were determined with reference to RoE targets and a group-wide strategic scorecard. Details of the
achievements and targets are outlined on the following page.
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Summary of annual bonus achievement
Name
Preben Prebensen
Mike Morgan
Financial target (RoE)
Group-wide strategic scorecard
Potential
maximum
£’000s
990
420
Actual
per cent of
maximum
0%
0%
Weighting
60%
60%
Actual
amount
awarded
£’000s
–
–
Potential
maximum
£’000s
660
280
Actual
per cent
awarded
100.0%
78.0%
Weighting
40%
40%
Actual
amount
awarded
£’000s
660
218
Total
bonus
awarded
£’000s
660
218
The RoE for the 2020 financial year was 8.0% against a target range of 12% to 20%, warranting an award of zero percent 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
8.0%
Percentage
of RoE element paid
0%
For Preben Prebensen and Mike Morgan, 60% of any annual bonus is deferred into group shares vesting in equal tranches over three
years in line with the 2017 Remuneration Policy.
Group-wide performance and executive directors’ objectives for the 2020 fi nancial year
The group entered the current crisis in a strong position, with our effective operational resilience allowing us to adapt and remain open
for business throughout.
Our first priority was to protect the safety and wellbeing of our colleagues, and we quickly and effectively implemented new working
arrangements to enable them to conduct their roles safely. We have taken great care to support of our people, seeking regular
feedback and providing a range of health and wellbeing classes and webinars, as well as opportunities for employees to engage with
management and each other.
We maintained the disciplined application of our business model, with prudent and conservative lending criteria, while continuing to
protect our margins. Our specialist, relationship-driven model supports a consistently strong NIM, which remains well ahead of our peer
group average. Our funding was prudent and diverse entering the crisis, with very strong levels of liquidity, and we have increased both
in recent months in response to Covid-19. The group’s strong levels of capital continued to build throughout the year and remain well
ahead of regulatory minimums.
Our continued focus on our customers and clients is demonstrated by the strong customer satisfaction scores our businesses achieve.
To maximise the support offered to our customers we extended a range of forbearance measures to assist customers and clients who
find themselves in difficulty and became accredited to lend under UK government support schemes.
Our diverse business model supports our resilience and performance in challenging markets, minimising concentration risk and
providing a variety of profit streams. Operating profits for the year were impacted by the effects of Covid-19 on the forward-looking
recognition of impairment charges under IFRS 9, partly offset by a very strong performance in Winterflood. The loan book remained
broadly flat reflecting a resilient overall performance in a challenging year, with uncertainty over the UK general election, Brexit
negotiations and Covid-19 impacting customer demand.
Throughout this period the group’s financial and operational performance has remained resilient, and we have seen an encouraging
increase in activity levels in June and July, supporting loan book growth and a partial recovery in the net interest margin. The Board is
now proposing payment of a 40p per share dividend in respect of the 2020 financial year, reflecting our confidence in the group’s
business model and strong financial position.
The group continues to invest in its key strategic projects, which include enhancements to our cyber and data security, our multi-year
programmes in Motor Finance and Asset Finance, our hiring programme in Asset Management, and investment to support our IRB
application. Our approach allows us to improve our operational capabilities and our proposition to customers, and recent investment
has enabled us to respond effectively to Covid-19. This includes our remote lending capability which proved invaluable to our Motor
Finance dealers during lockdown, our deployment of SalesForce, aiding the rapid set-up of a portal to streamline CBILS applications in
Asset Finance, and our online deposit portal which allowed us to continue raising deposits remotely throughout lockdown. We remain
committed to investing in our key strategic programmes to protect, improve and extend our business model and, in the current
environment, we will continue to review and prioritise investment spend while maintaining our focus on cost discipline.
We have a strong balance sheet, high quality loan book and proven, resilient business model, and are emerging from this crisis in a
strong position to support our customers and clients through their recovery.
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 105 and
106 sets out the key strategic scorecard objectives which were in place in 2020, 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.
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Directors’ Remuneration Report continuedClose Brothers Group plcAnnual Report 2020 105
When setting the objectives included in the strategic scorecard, the Committee assigned equal weight to each objective. When
assessing the performance at the end of the year, the Committee ascribed additional focus to certain objectives in light of the Covid-19
crisis, including; protecting the business model, focusing on investment projects that allowed the company to operative effectively
during the crisis, employee engagement, customer satisfaction, and maintaining an appropriate risk and control environment. The
Committee determined the overall outcome of the strategic scorecard and adjusted the final individual rating to take into account the
individual contributions. Given the very strong performance against the scorecard the percentage awarded for both Preben Prebensen
and Mike Morgan have increased from the prior year.
Key:
Performance objective has been achieved
Satisfactory outcome, further progress to be made
Performance objective has not been met
Objective
Assessment of performance against objectives including performance metrics
Strategic: Protect
Maintain the discipline of the business
model
Maintain prudent levels of capital,
funding and liquidity
Performance metrics
• Net interest margin 7.5% (2019: 7.9%)
• Bad debt ratio 2.3% (10-year range 0.6%-2.3%)
• Return on net loan book 1.3% (10-year range 1.3%-3.7%)
• Over 90% of the loan book is secured or has some form of structural protection
• Average loan book maturity 15 months (31 July 2019: 14 months)
• Flat loan book in difficult market conditions (10-year range: 0%-20%)
• Winterflood only 7 loss days (10-year range 0-17 days)
Assessment
• Firm adherence to lending model with continued underwriting and pricing discipline
• Multiple business strategy playbook iterations and simulations completed in H1, which were
then mobilised to very good effect during Covid-19 crisis. PRA kept updated
• Increase in bad debt predominantly reflects forward-looking recognition of impairment
charges under IFRS 9
• Core financial metrics remain consistent with the group’s lending model
• Loan book flat against a backdrop of a weak UK economy, with encouraging increase in
activity levels supporting loan book growth in June and July
• Credit risk metrics including security cover, tenor, pricing, credit quality and concentration risk
remain within risk appetite
• Analyst and shareholder feedback continue to recognise the key attributes and differentiation
of the group’s business model
Performance metrics
• CET1 ratio 14.1% (regulatory minimum requirement: 8.0%)
• Total capital ratio 16.3% (regulatory minimum requirement: 12.3%)
• Leverage ratio 11.2% (minimum requirement 3.0%)
• Total funding 135% of loan book (31 July 2019: 129%)
• Average maturity of funding 18 months vs loan book at 15 months
• £1,733.9 million of liquid assets (31 July 2019: £1,395.4 million)
• Average 12-month liquidity coverage ratio 823% (regulatory minimum 100%)
Assessment
• Maintained strong capital ratios, diverse funding and conservative maturity profile
• Further increased CET1 headroom over minimum requirement, with very strong leverage ratio
• Maintained prudent funding relative to loan book, with average maturity of allocated funding
longer than loan book
• Increased Euro customer deposits and reduced reliance on FX swaps from €300m to€€100m
• Prudent liquidity position and very strong liquidity coverage ratio, substantially in excess of
regulatory
Strategic: Improve
Progress key investment initiatives
Assessment
• Good progress on all strategic investments during H1, continued progress in H2 subject to minor
Covid-19 related delays
• During Covid-19 reprioritised focus given to those that would greater assist with recovery when
economy improves
• AIRB project on track and with detailed Board update in June. Formal application now anticipated
by the end of the year
• Multi-year investment roadmap in place and used effectively to reprioritise during Covid-19
Maintain cost discipline
Performance metrics
• Group E/I ratio 62% (2019: 61%)
• Banking E/I ratio 52% (2019: 50%)
Assessment
• Overall cost growth of 8% vs income at 6% reflects continued strategic investment, as well as
pressure on banking income during economic downturn and covid-19 pandemic.
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106
Objective
Assessment of performance against objectives including performance metrics
Strategic: Extend
Progress current new business
initiatives
Assessment
• Energy initiatives have delivered £5.7m AOP, 50% ahead of target, with no bad debt
• Maintained good growth momentum in Asset Management with net inflow rate of
9% and recent bespoke portfolio manager hires have added £1.1bn of AUM
• Good progress in extension of Winterflood Business Services, AuA is now £4.1
billion, up from £3.7 billion at 31 July 2019, and achieved first full year of profitability
People
Succession planning for key senior
management team
Assessment
• Group CEO succession completed and plans in place for smooth transition
• Seamless transition to new group head of internal audit and other senior roles
Maintain strong engagement and
reinforce position as employers of
choice
Performance metrics
• 86% employee engagement (external benchmark 82%)
• 82% feel company supporting their wellbeing
• 84% feeling connected to team and managers
Assessment
• Employee opinion survey confirms continued strong employee engagement
• This was emphasised during Covid-19 with strong underlying scores in internal
communications and feeling connected (84%) and supporting well-being (82%)
Customers
Maintain focus on the end customer
Performance metrics
• +56 customer NPS in Premium Finance; +77 customer NPS in Motor Finance and +72 NPS
in Savings
Risk conduct and compliance
Operate within risk appetite, preserve
compliance with legal and regulatory
obligations, maintain strong control
framework and overall operational
resilience
Assessment
• During Covid-19 we have continued to follow our business model and lend to our customers
• Focused strongly on client needs and servicing
• Maintained strong key customer metrics across the Banking businesses
• Implemented Government lending schemes in Asset Finance and Invoice Finance to support
customer needs.
Performance metrics
• 100% completion of mandatory compliance training for eligible staff
• 2019 employer opinion survey scores on colleagues consistently act with integrity; 93%
• 2019 employer opinion survey scores on our values and business principles are aligned to
the way we do business with our customers and clients; 92%
Assessment
• Continued development of operational risk framework, which was significantly
tested and shown to be effective during the Covid-19 crisis
• Cybersecurity strategy enhanced following expert third party review and
measurable controls framework subsequently implemented
• Internal Audit reviews confirm businesses continue to operate within established
and embedded risk appetite, reflecting mature and transparent risk management
practices
• Maintained key regulatory and compliance controls while remaining fully operational
in a working from home environment
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Long-term performance awards
The performance awards in the single total figure of remuneration include the 2017 LTIP grant. This will vest on 3 October 2020, and the
overall vesting is outlined in the table below.
Details of the overall vesting for the LTIP
Performance measure
Adjusted EPS growth2 (35% weighting)
RoE3 (35% weighting)
Risk management objectives (“RMO”)
(30% weighting)
Overall vesting
1 25% of the awards vest for satisfying the threshold target.
2 Over three years.
3 Average over three-year performance period.
Threshold target1
10%
12%
Maximum target
30%
20%
Actual achieved
(43.4)%
13.6%
n/a
n/a
94.2%
Overall vesting
0.0%
13.9%
28.2%
42.1%
The share price during the relevant performance period for the LTIP decreased by 23.9% 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 2020 was 1,111.0p
(from 1 May 2020 to 31 July 2020), which was the performance measurement period). The 2017 LTIP award was originally granted at
1,459.0p.
The performance awards also include the amount (in cash or shares) equal to the dividend which would have been paid during the
period from the beginning of the performance period to the time that the awards vest.
Details of the assessment of the risk management objectives for the LTIP
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 2018 and 2019 Directors’ Remuneration Reports respectively. The year three
performance assessment is detailed on the following page.
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Year three performance assessment against risk management objectives
Key:
Performance objective has been achieved
Satisfactory outcome, further progress to be made
Performance objective has not been met
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 13.0% to 14.1%. Provides a significant buffer
above both the current CET1 and Tier 1 regulatory minima of 8.0% and 9.9%
respectively.
Dividend
• Interim dividend cancelled due to the Covid-19 crisis, despite having financial
resource to have paid. The Board is now proposing payment of a 40p per share
dividend in respect of the 2020 financial year, reflecting our confidence in the
group’s business model and strong financial position.
Funding
• Total funding of £10.2 billion of which £4.7 billion is term funding. Average maturity
of funding allocated to loan book is 18 months, well in excess of the loan book at
15 months.
Liquidity
• Continue to comfortably meet the liquidity coverage ratio requirement with an
average annual ratio of 823% vs minimum requirement of 100%.
Risk, compliance and
controls
Internal Ratings Based
approach
• End to end IRB Reporting Framework complete and first generation models
launched.
Culture
• Second generation models developed, validated and approved by the Model
Governance Committee.
• Maintained key objectives and milestones and on track to submit application to
PRA in 2020, including formal update to the PRA’s Supervisory Risk Specialist in
February 2020.
• Group culture dashboard enhanced with further metrics and trend analysis
added, with outputs shared on a quarterly basis with the group Risk and
Compliance Committee and board.
• New employee survey implemented which focused on culture and wellbeing.
• Overall cultural assessment for the group remains positive and strong scores on
culture achieved in new employee survey.
Sustainability
• Sustainability targets met, exceeded or on track. These include our gender
balance target for 2020 of 30% of senior manager roles being held by a female,
which has been exceeded (33%), maintenance of strong customer satisfaction
scores across all our businesses, maintenance of our gold award for payroll
giving, and exceeded our 2021 targets of zero waste to landfill and a 20%
improvement in fleet vehicle emissions.
• Climate risk now embedded within the risk governance framework, with key
climate risk themes identified with quantification of credit related risks,
counterparty and collateral, continuing to progress.
Operational risk/resilience • Firm’s detailed approach to operational resilience agreed with strategic input from
a third party, and positive feedback from the PRA received.
• Repeatable methodology established for defining important business services
and defining impact tolerances.
• Group-wide disaster recovery strategy updated and tested to positive effect
during Covid-19 which presented a real-world stress of the firm’s operational
resilience. The crisis management, technology and business continuity
capabilities in place prior to the crisis enabled the firm’s operation through
extensive operational disruption.
• Cyber control framework agreed and implemented.
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Directors’ Remuneration Report continuedClose Brothers Group plcAnnual Report 2020
109
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 2021
Base salary
Group chief executive – Preben Prebensen1
Group chief executive – Adrian Sainsbury2
Group finance director – Mike Morgan
1 For the period 1 August 2020 to 21 September 2020.
2 Salary effective from 21 September 2020.
Year one assessment
100%
85%
Year two assessment Year three assessment
95%
95%
100%
90%
Salary effective from 1 August 2020
£550,000
£550,000
£400,000
Overall vesting
98.33%
90.00%
94.17%
Increase
0.0%
–
0.0%
Base salaries were determined with reference to the executive director’s role, 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 1%.
The executive directors will receive benefits in line with those outlined in the remuneration policy table on page 92. There will be no
increases to the allowances for benefits other than any potential increase in the cost of providing them.
Adrian Sainsbury and Mike Morgan will receive a 10% of base salary cash allowance in lieu of a pension, in line with the level of benefit
offered to the general employee population. Preben Prebensen will receive a cash allowance in lieu of a pension equivalent to 22.5% of
base salary for the period 1 August 2020 to 21 September 2020.
2021 annual bonus (i.e. bonus awarded in respect of the 2021 performance year)
RoE continues to be a long-standing metric for the financial element. The Committee considers it to be a significant measure of
business performance, as it provides strong evidence of adherence to the business model. To broaden the financial measures a
second metric, CET1 capital ratio, has been added as it is important at the current point in the cycle to ensure we maintain a strong
capital position. The target range is significantly above the regulatory minimum capital requirement of 8%.
Nature of measures
Financial
Non-financial
Choice of measures
RoE
CET1
Strategic scorecard:
Strategic objectives
and People and customers
Targets
10% to 18%
12.6% to 15.6%
Discretionary
assessment1
Percentage of bonus opportunity
30%
30%
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 2021 Annual Report on Remuneration.
2 Performance below threshold in the financial measures would result in zero vesting of the financial measure.
Adrian Sainsbury will initially have a maximum bonus potential of 225% of salary. Mike Morgan’s maximum bonus potential remains at
175% of salary in line with last year. Preben Prebensen will be eligible for a time-prorated bonus for the period he was chief executive.
2020 LTIP (i.e. LTIP awarded in respect of the 2020 to 2022 cycle)
The 2020 LTIP awards due to be granted in October 2020 are shown in the table below.
2020 LTIP award
Percentage change in LTIP award from 2019
2020 LTIP award as a percentage of 2020 salary
Chief executive
Preben Prebensen
–
–
–
Chief executive
Adrian Sainsbury1
£1,500,000
–
–
Group finance director
Mike Morgan
£700,000
0%
175%
1 Adrian Sainsbury’s 2020 LTIP award equates to 273% based on his chief executive salary.
The remuneration committee carefully considered the appropriate level of LTIP award in light of market volatility during the year. The
remuneration committee was satisfied that it was appropriate to grant at the level of 273% to Adrian Sainsbury and 175% to Mike
Morgan, noting that it has an overriding discretion to adjust vesting outcomes where it considers the application of formulaic
performance conditions to be inappropriate or to avoid windfall gains at vesting.
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Close Brothers Group plc Annual Report 2020
Directors’ Remuneration Report continued
The 2020 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
10% to 18%1
Non-financial
Risk management
objectives
Discretionary assessment
against specific goals
1 Average over three-year performance period.
35%
30%
Vesting ranges
Threshold – 25%
Maximum – 100%
Threshold – 25%
Maximum – 100%
Threshold – 25%
Maximum – 100%
The Committee believes these targets are appropriately stretching and effectively align the executive directors’ interests with those of
shareholders.
The four risk management objectives for the 2021 financial year remain the same as the prior year and 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 on 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 Final dividend proposed for the financial year.
2020
£ million
322.7
59.8
2019
£ million
292.4
98.5
Change in remuneration of the directors and all employees
The following table shows how the remuneration of the directors changed compared to the average employee population for the 2020
financial year. The year-on-year movement in salary and fees for the directors and employees reflects the annual review implemented in
August 2019 and changes throughout the financial year ending 31 July 2020. Certain fees for non-executive directors increased in
August 2019 for the first time since 2017. The change in bonus for the EDs primarily reflects the achievement against RoE outlined on
page 107. The average increase in bonus for the general employee population is 13.1%. For the population excluding Winterflood the
average decrease is 22.4%, this is a lower reduction than that of the EDs.
2020
Executive directors2
Chairman and non-executive directors4
Salary
Benefits
Bonus
Average
Employee1
1.8%
1.8%
13.1%
Preben
Prebensen
0%
0%
(51.3)%
Mike
Morgan3
0%
Mike
Biggs
0%
Lesley
Jones
5.6%
Geoffrey
Howe
2.9%
Bridget
Macaskill
5.6%
0%
(54.7)%
(25.7)%
–
(57.0)%
–
32.6% (50.5)%
–
–
Oliver
Corbett
5.6%
0%
–
Peter
Duffy5
0%
0%
–
Sally
Williams6
–
–
–
1 Calculated by dividing staff cost related to salaries, bonus and benefits by the average number of employees.
2 Calculated using the data from the single figure table in the annual report on remuneration on page 103.
3 Mike Morgan was appointed a director in November 2018. To enable a meaningful comparison, his 2019 salary, benefits and bonus were adjusted to reflect a full-year.
4 Calculated using the fees and taxable benefits from the single figure table for non-executive directors on page 114.
5 Peter Duffy was appointed a non-executive director on 1 January 2019. To enable a meaningful comparison, his 2019 fees were adjusted to reflect a full-year appointment
to the Board.
6 Sally Williams was appointed a non-executive director on 1 January 2020 therefore there is no year-on-year comparison.
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111
Pay ratios
The table below compares the chief executive’s single total remuneration figure for 2020 to the remuneration of the group’s UK
employees at as 31 July 2020. The Committee is satisfied that the median ratio is consistent with the pay, reward and progression
policies for our employee population.
Year
2020
Method
Option A
25th Percentile
64 : 1
Median
38 : 1
75% Percentile
23 : 1
Our ratios have been calculated using the most robust methodology option ‘A’ prescribed under the UK Companies (Miscellaneous
Reporting) Regulations 2018. Under this option, the ratios are calculated using the following:
• the full-time equivalent salaries and allowances for employees in the UK as at 31 July 2020;
• pensions and benefits paid during the 2020 financial year;
• annual bonus awarded for the 2020 financial year;
• actual and projected gains realised from exercising awards from taxable employee share plans;
• sales incentives paid during the 2020 financial year; and
• projection of vested performance awards.
The total remuneration value for the employee at the 25th percentile, median and 75th percentile was £32,194, £54,245 and £90,029
respectively, of which the salary component made up £27,167, £36,950 and £75,000 respectively.
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
2011
2012
2013
2014
2015
2016
2017
2018
20191
2020
£2,187 £2,496
£5,748
£7,411 £5,962 £3,995 £3,337 £2,541 £2,770 £2,052
95%
90% 100% 100%
98%
95%
91%
86%
82%
40%
33%
25%
79%
95%
97%
68%
51%
19%
30%
42%
1 The figures for the performance awards for 2019 have been recalculated using the actual share price on the dates of vesting for the LTIP and Matched SMP Shares of
£13.53. In the 2019 report, the three-month average to 31 July 2019 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.
LTIP vesting for the last seven years
Year awarded
20111
20122
20132
20142
20152
20162
20173
Year vested
2014
2015
2016
2017
2018
2019
2020
Adjusted EPS
100%
100%
100%
56%
0%
0%
0%
TSR
100%
100%
25%
26%
0%
28%
–
Vesting percentage
RoE
–
–
–
–
–
–
38%
RMO
85%
87%
89%
92%
93%
94%
94%
Total
95%
97%
68%
51%
19%
30%
42%
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.
3 Vesting was subject to 35% adjusted EPS, 35% RoE and 30% risk management objectives for the 2017 award.
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Directors’ Remuneration Report continued
Performance graph
The graph below shows a comparison of TSR for the company’s shares for the 10 years ended 31 July 2020 against the TSR for the
companies comprising the FTSE 250 Index.
350
300
250
200
150
100
50
0
July 2010
July 2011
July 2012
July 2013
July 2014
July 2015
July 2016
July 2017
July 2018 July 2019
July 2020
Source: Thomson Reuters Datastream
Close Brothers
FTSE 250 Index
Note:
This graph shows the value, by 31 July 2020, of £100 invested in Close Brothers Group plc on 31 July 2010 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 2020 was
1,096p and the range during the year was 926.5p to 1,663p.
Scheme interests awarded during the year (Audited)
The face value and key details of the share awards granted in the 2020 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 £13.66, the average mid-market closing price for the five days prior to grant
(1 October 2019).
Name
Preben Prebensen
Mike Morgan
Award type1
DSA2
LTIP3,4
DSA2
LTIP3,4
Vesting period
1-3 years
3 years
1-3 years
3 years
Performance
conditions
No
Yes
No
Yes
Face value
‘000
£814
£1,889
£205
£700
Percentage vesting
at threshold Number of shares
59,557
138,320
n/a
25%
Vesting/
performance
period end date
01-Oct-22
01-Oct-22
n/a
25%
14,990
51,230
01-Oct-22
01-Oct-22
1 The awards are all delivered as nil cost options.
2 The DSA vests in equal tranches over three years.
3 Performance conditions are detailed on page 107.
4 LTIPs granted in 2019 have an additional two-year holding period.
External appointments
Preben Prebensen received £71,867 in non-executive director fees (2019: £70,875) from The British Land Company plc.
Payments to departing directors (Audited)
Preben Prebensen will be eligible for a time-prorated bonus for the period of the 2021 financial year that he was chief executive. This
award will be determined by the Committee during the 2021 compensation round, and disclosed in next year’s Directors Remuneration
Report. Preben will not receive a 2020 LTIP award, recognising he will not be in the business for the majority of the long-term
performance period. He will be treated as a good leaver for his existing unvested LTIP awards, such that outstanding awards as at the
date of termination will not lapse. As a good leaver, vesting of shares will be pro-rated to reflect the period of employment up to the
termination date of 21 September 2020. Vesting will remain subject to performance testing against the published performance
conditions for each award and shares shall vest according to the original schedule. The term “good leaver” is used to mean (in respect
of grants taking effect on or after 16 November 2017) leaving for a “permitted reason” (as defined in the current Share Incentive Plan
Rules) and (in respect of grants taking effect before 16 November 2017) the Committee decided that his awards shall not lapse on the
date on which employment ends (in accordance with the previous rules). In relation to the Deferred Annual Bonus plan, under the rules
of the scheme, provided that Preben does not join another financial service business in the 12 months following termination of his
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113
employment, he will continue to remain eligible to receive his outstanding deferrals on the usual vesting schedule. However, the
Committee has exercised its discretion, such that taking up a non-executive director role during that 12-month period for a business in
the financial services sector that does not compete in a material way with Close Brothers in the markets in which it operates by offering
similar products in such markets, will not affect his eligibility. These arrangements are also based on the assumption that Preben will
retire from his executive career and does not take up an executive role elsewhere. All Preben’s deferred awards remain subject to the
prevailing Malus and Clawback conditions.
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 2020 are set out below:
Name
Preben Prebensen
Mike Morgan
Shareholding
requirement
at 31 July
20201
100,411
73,027
Number of
shares
owned
outright2
2020
103,261
51,602
Outstanding share awards not
subject to performance
conditions3
Outstanding share awards subject
to performance conditions4
Outstanding options5
2020
116,625
15,620
2019
140,171
21,619
2020
386,819
135,699
2019
405,182
130,024
2020
1,458
2,505
2019
1,458
2,505
1 Based on the closing mid-market share price of 1,096p on 31 July 2020.
2 This includes shares owned outright by closely associated persons.
3 This includes DSA.
4 This includes LTIP awards.
5 These are comprised of SAYE options.
No executive directors held shares that were vested but unexercised at 31 July 2020. There were no changes in notifiable interests
between 1 August 2020 and 18 September 2020, other than the purchase of shares by Preben Prebensen within the SIP which
increased his shareholding to 103,289 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 last year, he is continuing to build up his shareholding over a reasonable
timeframe to meet the minimum requirement under the Directors’ Remuneration Policy.
Preben Prebensen
Mike Morgan
200%
206%
200%
141%
0
100
200
300
Policy
Actual
Details of executive directors’ share exercises during the year (Audited)
Name
Preben Prebensen
Mike Morgan
Award type
2016 DSA
2017 DSA
2018 DSA
2016 LTIP
2016 SMP – Invested
2016 SMP – Matched
2018 DSA
2016 LTIP
2015 LTIP Special
Held at
1 August
2019
4,726
21,344
17,863
78,341
39,171
78,342
315
14,508
10,373
Called1
4,726
21,344
17,863
23,401
39,171
23,401
315
4,334
10,373
Market price
on award
p
1,378.6
1,459.0
1,588.8
1,378.6
1,378.6
1,378.6
Market price
on calling
p
1,344.0
1,339.2
1,354.9
1,344.0
1,344.0
1,344.0
1,588.8
1,378.6
1,446.0
1,344.0
1,344.0
1,344.0
Lapsed
-
–
–
54,940
–
54,941
–
10,174
0
Total value
on calling1
£
63,517
285,839
242,026
314,509
526,458
314,509
4,234
58,249
139,413
Dividends
paid on
vested shares
£
8,649
26,680
11,432
42,824
71,683
42,824
202
7,931
25,045
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
No executive director exercised options during the 2020 financial year.
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Single total fi gure of remuneration for non-executive directors (Audited)
2020
Basic fee1
£’000
300
70
70
70
70
70
41
Committee
chairman
£’000
–
33
–
33
33
–
–
Committee
member
£’000
–
10
15
10
10
5
6
Senior
independent
director
£’000
–
–
20
–
–
–
–
Benefi ts2
£’000
4
1
–
5
–
–
1
Total
£’000
304
114
105
118
113
75
48
Basic fee1
£’000
300
67
67
67
67
39
–
2019
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
110
102
118
107
42
–
Name
Mike Biggs
Lesley Jones
Geoffrey Howe
Bridget Macaskill
Oliver Corbett
Peter Duffy
Sally Williams3
1 Non-executive director fees were last increased with effect from 1 August 2019.
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 Sally Williams was appointed a non-executive director on 1 January 2020.
Notes to the single total fi gure of remuneration for non-executive directors
The fees payable to non-executive directors for the 2020 and 2021 financial years are as follows:
Role
Chairman1
Non-executive director
Supplements
Senior independent director
Chair of Audit Committee
Chair of Remuneration Committee
Chair 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
Mike Biggs
Lesley Jones
Geoffrey Howe
Bridget Macaskill
Oliver Corbett
Peter Duffy
Sally Williams
There were no changes in notifiable interests between 1 August 2020 and 18 September 2020.
This report was approved by the board of directors on 22 September 2020 and signed on its behalf by:
Bridget Macaskill
Chair of the Remuneration Committee
2021
£300,000
£70,000
2020
£300,000
£70,000
£20,000
£33,000
£33,000
£33,000
£5,000
£20,000
£33,000
£33,000
£33,000
£5,000
Shares held
benefi cially at
31 July 2020
500
–
5,000
2,500
–
848
–
Shares held
beneficially at
31 July 2019
500
–
5,000
2,500
–
–
–
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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 2020 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 2020; 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 note 5 to the financial statements, we have provided no non-audit services to the group or the parent
company in the period from 1 August 2019 to 31 July 2020.
Our audit approach
Overview
Materiality
• Overall group materiality: £11.2 million (2019: £13.2 million), based on 5% of the average profit before tax for the last three years
(2019: 5% of profit before tax).
• Overall parent company materiality: £10.5 million (2019: £10.0 million), based on 1% of total assets (2019: 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).
• Impact of COVID-19 (parent company and group).
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.
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Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the group and the banking 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 Prudential Regulation Authority (“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;
• Review of customer complaints reported and the results of management’s resolution of such matters, in so far as they related to the
financial statements;
• 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, including 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. There is an increased risk of material
misstatement of expected credit losses (ECL) due to the degree
of judgement and inherent uncertainty in the assumptions
arising from the impact of COVID-19.
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) including how
management considered the impact of COVID-19 in its
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.
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.
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Key audit matter
How our audit addressed the key audit matter
The expected credit loss provision includes additional
judgements to capture the economic impact of COVID-19.
These have included reassessment of the economic scenarios
and their respective weightings, refinements to the determination
of significant increase in credit risk, consideration of COVID-19
related concessions; and consideration of the impact of
COVID-19 on individually assessed expected loss provisions.
Relevant references:
• note 2, critical accounting estimates and judgements on
page 133; and
• note 28, financial risk management on page 165.
We used our economist experts to assess the reasonableness
of management’s selected economic scenarios and associated
probability weightings, giving specific consideration to the
economic volatility and uncertainty caused by COVID-19.
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 values and ranges
of potential outcomes were appropriate given the borrower’s
circumstances;
• 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; and
• Considered the extent to which the exposure is impacted by
the economic conditions caused by COVID-19 and whether
these factors had been appropriately reflected in the ECL
provision.
We performed testing over the measurement of the post model
adjustments recorded by management to account for the
impact of COVID-19, focusing on the larger adjustments and
those which we considered to represent the greatest level of
audit risk (e.g. where a payment holiday or other COVID-19
related forbearance has been granted, management have
captured the credit risk associated with these loans through the
use of post model adjustments).
We assessed the appropriateness of methodologies used to
determine and quantify the post model adjustments required
and the reasonableness of key assumptions.
Based on our knowledge and understanding of the limitations in
management’s models and industry emerging risks, we critically
assessed the completeness of the overlays proposed by
management.
Based on the evidence obtained, we concluded that the
methodologies, modelled assumptions, management
judgements, the data used and collective and individual
assessed expected credit losses to be appropriate and
compliant with the requirements of IFRS 9.
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118
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 has 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 133;
• the key accounting judgements section of the Audit
Committee Report on page 82; and
• note 1, significant accounting policies that includes the
group’s revenue recognition policy on page 129.
Impact of COVID-19 (parent company and group)
The COVID-19 pandemic, and measures taken by governments
in order to contain COVID-19 as well as to provide support to
business have a significant impact on operations and
performance of the parent company and group. As a result of
the pandemic there are significant judgements and assumptions
that impact financial reporting that management have
considered and the areas of our audit most impacted by
COVID-19 include:
Going concern
The parent company and group financial statements are
prepared on the going concern basis of accounting. We focused
on the appropriateness of using a going concern basis of
accounting given the uncertainty about the long-term economic
outlook and potential impact on the business model as a result
of the economic and social impacts of COVID-19. The ability of
the parent company and group to continue as going concerns is
dependent on the business model resilience and maintenance
of adequate liquidity and capital resources.
Relevant references:
• the other financial reporting section of the Audit Committee
Report on page 82.
Determination of expected credit losses on loans and advances
to customers (group)
Refer to the separate Determination of expected credit losses on
loans and advances to customers Key Audit Matter.
We have understood management’s process and tested key
controls around revenue recognition, including:
• Walkthroughs for the relevant 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
including the period over which amounts are to be
recognised, and testing the accuracy of model
computations by re-performing a sample of effective interest
rate calculations;
• We agreed a sample of inputs used to loan agreements and
cash receipts 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.
In assessing the Directors’ consideration of the impact of
COVID-19 on the financial statements, we have undertaken the
following audit procedures:
Going concern
In assessing the Directors’ going concern assessment:
Evaluated and challenged management’s assessment of the
impact of COVID-19 on their financial plans, liquidity and capital
position, and operating arrangements;
Evaluated the stress testing performed by management and
considered whether these were adequate and met relevant
accounting requirements;
Substantiated the nature and existence of the group’s financial
resources and liquidity financing facilities; and
We evaluated the adequacy of the disclosures made in the
financial statements with respect to the impact of COVID-19.
As a result of these procedures, we concluded that the impact
of Covid-19 has been appropriately evaluated and reflected in
the preparation of the financial statements.
Determination of expected credit losses on loans and
advances to customers (group)
Refer to the separate Determination of expected credit losses
on loans and advances to customers Key Audit Matter.
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119
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.
The group is structured into three primary segments being Banking, Winterflood Securities and Asset Management. The Bank is
subsequently divided into Retail, Commercial and Property segments. The consolidated financial statements are a consolidation of
these components.
In establishing the overall approach to the group audit, we determined the type of work that is required to be performed over the
components by us, as the group engagement team, or auditors within 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 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 or 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 other 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.
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 materiality
£11.2 million (2019: £13.2 million).
£10.5 million (2019: £10.0 million).
Group financial statements
Parent company financial statements
1% of total assets (2019: 1% of total assets).
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 a
trading company.
How we determined it
Rationale for benchmark
applied
5% of the average profit before
tax for the last three years
(2019: 5% of profit before tax)
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 considered the economic
impact of the COVID-19 pandemic
on the Group’s results. Whilst
profit before tax is still considered
to be the most suitable
benchmark, we have used a three
year average to eliminate the
volatility introduced by COVID-19.
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 £3.1 million and £10 million. 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) (2019: £500,000) and £500,000 (parent company audit) (2019: £500,000) as well as misstatements below those amounts that, in
our view, warranted reporting for qualitative reasons.
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Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or
draw attention to in respect of the directors’ statement in the
financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the directors’ identification
of any material uncertainties to the group’s and the parent
company’s ability to continue as a going concern over a period of
at least twelve months from the date of approval of the financial
statements.
We are required to report if the directors’ statement relating to
Going Concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the group’s and
parent company’s ability to continue as a going concern.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any
form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06),
ISAs (UK) and the Listing Rules of the FCA require us also to report certain opinions and matters as described below (required by
ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 July 2020 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
liquidity of the group
We have nothing material to add or draw attention to regarding:
• The directors’ confirmation on page 66 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 66 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)
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Independent Auditors’ Report to the Members of Close Brothers Group plc continuedClose Brothers Group plcAnnual Report 2020 121
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the directors, on page 67, 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 81 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 fi nancial 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 67, the directors are responsible for the preparation of
the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The
directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic
alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance
with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or
assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
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 3 years,
covering the years ended 31 July 2018 to 31 July 2020.
Mark Hannam (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
22 September 2020
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Financial StatementsGovernance ReportStrategic ReportIndependent Auditors’ Report to the Members of Close Brothers Group plc continuedClose Brothers Group plcAnnual Report 2020 122
Consolidated Income Statement
for the year ended 31 July 2020
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 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
2020
£ million
629.1
(135.1)
2019
£ million
635.6
(129.9)
494.0
505.7
4
4
4
16
4
11
15
6
7
8
8
8
8
9
9
230.2
(17.6)
142.6
83.4
(66.5)
372.1
866.1
(538.4)
(183.7)
(722.1)
144.0
(3.1)
140.9
(31.4)
109.5
–
109.5
–
224.9
(19.2)
81.3
77.4
(53.7)
310.7
816.4
(497.4)
(48.5)
(545.9)
270.5
(5.8)
264.7
(64.4)
200.3
1.1
201.4
(0.2)
109.5
201.6
72.8p
72.5p
133.5p
132.5p
72.8p
72.5p
–
40.0p
134.2p
133.2p
22.0p
44.0p
933175.indb 122
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Close Brothers Group plcAnnual Report 2020 123
Consolidated Statement of Comprehensive Income
for the year ended 31 July 2020
Profit after tax
Other comprehensive (expense)/income that may be reclassified to income statement from
continuing operations
Currency translation (losses)/gains
Losses on cash flow hedging
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 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, net of tax from continuing operations
Total comprehensive income
Attributable to
Non-controlling interests
Shareholders
2020
£ million
109.5
2019
£ million
201.4
(0.4)
(1.9)
(0.6)
1.0
(1.9)
0.9
(0.3)
0.6
(1.3)
0.4
(6.0)
(0.1)
1.1
(4.6)
1.9
(0.4)
1.5
(3.1)
108.2
198.3
–
108.2
(0.2)
198.5
108.2
198.3
933175.indb 123
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 124
Consolidated Balance Sheet
at 31 July 2020
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
Current tax assets
Deferred tax assets
Prepayments, accrued income and other assets
Total assets
Liabilities
Settlement balances and short positions
Deposits by banks
Deposits by customers
Loans and overdrafts from banks
Debt securities in issue
Loans from money brokers against stock advanced
Derivative financial instruments
Current tax liabilities
Accruals, deferred income and other liabilities
Subordinated loan capital
Total liabilities
Equity
Called up share capital
Retained earnings
Other reserves
Total shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
31 July
2020
£ million
31 July
2019
£ million
Note
10
11
12
13
14
15
16
6
17
18
19
19
19
19
14
17
20
21
1,375.8
619.7
125.8
7,616.7
382.5
30.0
45.8
39.9
240.1
297.2
41.2
47.3
209.5
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
11,071.5
10,561.3
604.9
152.8
5,917.7
497.9
1,870.3
17.9
20.8
1.3
315.3
223.0
568.1
58.0
5,638.4
519.3
1,860.1
14.3
20.6
21.2
233.3
221.6
9,621.9
9,154.9
38.0
1,435.0
(22.4)
38.0
1,392.5
(23.1)
1,450.6
1,407.4
(1.0)
(1.0)
1,449.6
1,406.4
11,071.5
10,561.3
The consolidated financial statements were approved and authorised for issue by the board of directors on 22 September 2020 and
signed on its behalf by:
Michael N. Biggs A. Sainsbury
Chief Executive
Chairman
Registered number: 520241
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Close Brothers Group plcAnnual Report 2020 125
Consolidated Statement of Changes in Equity
for the year ended 31 July 2020
Other reserves
Called
up share
capital
£ million
Retained
earnings
£ million
FVOCI
reserve
£ million
Share-
based
payments
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 2018
38.0
1,282.8
0.8
(15.9)
(1.2)
0.1
1,304.6
(0.8)
1,303.8
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
Income tax
–
–
–
–
–
–
–
–
201.6
1.5
203.1
(95.5)
–
–
2.8
(0.7)
–
(0.1)
(0.1)
–
–
–
–
–
–
–
–
–
(11.0)
10.9
(2.2)
–
–
–
–
–
–
–
–
–
–
(4.5)
(4.5)
–
–
–
–
–
201.6
(3.1)
198.5
(95.5)
(11.0)
10.9
0.6
(0.7)
(0.2)
–
(0.2)
–
–
–
–
–
201.4
(3.1)
198.3
(95.5)
(11.0)
10.9
0.6
(0.7)
At 31 July 2019
38.0
1,392.5
0.7
(18.2)
(1.2)
(4.4)
1,407.4
(1.0)
1,406.4
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense)
for the year
Dividends paid (note 9)
Shares purchased
Shares released
Other movements
Income tax
–
–
–
–
–
–
–
–
109.5
0.6
110.1
(65.8)
–
–
(1.9)
0.1
–
(0.5)
(0.5)
–
–
–
–
–
–
–
–
–
(8.0)
11.9
(1.3)
–
–
(0.1)
(0.1)
–
–
–
–
–
–
(1.3)
(1.3)
–
–
–
–
–
109.5
(1.3)
108.2
(65.8)
(8.0)
11.9
(3.2)
0.1
–
–
–
–
–
–
–
–
109.5
(1.3)
108.2
(65.8)
(8.0)
11.9
(3.2)
0.1
At 31 July 2020
38.0 1,435.0
0.2
(15.6)
(1.3)
(5.7) 1,450.6
(1.0)
1,449.6
933175.indb 125
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 126
Consolidated Cash Flow Statement
for the year ended 31 July 2020
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
Payment of lease liabilities
Net increase/(decrease) in cash
Cash and cash equivalents at beginning of year
Note
27(a)
2020
£ million
429.4
2019
£ million
20.4
27(b)
27(c)
(5.3)
(44.3)
(4.6)
0.5
(53.7)
375.7
(8.0)
(65.8)
(14.3)
(14.6)
(4.9)
(42.2)
(3.6)
87.6
36.9
57.3
(11.0)
(95.5)
(14.2)
–
273.0
1,188.3
(63.4)
1,251.7
Cash and cash equivalents at end of year
27(d)
1,461.3
1,188.3
933175.indb 126
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Close Brothers Group plcAnnual Report 2020 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
Purchase of own shares for employee share award schemes
Financing activities
Equity dividends paid
Interest paid on subordinated loan capital and debt financing
Payment of lease liabilities
Net increase/(decrease) in cash
Cash and cash equivalents at beginning of year
Note
27(a)
2020
£ million
429.4
2019
£ million
20.4
27(b)
27(c)
(5.3)
(44.3)
(4.6)
0.5
(53.7)
375.7
(8.0)
(65.8)
(14.3)
(14.6)
(4.9)
(42.2)
(3.6)
87.6
36.9
57.3
(11.0)
(95.5)
(14.2)
–
273.0
1,188.3
(63.4)
1,251.7
Cash and cash equivalents at end of year
27(d)
1,461.3
1,188.3
Company Balance Sheet
at 31 July 2020
Fixed assets
Intangible assets
Property, plant and equipment
Investment in subsidiary
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
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
Lease liability
Provisions
Net assets
Capital and reserves
Called up share capital
Profit and loss account
Other reserves
Shareholders’ funds
127
Note
15
16
31
6
19
17
19
17
21
2020
£ million
2019
£ million
0.1
23.7
287.0
310.8
416.8
312.6
3.2
0.1
8.8
0.9
–
–
287.0
287.0
408.5
312.2
4.0
1.4
7.8
0.2
742.4
734.1
1.8
1.1
1.5
5.5
9.9
1.8
2.3
0.4
8.5
13.0
732.5
721.1
1,043.3
1,008.1
248.9
174.6
18.4
2.2
248.5
174.3
–
2.5
599.2
582.8
38.0
576.8
(15.6)
38.0
563.0
(18.2)
599.2
582.8
The Company reported a profit for the financial year ended 31 July 2020 of £81.1 million (2019: £88.3 million).
The Company financial statements were approved and authorised for issue by the board of directors on 22 September 2020 and
signed on its behalf by:
Michael N. Biggs A. Sainsbury
Chief Executive
Chairman
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 128
Company Statement of Changes in Equity
for the year ended 31 July 2020
Other reserves
Share-
based
payments
reserve
£ million
Profit
and loss
account
£ million
Shareholders’
funds
£ million
Share capital
£ million
At 1 August 2018
38.0
565.7
(15.9)
587.8
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Dividends paid (note 9)
Shares purchased
Shares released
Other movements
–
–
–
–
–
–
–
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
At 31 July 2019
38.0
563.0
(18.2)
582.8
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Dividends paid (note 9)
Shares purchased
Shares released
Other movements
–
–
–
–
–
–
–
81.1
0.7
81.8
(65.8)
–
–
(2.2)
–
–
–
–
(8.0)
11.9
(1.3)
81.1
0.7
81.8
(65.8)
(8.0)
11.9
(3.5)
At 31 July 2020
38.0
576.8
(15.6)
599.2
933175.indb 128
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Close Brothers Group plcAnnual Report 2020 129
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
(2019: 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 16 Leases, which was
effective from 1 August 2019.
IFRS 16 replaces IAS 17 Leases and introduces a new
recognition model that recognises all leases on a lessee’s balance
sheet, subject to certain exemptions. As a result, there is no
longer a distinction between finance and operating leases for
lessees. However, lessor accounting is substantially unchanged.
IFRS 16 has been applied on a modified retrospective basis and
comparative information has not been restated. The impact of the
initial application of IFRS 16 is set out in note 30.
Future accounting developments
Minor amendments to IFRSs effective for the group from 1 August
2020 have been issued by the IASB. These amendments are
expected to have no or an immaterial impact on the group.
(c) Basis of preparation
The consolidated and company accounts have been prepared
under the historical cost convention, except for the revaluation of
financial assets and liabilities held at fair value through profit or
loss, financial assets held at fair value through other
comprehensive income and all derivative financial instruments
(“derivatives”).
The consolidated financial statements have been prepared in
accordance with the Companies Act 2006 as applicable to
companies using IFRS.
The financial statements are prepared on a going concern basis
as disclosed in the Directors’ Report.
(d) Consolidation
Subsidiaries
Subsidiaries are all entities over which the group has control. The
group controls an entity when it is exposed to, or has rights to,
variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the entity.
Such power generally accompanies a shareholding of more than
one half of the voting rights. Subsidiaries are fully consolidated
from the date on which the group effectively obtains control. They
are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries. Under the acquisition method of
accounting, with some limited exceptions, the assets, liabilities and
contingent liabilities of a subsidiary are measured at their fair values
at the date of acquisition. Any non-controlling interest is measured
either at fair value or at the non-controlling interest’s proportion of
the net assets acquired. Acquisition related costs are accounted for
as expenses when incurred, unless directly related to the issue of
debt or equity securities. Any excess of the cost of acquisition over
net assets is capitalised as goodwill. All intra-group balances,
transactions, income and expenses are eliminated.
(e) Discontinued operations
The results of discontinued operations are shown as a single
amount on the face of the consolidated income statement
comprising the post-tax profit or loss of discontinued operations
and the post-tax gain or loss recognised either on measurement
to fair value less costs to sell or on the disposal of the
discontinued operation. A discontinued operation is a CGU or a
group of CGUs that either has been disposed of, or is classified
as held for sale, and represents a separate major line of business
or geographical area of operations, is part of a single coordinated
plan to dispose of a separate major line of business or
geographical area of operations or is a subsidiary acquired
exclusively with a view to resale.
(f) Foreign currency translation
For the company and those subsidiaries whose balance sheets
are denominated in sterling, which is the company’s functional
and presentation currency, monetary assets and liabilities
denominated in foreign currencies are translated into sterling at
the closing rates of exchange at the balance sheet date. Foreign
currency transactions are translated into sterling at the average
rates of exchange over the year and exchange differences arising
are taken to the consolidated income statement.
The balance sheets of subsidiaries denominated in foreign
currencies are translated into sterling at the closing rates. The
income statements for these subsidiaries are translated at the
average rates and exchange differences arising are taken to
equity. Such exchange differences are reclassified to the
consolidated income statement in the period in which the
subsidiary is disposed of.
(g) Revenue recognition
Interest income
Interest on loans and advances made by the group, and fee
income and expense and other direct costs relating to loan
origination, restructuring or commitments are recognised in the
consolidated income statement using the effective interest rate
method.
The effective interest rate method applies a rate that discounts
estimated future cash payments or receipts relating to a financial
instrument to its net carrying amount. The cash flows take into
account all contractual terms of the financial instrument including
transaction costs and all other premiums or discounts but not
future credit losses.
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1. Significant Accounting Policies continued
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. 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 are recognised in other comprehensive income, except for
impairment gains and losses, until the financial asset is either sold
or matures, at which time the cumulative gain or loss is
recognised in the income statement. Impairment gains and
losses 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. The adjustment is
recognised within interest income on the income statement.
(j) Impairment of fi nancial assets
Expected credit losses
In accordance with IFRS 9, 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, financial assets are considered to be in
Stage 1 and a provision is recognised for 12 months of expected
credit losses. If a significant increases in credit risk since initial
recognition occurs, these financial assets are considered to be in
Stage 2 and a provision is made for the lifetime expected credit
losses. As a backstop, all financial assets 30 days past due are
considered to have experienced a significant increase in credit
risk and are transferred to 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 is returned to Stage 1. At a minimum
this means that all payments must be up-to-date, the quantitative
probability of default assessment trigger is no longer met, and the
account is not evidencing qualitative assessment triggers.
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When objective evidence exists that a financial asset is credit
impaired, such as the occurrence of a credit default event or
identification of an unlikeliness to pay indicator the financial asset
is considered to be in Stage 3. As a backstop, all financial assets
90 days past due or more are considered to be credit impaired
and transferred to Stage 3.
For certain portfolios, a cure definition is in operation where
financial assets in Stage 3 can move back to Stage 2, subject to
Stage 3 indicators no longer being in effect, and meeting the
appropriate cure period. For other portfolios, financial assets will
only be considered as cured once repaid or written off.
In all circumstances 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.
has incorporated our experience and knowledge of our customers,
the sectors in which they operate, and the assets which we
finance.
As a result, the charge incurred during the year represents a
forward-looking estimate of credit losses under IFRS 9, based on
information available at 31 July 2020 and considering the expert
management judgement of our businesses. We will continue to
refine our assumptions as updated macroeconomic forecasts
become available and visibility on the performance of the loan
book evolves.
Separate from the impact of Covid-19, during the year, a number
of changes were made to the IFRS 9 models used for the
calculation of expected credit losses in the Property and Motor
Finance businesses. The changes were made to ensure modelled
provisions better reflect future loss emergence, reducing the need
for model adjustments. The impact of model changes to the
expected credit loss provision are disclosed in note 11b.
The calculation of expected credit losses for loans and advances
to customers, either on a 12-month or lifetime basis, is based on
the probability of default (“PD”), the estimated exposure at default
(“EAD”) and the estimated loss given default (“LGD”), and
includes forward-looking macroeconomic information where
appropriate. The EAD and LGD are adjusted to account for the
impact of discounting using the effective interest rate.
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
expected to be owed at the time of default. LGD represents an
expectation of the extent of loss on a defaulted exposure after
taking into account cash recoveries including the value of
collateral held. Collateral value represents the value of charged
assets and generally excludes any value attributed to
financial guarantees.
(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.
Notwithstanding staging, 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.
Expected credit losses are assessed against actual loss
experience via a series of provision adequacy reviews. These
reviews also incorporate management judgement to ensure that
our ECL coverage ratios are appropriate and actively monitored
as such.
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. These adjustments
are generally determined by taking into account the attributes or
risks of a financial asset which are not captured by existing
impairment model outputs. Management adjustments are actively
monitored, reviewed and incorporated into future model
development where applicable.
During the second half of the financial year a monthly review has
been conducted of the updated macroeconomic scenario
assumptions, with the resultant incorporation of these into our
models as the macroeconomic situation has evolved. In addition,
the use and quantum of adjustments have increased to recognise
the impact of Covid-19, which predominantly reflect the application
of expert management judgement to determine the appropriate
allocation of loan balances between Stages 1 and 2 and the review
of provision coverage at the individual portfolio level. This approach
(m) Finance leases, operating leases and hire
purchase contracts
Lessor
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.
An operating lease is a lease that does not transfer substantially
all the risks and rewards incidental to ownership of an asset to the
lessee. 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.
Lessee
A lease liability and right of use asset are recognised on the
balance sheet at the lease commencement date. The lease
liability is measured at the present value of future lease payments.
The discount rate is the rate implicit in the lease, or if that cannot
be determined, the group’s incremental borrowing rate
appropriate for the right of use asset. The right of use asset is
measured at cost, comprising the initial lease liability, payments
made at or before the commencement date less lease incentives
received, initial direct costs, and estimated costs of restoring the
underlying asset to the condition required by the lease.
Lease payments are allocated between the liability and finance
cost. The finance cost relating to the lease liability is charged to
the consolidated income statement over the lease term. The right
of use asset is depreciated over the shorter of the asset’s useful
life and the lease term on a straight line basis.
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1. Significant Accounting Policies continued
The following was applied in the previous financial year
under IAS 17 Leases.
the consolidated income statement in the period when the
hedged item affects income.
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 fi nancial instruments
Financial assets and financial liabilities are offset and the net
amount presented on the consolidated balance sheet if, and only
if, there is a legally enforceable right to set off the recognised
amounts and there is an intention to settle on a net basis, or to
realise an asset and settle the liability simultaneously.
(q) Derivatives and hedge accounting
In general, derivatives are used to minimise the impact of interest,
currency rate and equity price changes to the group’s financial
instruments. They are carried on the consolidated balance sheet
at fair value which is obtained from quoted market prices in active
markets, including recent market transactions and discounted
cash flow models.
On acquisition, certain derivatives are designated as a hedge and
the group formally documents the relationship between these
derivatives and the hedged item. The group also documents its
assessment, both at hedge inception and on an ongoing basis, of
whether the derivative is highly effective in offsetting changes in fair
values or cash flows of hedged items. If a hedge was deemed
partially ineffective but continues to qualify for hedge accounting,
the amount of the ineffectiveness, taking into account the timing of
the expected cash flows where relevant, would be recorded in the
consolidated income statement. If the hedge is not, or has ceased
to be, highly effective, the group discontinues hedge accounting.
For fair value hedges, changes in the fair value are recognised in
the consolidated income statement, together with changes in the
fair value of the hedged item. For cash flow hedges, the fair value
gain or loss associated with the effective proportion of the cash
flow hedge is recognised initially directly in equity and recycled to
(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
1 to 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 benefi ts
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
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The Notes continuedClose Brothers Group plcAnnual Report 2020 133
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 2020, 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 probable that sufficient taxable profits will be available
against which temporary differences can be set. Deferred tax
liabilities are offset against deferred tax assets when there is both
a legal right to set off and an intention to settle on a net basis.
(y) Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash
equivalents comprises cash and demand deposits with banks,
together with short-term highly liquid investments that are readily
convertible to known amounts of cash.
(z) Segmental reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the Executive Committee, which is
considered the group’s chief operating decision maker. All
transactions between business segments are conducted on an
arm’s length basis, with intra-segment revenue and costs being
eliminated on consolidation. Income and expenses directly
associated with each segment are included in determining
business segment performance.
2. Critical Accounting Estimates and Judgements
The reported results of the group are sensitive to the accounting
policies, assumptions and estimates that underlie the preparation
of its financial statements. UK company law and IFRS require the
directors, in preparing the group’s financial statements, to select
suitable accounting policies, apply them consistently and make
judgements and estimates that are reasonable. The group’s
estimates and assumptions are based on historical experience
and expectations of future events and are reviewed on an
ongoing basis.
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.
Expected credit losses
At 31 July 2020 the group’s expected credit loss provision was
£238.7 million (31 July 2019: £104.3 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, which requires judgement, is unbiased,
probability weighted and uses both actual and forward-looking
information.
In general, the group assesses whether a significant increase in
credit risk has occurred based on a quantitative and qualitative
assessment, with a 30 day past due backstop. Due to the diverse
nature of the group’s lending businesses, the specific indicators
of a significant increase in credit risk vary by business, and
include some or all of the following factors. The credit risk of a
financial asset is considered to have significantly increased when
any of the following triggers are met:
• Quantitative assessment: the lifetime PD has increased by more
than an agreed threshold relative to the equivalent at origination.
Thresholds are based on a fixed number of risk grade
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2. Critical Accounting Estimates and Judgements continued
movements which are bespoke to the business to ensure that
the increased risk since origination is appropriately captured;
• Qualitative assessment: events or observed behaviour indicate
credit distress. This includes a wide range of information that is
reasonably available including individual credit assessments of
the financial performance of borrowers as appropriate during
routine reviews, plus forbearance and watch list information; or
• Backstop criteria: the 30 days past due backstop is met.
Due to the impact and complexity of Covid-19, and to reflect the
ongoing uncertainty in the external environment, it has been
necessary to enhance the approach to determining whether a
significant increase in credit risk has occurred for certain loans. A
number of enhancements have been made to the above
mentioned staging approach to fully incorporate the effects of
Covid-19 into the significant increase in credit risk assessment:
• A Covid-19 payment concession or loan extension has not in
itself constituted a significant increase in credit risk (transfer to
Stage 2). Instead Covid-19 related forbearance has been
considered alongside usual indicators of a significant increase
in credit risk, knowledge of recent customer payment history
and whether the customer was up to date at the time of
requesting such a concession.
• In line with regulatory guidance a distinction has been drawn
between the impact of Covid-19 to consumers and businesses,
with businesses expected to be more materially impacted in
the short and medium term therefore influencing the staging of
these loans. As a result the approach to determining a
significant increase in credit risk has been applied at a
divisional level:
– Commercial: forbearance granted has been considered an
indicator of a significant increase in credit risk, resulting in
these exposures migrating to Stage 2;
– Property: the vast majority of forbearance took the form of a
fee concession or term extensions, which are considered a
“business as usual” feature of the Residential Development
book and have therefore not been considered an indicator of
a significant increase in credit risk. These exposures have
remained in Stage 1;
– Retail: exposures have been assessed based on their status
immediately prior to requesting forbearance; broadly, if up to
date, the forbearance has not been considered an indicator
of a significant increase in credit risk and the exposure has
remained in Stage 1; if in arrears, the forbearance has been
considered an indicator of a significant increase in credit
risk and the exposure has migrated to Stage 2.
Note 28 sets out the group’s approach to Covid-19 related
concessions.
Definition of default
The definition of default is an important building block for
impairment models, and is considered a key judgement. A default
is considered to have occurred if any unlikeliness to pay criteria
are met or when a financial asset meets the 90 days past due
backstop. These include an assessment of whether the borrower
has significant financial difficulties which are expected to have a
detrimental impact on their ability to pay interest or principal on
the loan, and include events such as administration, insolvency,
bankruptcy, distressed restructuring and fraud.
An asset is considered credit impaired when one or more events
occur that have a detrimental impact on the estimated future cash
flows of the financial asset. This comprises assets defined as
defaulted and other individually assessed exposures where
imminent default or actual loss is identified.
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.
Expected credit losses
The accuracy of the expected credit loss calculation can be
impacted by unpredictable effects or unanticipated changes to
model assumptions, resulting in modelled risk parameters varying
from actual outcomes observed. In addition, forecast errors could
occur due to macroeconomic scenarios or weightings differing
from actual outcomes observed. Regular model monitoring,
validations and provision adequacy reviews are key mechanisms
to manage estimation uncertainty. A representation of the core
drivers of the macroeconomic scenarios that are deployed in our
models is outlined on page 135. In some instances our underlying
business expected credit loss models use a range of other
macroeconomic metrics and assumptions which are linked to the
underlying characteristics of the business.
Forward-looking information
Determining expected credit losses under 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.
The introduction of macroeconomic information introduces
additional volatility to provisions. In order to calculate forward-
looking provisions, Moody’s Baseline and Alternative Scenarios
are externally sourced and include forecast economic data and
scenarios which are used to project potential credit conditions for
each portfolio. Management exercises judgement in estimating
future economic conditions which are incorporated into
provisions through the modelling of these multiple scenarios.
Economic scenarios are assigned a probability weighting using a
combination of quantitative analysis and expert judgement. Five
different projected economic scenarios are currently considered to
cover a range of possible outcomes, reflecting upside and downside
relative to the baseline forecast economic conditions. The economic
scenarios are generated to capture a range of possible economic
outcomes to facilitate the calculation of unbiased and expected
credit losses. Non-linearity of losses is considered by management
when assessing provision adequacy at an individual portfolio level.
The impact of probability weighted forward-looking information
varies across the group’s lending businesses because of the differing
sensitivity of each portfolio to specific macroeconomic variables.
The Group Risk and Compliance Committee (“GRCC”) including
the group chief executive officer, group finance director, group chief
risk officer, chief credit risk officer, and head of treasury meets
quarterly, to review and, if appropriate, agree changes to the
economic scenarios and probability weightings assigned thereto. In
light of the Covid-19 pandemic, the committee has discussed and
assessed the suitability of the updated economic scenario
forecasts and associated probability weighting on a monthly basis.
At 31 January 2020, the scenario weightings were maintained
and consistent with the position at 31 July 2019, with 5% upside,
40% baseline, and 55% across the three downside scenarios.
The scenarios at 31 January 2020 represented the benign
economic environment prior to Covid-19, with GDP growth of
0.9% forecast for 2020, and unemployment of 4.3% under the
baseline scenario.
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Subsequently, as the effects of the Covid-19 pandemic began to
be felt more acutely the Moody’s forecasts were updated to
reflect the deterioration in the economic outlook as a result of the
Covid-19 pandemic and the weightings were also updated, to
reflect the increased downside risk and ongoing uncertainty.
From 30 April 2020, the upside weighting was reduced to zero,
baseline maintained at 40%, and additional weighting allocated to
the more severe downside scenarios. Management believe that
these weightings continue to appropriately reflect the prevailing
macroeconomic challenges and uncertainties as at 31 July 2020,
noting the narrow range in which the scenarios are operating.
Refreshed scenario forecasts have been deployed in the IFRS 9
macroeconomic models on a monthly basis since the start of the
pandemic. As at year end, the latest baseline scenario forecasts
GDP contraction of 8.5% in 2020, with unemployment of 7.1%.
The baseline scenario forecasts economic recovery in Q2 2021,
with positive GDP growth and falling unemployment.
The baseline Moody’s scenario is based around a gradual
reopening of the UK economy in the absence of a further national
lockdown, with a combination of inflation remaining flat for several
quarters, government-provided fiscal stimulus occurring in the
second half of this year plus an expansion of quantitative easing
to prevent rising borrowing costs.
The table below shows the key UK economic assumptions within
each scenario, and the weighting applied to each at 31 July 2020.
The numbers shown are the forecasts for 2020, 2021, and an
average over the five-year period from 2020 to 2024. A further
table is set out below to show the peak to trough range across
the key metrics for the scenarios utilised over the five-year period.
These periods have been included as they demonstrate the short,
medium and long-term outlook for the key macroeconomic
indicators which form the fundamental basis of the scenario
forecasts. Furthermore, this demonstrates the anticipated
short-term severity of the recession, in addition to the gradual
recovery that commences in 2021. On average, the portfolio has
a residual maturity of 15 months, with c.98% of loan value having
a maturity of five years or less.
The following tables show the forecasts for key metrics across the
various scenarios for the next two years to demonstrate the short-
term outlook deployed in the models. The weightings ascribed
are the point in time weightings applied to each scenario at
31 July 2020.
At 31 July 2020
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Weighting
At 31 July 2019
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
(8.5%)
7.1%
(6.9%)
0.2%
2.8%
8.4%
(12.1%)
0.1%
(7.2%)
6.8%
(5.9%)
0.3%
4.7%
6.9%
(6.9%)
0.4%
(9.4%)
7.4%
(7.7%)
0.2%
1.6%
9.3%
(16.4%)
0.1%
(9.5%)
7.8%
(8.8%)
0.2%
0.3% (10.0%)
7.9%
10.6%
(9.3%)
(21.3%)
0.2%
0.1%
(0.6%)
11.4%
(24.5%)
0.1%
40%
Baseline
0%
20%
25%
15%
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
1.3%
3.9%
1.5%
0.8%
1.4%
4.3%
0.9%
0.9%
1.6%
3.8%
2.1%
0.8%
3.4%
3.3%
5.4%
1.1%
0.9%
4.0%
1.2%
0.6%
0.0%
5.1%
(2.0%)
0.3%
0.7%
4.1%
1.0%
0.5%
(1.7%)
5.9%
(5.5%)
0.0%
0.5%
4.2%
0.7%
0.4%
(3.1%)
6.3%
(8.3%)
0.0%
Weighting
40%
5%
40%
10%
5%
At 31 July 2020
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Weighting
At 31 July 2019
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Weighting
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
5 year average (2020 – 2024)
1.2%
7.5%
(0.2%)
0.3%
40%
1.8%
6.3%
1.3%
0.8%
0%
1.0%
8.1%
(1.1%)
0.1%
20%
0.7%
9.4%
(3.2%)
0.1%
25%
0.5%
10.3%
(5.1%)
0.1%
15%
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
5 year average (2019 – 2023)
1.5%
4.7%
1.8%
1.1%
40%
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%
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2. Critical Accounting Estimates and Judgements continued
The tables below provide a summary for the subsequent five-year period (31 July 2020 - 31 July 2024) of the peak to trough range of
values of the key UK economic variables used within the economic scenarios at 31 July 2020 and 31 July 2019:
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
Peak
Trough
Peak
Trough
Peak
Trough
Peak
Trough
Peak
Trough
At 31 July 2020
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
13.2% (12.3%)
8.5%
6.4%
9.9% (19.3%)
0.1%
0.8%
17.4% (10.5%)
8.3%
5.4%
8.3% (14.6%)
0.2%
1.4%
10.5% (12.4%)
6.9%
9.4%
11.8% (21.4%)
0.1%
0.1%
8.9% (13.1%)
10.7%
8.4%
12.4% (24.6%)
0.1%
0.1%
7.3% (14.0%)
11.7%
9.4%
12.4% (28.2%)
0.1%
0.1%
Weighting
40%
0%
20%
25%
15%
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
Peak
Trough
Peak
Trough
Peak
Trough
Peak
Trough
Peak
Trough
At 31 July 2019
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
1.7%
5.0%
2.1%
1.5%
0.8%
3.9%
0.3%
0.7%
3.9%
3.8%
6.3%
2.0%
1.1%
3.1%
0.8%
0.7%
2.1%
5.6%
3.3%
1.1%
(0.6%)
4.0%
(3.7%)
0.2%
2.5%
7.2%
3.5%
0.6%
(2.0%)
4.0%
(8.8%)
0.0%
(3.6%)
2.5%
8.4%
4.0%
4.2% (13.2%)
0.0%
0.4%
Weighting
40%
5%
40%
10%
5%
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 as follows:
• For the majority of our portfolios the expected credit loss provision has been recalculated under the upside strong and downside
protracted scenarios described on the prior page, applying a 100% weighting to each scenario in turn. The change in provision is
driven by the movement in risk metrics under each scenario and resulting impact on stage allocation as well as the measurement of
the resulting provision.
• For some loans within the Retail Division a specific sensitivity approach has been adopted to gauge short tenor loans’ response to
modelled macroeconomic forecasts. For these short tenor loans, PD has been extrapolated from emerging default rates and then
proportionally scaled to reflect a sharp recovery in the upside scenario and a much slower recovery in a downside scenario.
• All 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.
Based on the above analysis, at 31 July 2020, application of weighting to the upside strong scenario would decrease the expected
credit loss by £18.3 million whilst application to the downside protracted scenario would increase the expected credit loss by £23.7
million driven by the aforementioned changes in risk metrics and stage allocation of the portfolios.
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 should not be taken to represent the lower or upper range of possible and
actual expected credit loss outcomes. The recalculated ECL provision 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 2020; it does not incorporate future changes relating to performance,
growth or credit risk. In addition, given the change in the macroeconomic conditions, as well as the underlying modelled provisions,
comparison between the sensitivity results at 31 July 2020 and 31 July 2019 is not appropriate.
The economic environment remains uncertain and future impairment charges may be subject to further volatility (including from
changes to macroeconomic variable forecasts) depending on the length and severity of the Covid-19 pandemic, as well as the
effectiveness of government support measures.
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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 (2019: 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.
Summary income statement
for the year ended 31 July 2020
Net interest income/(expense)
Non-interest income/(expense)
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group
£ million
Total
£ million
180.0
66.6
194.0
24.4
120.9
0.1
(0.1)
128.3
(1.0)
152.9
0.2
(0.2)
494.0
372.1
Operating income
246.6
218.4
121.0
128.2
151.9
–
866.1
Administrative expenses
Depreciation and amortisation
Impairment losses on financial assets
(126.2)
(16.4)
(99.2)
(110.8)
(16.1)
(56.6)
(28.2)
(5.7)
(27.6)
(102.4)
(5.3)
(0.1)
(100.7)
(3.1)
(0.2)
(21.7)
(1.8)
–
(490.0)
(48.4)
(183.7)
Total operating expenses
(241.8)
(183.5)
(61.5)
(107.8)
(104.0)
(23.5)
(722.1)
Adjusted operating profit/(loss)1
Amortisation of intangible assets on
acquisition
Operating profit/(loss) before tax
from continuing operations
Profit before tax from
discontinued operations
Operating profit/(loss) before tax
4.8
34.9
59.5
20.4
47.9
(23.5)
144.0
(1.7)
(0.3)
–
(1.1)
–
–
(3.1)
3.1
–
3.1
34.6
59.5
19.3
47.9
(23.5)
140.9
–
–
–
–
–
–
34.6
59.5
19.3
47.9
(23.5)
140.9
External operating income/(expense)
Inter segment operating (expense)/income
302.2
(55.6)
261.8
(43.4)
147.0
(26.0)
128.3
(0.1)
151.9
–
(125.1)
125.1
866.1
–
Segment operating income
246.6
218.4
121.0
128.2
151.9
–
866.1
1 Adjusted operating profit/(loss) is stated before amortisation of intangible assets on acquisition, profit from discontinued operations and tax.
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group2
£ million
Total
£ million
Balance sheet information at 31 July 2020
Total assets1
Total liabilities
3,269.9
–
2,834.5
–
1,734.2
–
115.7
54.8
779.7
707.6
2,337.5
8,859.5
11,071.5
9,621.9
1 Total assets for the Banking operating segments comprise the loan book and operating lease assets only.
2 Balance sheet includes £2,305.7 million assets and £8,930.1 million liabilities attributable to the Banking division primarily comprising the treasury balances described in the
second paragraph of this note.
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3. Segmental analysis continued
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 £7,838.6 million, in addition to assets and liabilities of £2,305.7 million and
£8,930.1 million respectively primarily comprising treasury balances which are included within the Group column above.
Equity
Banking
£ million
1,214.2
Asset
Management
£ million
60.9
Securities
£ million
72.1
Group
£ million
102.4
Total
£ million
1,449.6
Other segmental information
for the year ended 31 July 2020
Employees (average number)1
Banking
Commercial
Retail
Property
Asset
Management
Securities
Group
Total
1,215
1,080
176
699
281
70
3,521
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 2019
Net interest income/(expense)
Non-interest income/(expense)
176.7
73.2
199.8
23.4
129.8
(0.3)
0.1
120.3
Operating income
249.9
223.2
129.5
120.4
Administrative expenses
Depreciation and amortisation
Impairment (losses)/gains 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)
(0.7)
94.1
93.4
(71.7)
(1.7)
–
–
–
–
(24.9)
(0.1)
–
505.7
310.7
816.4
(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)
84.9
72.2
94.7
17.9
20.0
(25.0)
264.7
Operating profit/(loss) before tax from
continuing operations
Profit before tax from
discontinued operations
Operating profit/(loss) before tax
External operating income/(expense)
Inter segment operating (expense)/income
300.8
(50.9)
264.6
(41.4)
Segment operating income
249.9
223.2
129.5
120.4
–
84.9
0.8
73.0
–
94.7
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
1 Adjusted operating profit/(loss) is stated before amortisation of intangible assets on acquisition, loss from discontinued operations and tax.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 139
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group2
£ million
Total
£ million
Balance sheet information at 31 July 2019
Total assets1
Total liabilities
3,211.7
–
2,810.7
–
1,847.6
–
115.9
59.1
723.8
652.6
1,851.6
8,443.2
10,561.3
9,154.9
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.
Equity1
Banking
£ million
1,192.6
Asset
Management
£ million
56.8
Securities
£ million
71.2
Group
£ million
85.8
Total
£ million
1,406.4
1 Equity of the Banking division 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 in the balance sheet information above.
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.
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
2020
£ million
2019
£ million
5.2
0.3
619.9
3.7
6.2
0.5
623.1
5.8
629.1
635.6
(0.1)
(82.6)
(41.6)
(10.8)
(0.1)
(76.0)
(44.6)
(9.2)
(135.1)
(129.9)
494.0
505.7
2020
£ million
2019
£ million
92.3
128.6
9.3
93.6
120.3
11.0
230.2
224.9
(17.6)
(19.2)
212.6
205.7
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 £92.3 million (2019: £93.6 million) and £15.4 million (2019: £17.1 million) respectively.
Fee income and expense arising from trust and other fiduciary activities amounted to £128.6 million (2019: £120.3 million) and
£1.7 million (2019: £1.6 million) respectively.
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140
4. Operating Profit before Tax continued
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 (2019: PricewaterhouseCoopers LLP).
2020
£ million
2019
£ million
69.1
14.3
83.4
64.4
13.0
77.4
2020
£ million
2019
£ million
269.2
36.6
2.1
14.8
322.7
48.4
167.3
241.3
34.6
3.7
12.8
292.4
31.5
173.5
538.4
497.4
2020
£ million
2019
£ million
0.2
1.8
0.5
–
2.5
0.2
1.2
0.5
0.1
2.0
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The Notes continuedClose Brothers Group plcAnnual Report 2020 6. Taxation
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax
Foreign tax
Adjustments in respect of previous years
Deferred tax:
Deferred tax (credit)/charge for the current year
Adjustments in respect of previous years
Tax on items not (credited)/charged to the income statement
Current tax relating to:
Share-based payments
Deferred tax relating to:
Cash flow hedging
Defined benefit pension scheme
Financial instruments classified as fair value through other comprehensive income
Share-based payments
Currency translation (losses)/gains
Acquisitions
Reconciliation to tax expense
UK corporation tax for the year at 19.0% (2019: 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 tax rates
Prior year tax provision
141
2020
£ million
2019
£ million
35.4
0.2
(10.0)
25.6
(3.1)
8.9
59.4
1.3
(0.9)
59.8
3.7
0.9
31.4
64.4
(0.1)
(0.6)
0.3
(0.1)
–
(0.3)
(0.2)
(1.0)
26.8
(0.2)
1.6
7.2
(2.9)
(1.1)
31.4
(0.1)
(1.5)
0.4
–
0.8
0.4
0.2
0.2
50.3
(0.2)
0.3
14.0
–
–
64.4
The standard UK corporation tax rate for the financial year is 19.0% (2019: 19.0%). However, an additional 8% surcharge applies to
banking company profits as defined in legislation. The effective tax rate of 22.3% (2019: 24.3%) is above the UK corporation tax rate
primarily due to the surcharge applying to most of the group’s profits.
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6. Taxation continued
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 2018
(Charge)/credit to the income statement
(Charge)/credit to other comprehensive
income
Charge to equity
Acquisitions
At 31 July 2019
(Charge)/credit to the income statement
Credit/(charge) to other comprehensive
income
Charge to equity
Acquisitions
At 31 July 2020
38.4
(3.3)
(0.4)
–
–
34.7
(3.5)
0.3
–
–
31.5
(1.1)
0.1
(0.4)
–
–
(1.4)
–
(0.3)
–
–
(1.7)
9.6
(0.5)
–
(0.8)
–
8.3
0.6
–
–
–
14.6
(1.9)
–
–
–
12.7
(3.2)
–
–
–
8.9
9.5
–
–
1.5
–
–
1.5
–
0.6
–
–
2.1
(4.1)
1.0
–
–
(0.2)
(3.3)
0.1
–
–
–
(3.2)
(0.3)
–
–
–
–
(0.3)
0.2
0.1
–
0.2
0.2
Company
At 1 August 2018
Credit/(charge) to the income statement
Charge to statement of recognised gains and losses
At 31 July 2019
Charge to the income statement
Charge to statement of recognised gains and losses
At 31 July 2020
Capital
allowances
£ million
Pension
scheme
£ million
Share-based
payments
and deferred
compensation
£ million
0.2
–
–
0.2
(0.2)
–
–
(1.1)
0.1
(0.4)
(1.4)
–
(0.3)
(1.7)
2.9
(0.3)
–
2.6
(0.8)
–
1.8
57.1
(4.6)
0.7
(0.8)
(0.2)
52.2
(5.8)
0.7
–
0.2
47.3
Total
£ million
2.0
(0.2)
(0.4)
1.4
(1.0)
(0.3)
0.1
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 from discontinued operations
2020
£ million
–
–
–
–
–
–
–
–
–
2019
£ million
3.7
(4.2)
(1.6)
(2.1)
0.5
–
(1.6)
2.7
1.1
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The Notes continuedClose Brothers Group plcAnnual Report 2020 Cash fl ow from discontinued operations
Net cash flow from operating activities
Net cash flow from investing activities
143
2020
£ million
–
–
2019
£ million
(16.1)
(0.3)
8. Earnings per Share
The calculation of basic earnings per share is based on the profit attributable to shareholders and the number of basic weighted
average shares. When calculating the diluted earnings per share, the weighted average number of shares in issue is adjusted for the
effects of all dilutive share options and awards.
Continuing operations
Basic
Diluted
Adjusted basic1
Adjusted diluted1
Continuing and discontinued operations2
Basic
Diluted
1 Excludes amortisation of intangible assets on acquisition and their tax effects.
2 Discontinued operations relate to 2019 only.
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
Adjusted profit attributable to shareholders on continuing operations
Average number of shares
Basic weighted
Effect of dilutive share options and awards
Diluted weighted
9. Dividends
For each ordinary share
Final dividend for previous financial year paid in November 2019: 44.0p (2018: 42.0p)
Interim dividend for current financial year paid in April 2020: 0.0p (2019: 22.0p)
2020
2019
72.8p
72.5p
74.5p
74.2p
133.5p
132.5p
136.7p
135.7p
72.8p
72.5p
134.2p
133.2p
2020
£ million
109.5
–
109.5
2019
£ million
201.6
1.1
200.5
3.1
(0.5)
5.8
(1.0)
112.1
205.3
2020
million
150.4
0.7
2019
million
150.2
1.1
151.1
151.3
2020
£ million
2019
£ million
65.8
–
65.8
62.7
32.8
95.5
A final dividend relating to the year ended 31 July 2020 of 40.0p, amounting to an estimated £59.8 million, is proposed. This final
dividend, which is due to be paid on 24 November 2020 to shareholders on the register at 16 October 2020, is not reflected in these
financial statements.
10. Loans and Advances to Banks
At 31 July 2020
At 31 July 2019
On demand
£ million
98.5
93.4
Within three
months
£ million
Between
three months
and one year
£ million
12.0
0.4
10.3
1.9
Between
one and
two years
£ million
2.9
10.3
Between
two and
five years
£ million
2.1
2.9
Total
£ million
125.8
108.9
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 144
11. Loans and Advances to Customers
The following table sets out a maturity analysis of loans and advances to customers. At 31 July 2020 loans and advances to customers
with a maturity of two years or less was £6,031.6 million representing 76.8% (31 July 2019: 78.4%) of total loans and advances to
customers:
On demand
£ million
Within three
months
£ million
Between
three months
and one year
£ million
At 31 July 2020
At 31 July 2019
78.1
80.7
2,174.0
2,288.8
2,348.2
2,381.0
Between
one and
two years
£ million
1,431.3
1,332.0
Between
two and
five years
£ million
1,680.5
1,556.3
After
more than
five years
£ million
143.3
115.1
Total gross
loans and
advances to
customers
£ million
7,855.4
7,753.9
Impairment
provisions
£ million
Total net
loans and
advances to
customers
£ million
(238.7)
(104.3)
7,616.7
7,649.6
(a) Loans and advances to customers and impairment provisions by stage
Gross loans and advances to customers by stage and the corresponding impairment provisions and provision coverage ratios are set
out below:
At 31 July 2020
Gross loans and advances to customers
Commercial
Retail
Property
Impairment provisions
Commercial
Retail
Property
Provision coverage ratio
Commercial
Retail
Property
At 31 July 2019
Gross loans and advances to customers
Commercial
Retail
Property
Impairment provisions
Commercial
Retail
Property
Provision coverage ratio
Commercial
Retail
Property
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
1,913.4
2,604.9
1,388.3
5,906.6
1,110.9
208.1
125.3
1,444.3
21.1
49.4
59.4
129.9
1,132.0
257.5
184.7
1,574.2
18.1
28.4
11.1
57.6
0.9%
1.1%
0.8%
1.0%
59.9
11.1
6.6
77.6
5.4%
5.3%
5.3%
5.4%
1.5
7.5
0.7
9.7
7.1%
15.2%
1.2%
7.5%
Stage 2
61.4
18.6
7.3
87.3
5.4%
7.2%
4.0%
5.5%
126.4
43.4
204.8
374.6
44.3
24.3
25.2
93.8
35.0%
56.0%
12.3%
25.0%
3,171.8
2,905.8
1,777.8
7,855.4
123.8
71.3
43.6
238.7
3.9%
2.5%
2.5%
3.0%
Less than
30 days past
due
£ million
Greater than
or equal to 30
days past due
£ million
Stage 1
£ 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%
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The Notes continuedClose Brothers Group plcAnnual Report 2020 145
Stage 1 loans and advances to customers have fallen during the year to £5,906.6 million (31 July 2019: £6,864.0 million), primarily as a
result of migrations to Stages 2 and 3 during the second half of the year due to both macroeconomic and case-specific effects
associated with Covid-19. Those same factors drove an increase in the Stage 1 impairment provisions to £57.6 million (31 July 2019:
£24.9 million), which in turn increased the provision coverage ratio to 1.0% (31 July 2019: 0.4%).
Stage 2 loans and advances to customers increased by £870.5 million to £1,574.2 million (31 July 2019: £703.7 million) across all
segments following an increased incidence of a significant increase in credit risk, as a result of the macroeconomic environment and its
effect on our customers, reflective of our forbearance and associated staging detailed on page 134. Those same factors drove an
increase in the Stage 2 impairment provisions to £87.3 million (31 July 2019: £27.1 million), which in turn increased the provision
coverage ratio to 5.5% (31 July 2019: 3.9%).
Stage 3 loans and advances to customers similarly increased by £188.4 million to £374.6 million (31 July 2019: £186.2 million) with
migrations occurring across all of our portfolios primarily in the wake of the effects of Covid-19, and Stage 3 impairment provisions
increased to £93.8 million (31 July 2019: £52.3 million). Stage 3 Property exposures carry lower provision coverage than those in Retail
and Commercial, reflecting the lower likelihood of loss. Property exposures comprise a greater proportion of total Stage 3 exposures
than at 31 July 2019, and this has therefore resulted in a slight decrease in the provision coverage ratio for this population to 25.0%
(31 July 2019: 28.1%).
All of the above resulted in an increase in the total provision coverage ratio to 3.0% (31 July 2019: 1.3%).
(b) Reconciliation of loans and advances to customers and impairment provisions
Reconciliations of gross loans and advances to customers and associated impairment provisions are set out below.
New financial assets originate in Stage 1 only, and the amount presented represents the value at origination.
Subsequently, a loan may transfer between stages, and the presentation of such transfers is based on a comparison of the loan at the
beginning of the year (or at origination if this occurred during the year) and the end of the year (or just prior to final repayment or
write off).
Repayments relating to loans which transferred between stages during the year are presented within the transfers between stages lines.
All other repayments are presented in a separate line.
ECL model methodologies may be updated or enhanced from time to time and the impacts of such changes are presented on a
separate line. Enhancements to our model suite during the course of the financial year are a contributory factor to ECL movements and
such factors have been taken into consideration when assessing any required adjustments to modelled output and ensuring
appropriate provision coverage levels.
A loan is written off when there is no reasonable expectation of further recovery following realisation of all associated collateral and
available recovery actions against the customer.
Gross loans and advances to customers
At 1 August 2019
New financial assets originated
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Net transfers between stages and repayments1
Repayments while stage remained unchanged and final repayments
Changes to model methodologies
Write offs
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
6,864.0
5,859.1
105.4
(2,206.1)
(303.0)
(2,403.7)
(4,511.7)
100.9
(2.0)
703.7
–
(164.7)
1,670.5
(157.9)
1,347.9
(386.5)
(89.4)
(1.5)
186.2
–
(14.3)
(0.8)
365.9
350.8
(57.8)
(11.5)
(93.1)
7,753.9
5,859.1
(73.6)
(536.4)
(95.0)
(705.0)
(4,956.0)
–
(96.6)
At 31 July 2020
5,906.6
1,574.2
374.6
7,855.4
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 146
11. Loans and Advances to Customers continued
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 repayments1
Repayments while stage remained unchanged and final repayments
Changes to model methodologies
Write offs
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)
At 31 July 2019
6,864.0
703.7
186.2
7,753.9
1 Repayments relate only to financial assets which transferred between stages during the year. Other repayments are shown in the line below.
The gross carrying amount before modification of loans and advances to customers which were modified during the year while in Stage 2 or 3
was £689.4 million (2019: £275.0 million). A loss of £3.4 million (2019: £nil) was recognised as a result of these modifications. The loss relating
to all loans which were modified during the year was £5.9 million. The gross carrying amount at 31 July 2020 of modified loans and advances
to customers which transferred from Stage 2 or 3 to Stage 1 during the year was £52.8 million (31 July 2019: £55.4 million).
Impairment provisions on loans and advances to customers
At 1 August 2019
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 repayments1
Repayments and ECL movements while stage remained unchanged and final
repayments
Changes to model methodologies
Charge to the income statement
Write offs
At 31 July 2020
Impairment provisions on loans and advances to customers
At 31 July 2018
IFRS 9 transition
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 repayments1
Repayments and ECL movements while stage remained unchanged and final
repayments
Changes to model methodologies
Charge to the income statement
Write offs
At 31 July 2019
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
24.9
28.1
0.9
(13.9)
(2.5)
27.1
–
(4.1)
69.1
(8.5)
52.3
–
(0.1)
(0.1)
82.9
104.3
28.1
(3.3)
55.1
71.9
(15.5)
56.5
82.7
123.7
3.6
16.9
33.1
(0.4)
57.6
3.0
1.3
60.8
(0.6)
87.3
(0.3)
(3.6)
78.8
(37.3)
6.3
14.6
172.7
(38.3)
93.8
238.7
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
23.7
26.5
1.0
(6.4)
(2.1)
24.8
–
(4.4)
20.8
(4.7)
48.8
–
(0.4)
(0.2)
48.2
39.1
58.2
97.3
26.5
(3.8)
14.2
41.4
(7.5)
11.7
47.6
51.8
(17.5)
–
1.5
(0.3)
24.9
(7.5)
–
4.2
(1.9)
(11.4)
(0.3)
35.9
(32.4)
(36.4)
(0.3)
41.6
(34.6)
27.1
52.3
104.3
1 Repayments relate only to financial assets which transferred between stages during the year. Other repayments are shown in the line below.
933175.indb 146
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The Notes continuedClose Brothers Group plcAnnual Report 2020 147
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
2020
£ million
2019
£ million
172.7
7.8
180.5
3.2
183.7
41.6
5.8
47.4
1.1
48.5
The contractual amount outstanding at 31 July 2020 on financial assets that were written off during the period and are still subject to
recovery activity is £12.4 million (31 July 2019: £12.7 million).
(c) Finance lease and hire purchase agreement receivables
Loans and advances to customers comprise
Hire purchase agreement receivables
Finance lease receivables
Other loans and advances
At 31 July
2020
£ million
2019
£ million
2,998.0
474.8
4,143.9
2,927.6
453.1
4,268.9
7,616.7
7,649.6
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:
One year or within one year
One to two years
Two to three years
Three to four years
Four to five years
More than five years
Unearned finance income
2020
£ million
2019
£ million
1,461.1
1,520.6
660.3
309.9
102.7
72.0
4,126.6
(546.6)
1,408.2
1,519.8
606.4
282.9
84.5
73.3
3,975.1
(531.0)
Present value of minimum lease and hire purchase agreement payments
3,580.0
3,444.1
Of which due:
One year or within one year
One to two years
Two to three years
Three to four years
Four to five years
More than five years
1,267.9
1,320.7
573.8
268.7
88.6
60.3
1,218.9
1,319.2
527.2
245.5
73.3
60.0
3,580.0
3,444.1
The aggregate cost of assets acquired for the purpose of letting under finance leases and hire purchase agreements was
£6,183.4 million (2019: £6,060.4 million). The average effective interest rate on finance leases approximates to 10.2% (2019: 9.4%). 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.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 148
12. Debt Securities
Long trading positions in debt securities
Certificates of deposit
Sovereign and central bank debt
Fair value
through
profit or
loss
£ million
24.4
–
–
Fair value
through
other
compre-
hensive
income
£ million
–
–
72.2
Amortised
cost
£ million
–
285.9
–
Total
£ million
24.4
285.9
72.2
At 31 July 2020
24.4
72.2
285.9
382.5
Long trading positions in debt securities
Certificates of deposit
Sovereign and central bank debt
At 31 July 2019
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
2020
£ million
48.3
22.7
(0.8)
2.0
2019
£ million
44.5
–
1.0
2.8
72.2
48.3
31 July
2020
£ million
29.2
0.8
31 July
2019
£ million
35.3
1.0
30.0
36.3
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 2020
31 July 2019
Exchange rate contracts
Interest rate contracts
Notional
value
£ million
99.2
3,132.8
3,232.0
1.0
38.9
39.9
Notional
value
£ million
260.5
2,836.7
0.4
20.4
20.8
3,097.2
Assets
£ million
Liabilities
£ million
1.2
28.9
30.1
5.6
15.0
20.6
Assets
£ million
Liabilities
£ million
Notional amounts of interest rate contracts totalling £2,130.2 million (31 July 2019: £2,282.7 million) have a residual maturity of more
than one year.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 149
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 2020
31 July 2019
Notional
value
£ million
Assets
£ million
Liabilities
£ million
747.1
–
1,234.3
35.3
8.4
7.9
Notional
value
£ million
735.7
1,251.1
Assets
£ million
Liabilities
£ million
0.2
27.6
6.1
5.5
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 six (2019: seven) 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.
Fair value hedges
Interest rate risk
31 July 2020
31 July 2019
On demand
£ million
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
–
–
4.9
–
40.5
–
382.1
62.0
404.6
826.6
402.2
362.5
1,234.3
1,251.1
Fair value hedges have an average fixed rate of 2.7% (31 July 2019: 2.8%).
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
2020
£ million
Hedge
ineffectiveness
recognised in
income statement
2020
£ million
Changes in fair
value of hedging
instrument used for
calculating hedge
ineffectiveness
2019
£ million
Hedge
ineffectiveness
recognised in
income statement
2019
£ million
(2.0)
4.8
(0.1)
0.1
(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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14. Derivative Financial Instruments continued
Details of the hedged exposures covered by the group’s hedging strategies are set out below.
At 31 July 2020
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
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
72.2
83.4
155.6
176.8
759.5
176.6
1,112.9
3.3
4.4
7.7
1.6
27.1
1.9
30.6
0.5
2.0
2.5
0.4
(6.4)
(1.1)
(7.1)
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.
Cash flow hedges
Interest rate risk
31 July 2020
31 July 2019
Changes in fair value of
hedged item used for
calculating hedge
ineffectiveness
£ million
Losses from changes in
value of hedging
instrument recognised in
other comprehensive
income
£ million
Amounts
reclassified
from reserves
to income
statement1
£ million
1.9
6.1
(1.9)
(6.1)
—
0.1
1 Amounts have been reclassified to other income since hedged cash flows will no longer occur.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 15. Intangible Assets
Co st
At 1 August 2018
Additions
Disposals
At 31 July 2019
Additions
Disposals
At 31 July 2020
Amortisation and impairment
At 1 August 2018
Amortisation charge for the year
Disposals
At 31 July 2019
Amortisation charge for the year
Disposals
At 31 July 2020
Net book value at 31 July 2020
Net book value at 31 July 2019
Net book value at 1 August 2018
151
Goodwill
£ million
Software
£ million
Intangible
assets on
acquisition
£ million
Group total
£ million
Company
software
£ million
150.7
0.2
(0.1)
150.8
2.3
(0.1)
160.8
48.1
(7.7)
201.2
46.9
(14.8)
67.0
0.5
–
67.5
–
–
378.5
48.8
(7.8)
419.5
49.2
(14.9)
153.0
233.3
67.5
453.8
47.9
–
–
47.9
–
–
47.9
105.1
102.9
102.8
87.9
20.5
(3.4)
105.0
25.3
(14.8)
115.5
117.8
96.2
72.9
41.4
5.8
–
47.2
3.1
–
50.3
17.2
20.3
25.6
177.2
26.3
(3.4)
200.1
28.4
(14.8)
213.7
240.1
219.4
201.3
0.4
–
–
0.4
0.1
–
0.5
0.4
–
–
0.4
–
–
0.4
0.1
–
–
Intangible assets on acquisition relate to broker and customer relationships and are amortised over a period of eight to 20 years.
In the 2020 financial year £3.1 million (2019: £5.8 million) of the amortisation charge is included in amortisation of intangible assets on
acquisition and £25.3 million (2019: £20.5 million) of the amortisation charge is included in administrative expenses shown in the
consolidated income statement.
Impairment tests for goodwill
At 31 July 2020, 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 three year plans to determine the
recoverable amount of each CGU. These three year plans include the expected impact of Covid-19. 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% (2019: 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 2020, the results of the review, which includes careful consideration of the impact of Covid-19, 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 to the carrying value of any
CGU to exceed its recoverable amount.
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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 2018
Additions
Disposals
At 31 July 2019
IFRS 16 transition (note 30)
At 1 August 2019
Additions
Disposals
At 31 July 2020
Depreciation
At 1 August 2018
Charge for the year and impairment
Disposals
At 31 July 2019
Charge for the year and impairment
Disposals
At 31 July 2020
Net book value at 31 July 2020
Net book value at 31 July 2019
Net book value at 1 August 2018
1 Right of use assets primarily relate to the group’s leasehold properties.
31 July 2020
31 July 2019
Goodwill
£ million
Pre-tax
discount rate
%
9.0
12.3
12.1
12.1-13.4
38.3
23.3
12.1
31.4
105.1
Pre-tax
discount rate
%
9.0
10.6
10.2
10.2-11.3
Goodwill
£ million
38.4
23.3
12.1
29.1
102.9
Leasehold
property
£ million
Fixtures,
fittings and
equipment
£ million
Assets
held under
operating
leases
£ million
Motor
vehicles
£ million
Right of use
assets1
£ million
Total
£ million
22.4
5.9
(1.2)
27.1
–
27.1
0.7
(2.3)
55.8
6.2
(6.5)
55.5
–
55.5
10.8
(6.2)
268.9
72.9
(27.7)
314.1
–
314.1
54.6
(27.3)
25.5
60.1
341.4
12.9
2.7
(1.0)
14.6
2.4
(2.2)
14.8
10.7
12.5
9.5
38.0
8.3
(6.1)
40.2
7.5
(4.8)
42.9
17.2
15.3
17.8
70.1
36.1
(12.5)
93.7
44.3
(18.5)
119.5
221.9
220.4
198.8
0.1
–
–
0.1
–
0.1
–
–
0.1
0.1
–
–
0.1
–
–
0.1
–
–
–
–
–
–
–
44.8
44.8
16.3
(0.7)
347.2
85.0
(35.4)
396.8
44.8
441.6
82.4
(36.5)
60.4
487.5
–
–
–
–
13.2
(0.2)
13.0
47.4
–
–
121.1
47.1
(19.6)
148.6
67.4
(25.7)
190.3
297.2
248.2
226.1
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The Notes continuedClose Brothers Group plcAnnual Report 2020 153
There was no gain or loss from the sale of assets held under operating leases for the year ended 31 July 2020 (2019: £0.3 million gain).
Future minimum lease rentals receivable under non-cancellable operating leases
One year or within one year
One to two years
Two to three years
Three to four years
Four to five years
More than five years
31 July
2020
£ million
31 July
2019
£ million
43.8
28.5
15.9
6.7
2.2
1.3
98.4
42.0
31.3
20.7
10.5
3.2
0.6
108.3
Company
Cost
At 1 August 2018
At 31 July 2019
IFRS 16 transition (note 30)
At 1 August 2019
Additions
Disposals
At 31 July 2020
Depreciation
At 1 August 2018
At 31 July 2019
Charge for the year
Disposals
At 31 July 2020
Net book value at 31 July 2020
Net book value at 31 July 2019
Net book value at 1 August 2018
The net book value of leasehold property comprises:
Long leasehold property
Short leasehold property
Leasehold
property
£ million
Fixtures,
fittings and
equipment
£ million
Right of use
assets
£ million
Total
£ million
2.7
2.7
–
2.7
0.3
(1.9)
1.1
2.7
2.7
–
(1.9)
0.8
0.3
–
–
1.1
1.1
–
1.1
5.1
(0.7)
5.5
1.1
1.1
–
(0.7)
0.4
5.1
–
–
–
–
10.6
10.6
9.5
–
20.1
–
–
1.8
–
1.8
3.8
3.8
10.6
14.4
14.9
(2.6)
26.7
3.8
3.8
1.8
(2.6)
3.0
18.3
23.7
–
–
–
–
Group
Company
31 July
2020
£ million
1.6
9.1
10.7
31 July
2019
£ million
1.4
11.1
12.5
31 July
2020
£ million
31 July
2019
£ million
0.3
–
0.3
–
–
–
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 154
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 2018
Additions
Utilised
Released
At 31 July 2019
Additions
Utilised
Released
At 31 July 2020
Company
At 1 August 2018
Additions
Utilised
Released
At 31 July 2019
Additions
Utilised
Released
At 31 July 2020
31 July
2020
£ million
154.9
54.6
31 July
2019
£ million
140.4
50.0
209.5
190.4
159.7
139.8
15.8
144.5
70.9
17.9
315.3
233.3
Claims
£ million
Property
£ million
Other
£ million
Total
£ million
–
0.5
(0.1)
(0.1)
0.3
0.2
(0.5)
–
–
8.1
1.0
(0.1)
(3.1)
5.9
0.5
–
(0.3)
6.1
13.4
3.8
(4.8)
(0.7)
11.7
5.8
(6.0)
(1.8)
9.7
21.5
5.3
(5.0)
(3.9)
17.9
6.5
(6.5)
(2.1)
15.8
Property
£ million
Other
£ million
Total
£ million
2.1
–
–
(1.7)
0.4
–
–
–
0.4
4.0
1.2
(0.8)
–
4.4
0.8
(1.1)
(1.2)
2.9
6.1
1.2
(0.8)
(1.7)
4.8
0.8
(1.1)
(1.2)
3.3
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 ten years.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 155
31 July
2020
£ million
587.5
8.3
9.1
17.4
31 July
2019
£ million
547.6
9.6
10.9
20.5
604.9
568.1
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
On demand
£ million
Within three
months
£ million
25.5
543.3
6.9
27.1
123.3
1,103.9
1.0
37.1
Between
three
months and
one year
£ million
4.0
2,799.2
–
914.9
Between
one and two
years
£ million
Between
two and five
years
£ million
After
more than
five years
£ million
–
1,151.8
262.0
212.4
–
319.5
228.0
407.7
–
–
–
271.1
Total
£ million
152.8
5,917.7
497.9
1,870.3
At 31 July 2020
602.8
1,265.3
3,718.1
1,626.2
955.2
271.1
8,438.7
Deposits by banks
Deposits by customers
Loans and overdrafts from banks
Debt securities in issue
On demand
£ million
Within
three
months
£ million
Between
three months
and one year
£ million
12.5
78.3
19.0
20.7
15.7
1,232.7
10.3
27.4
29.8
2,817.9
–
143.6
Between
one and
two years
£ million
–
1,157.2
213.2
937.8
Between
two and
five years
£ million
After
more than
five years
£ million
–
352.3
276.8
459.5
–
–
–
271.1
Total
£ million
58.0
5,638.4
519.3
1,860.1
At 31 July 2019
130.5
1,286.1
2,991.3
2,308.2
1,088.6
271.1
8,075.8
At 31 July 2020, the parent company held £250.8 million (31 July 2019: £250.3 million) debt securities in issue.
As discussed in note 28(c) the group has accessed £262.0 million (31 July 2019: £490.0 million) cash under the Bank of England’s Term
Funding Scheme and £228.0 million (31 July 2019: £nil) under the Term Funding Scheme with Additional Incentives for SMEs. Cash
from the schemes and repurchase agreements is included within bank loans and overdrafts. Residual maturities of the schemes and
repurchase agreements are as follows:
At 31 July 2020
At 31 July 2019
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
–
–
Between
one and
two years
£ million
262.0
213.2
Between
two and
five years
£ million
228.0
276.8
After
more than
five years
£ million
–
–
Prepayment
date
2021
2021
2022
Initial
interest
rate
7.42%
7.62%
4.25%
31 July
2020
£ million
15.5
31.0
176.5
Total
£ million
490.0
490.3
31 July
2019
£ million
15.5
31.0
175.1
At 31 July 2020, the parent company held £176.5 million (31 July 2019: £175.1 million) of subordinated loan capital with a final maturity
date of 2027.
223.0
221.6
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 156
21. Share Capital and Reserves
Group and company
Allotted, issued and fully paid
Ordinary shares of 25p each
31 July 2020
31 July 2019
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 124 and 127.
At 31 July 2020, the company’s reserves available for distribution under section 830(2) and 831(2) of the Companies Act 2006 were
£392.6 million (2019: £376.2 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 9.8%, of which 5.5% 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 1.8%, of which 1.0% 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, which are unaudited, 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 8.0% and a minimum total capital ratio of 12.3%.
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% 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 2020, the group’s CET1 capital ratio was 14.1% (31 July 2019: 13.0%). CET1 capital increased to £1,254.0 million (31 July
2019: £1,169.2 million) primarily due to retained profit with the impact of higher impairment charges largely offset by the capital
add-back under transitional IFRS 9 arrangements.
RWAs, calculated using the standardised approaches, decreased to £8,863.2 million (31 July 2019: £8,967.4 million) due to a reduction
in loan book RWAs including the impact of the accelerated application of the CRR2 SME supporting factor.
933175.indb 156
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The Notes continuedClose Brothers Group plcAnnual Report 2020 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
157
31 July
2020
£ million
31 July
2019
£ million
38.0
1,435.0
17.2
38.0
1,392.5
19.0
(236.9)
(59.8)
(33.9)
(5.7)
(0.2)
100.3
(216.1)
(65.7)
(37.7)
(5.3)
(0.1)
44.6
1,254.0
1,169.2
187.0
195.4
1,441.0
1,364.6
7,789.0
945.7
128.5
7,930.5
884.4
152.5
8,863.2
8,967.4
14.1%
16.3%
13.0%
15.2%
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2020 and 31 July 2019 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 2020, which allow the capital impact of expected credit losses to be phased in over the
transition period. For 31 July 2020 relief has been applied at 85%. The Covid-19 regulatory measures finalised in June 2020 will allow for 100% relief on stage 1 and stage 2
impairment provisions recognised since 1 January 2020. This additional relief will apply to the group’s capital ratios throughout FY21 and FY22 before reducing on a straight
line basis over the following four financial years.
3 Shown after applying IFRS 9 transitional arrangements and the Capital Requirements Regulations transitional and qualifying own funds arrangements. At 31 July 2020 the
fully loaded CET1 capital ratio is 13.1% and total capital ratio is 15.1% (31 July 2019: CET1 capital ratio 12.6% and total capital ratio 14.5%).
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
2020
£ million
31 July
2019
£ million
1,449.6
1,406.4
(236.9)
(59.8)
100.3
(5.7)
(0.2)
5.7
1.0
(216.1)
(65.7)
44.6
(5.3)
(0.1)
4.4
1.0
1,254.0
1,169.2
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2020 and 31 July 2019 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 2020, which allow the capital impact of expected credit losses to be phased in over the
transitional period.
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158
22. Capital continued
The following table shows the movement in CET1 capital during the year:
CET1 capital at 31 July 2019
Profit in the period attributable to shareholders
Dividends paid and foreseen
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 2020
£ million
1,169.2
109.5
(59.9)
55.7
(20.8)
(3.0)
3.3
1,254.0
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
2020
£ million
163.7
31 July
2019
£ million
163.1
31 July
2020
£ million
153.9
31 July
2019
£ million
156.6
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. The earliest period in which these guarantees could
be called is within one year.
Commitments
Undrawn facilities, credit lines and other commitments to lend
Within one year1
1 Includes both revocable and irrevocable commitments.
31 July
2020
£ million
1,195.2
31 July
2019
£ million
1,100.6
1,195.2
1,100.6
Operating lease commitments
IFRS 16 Leases was effective for the group from 1 August 2019. IFRS 16 replaced IAS 17 Leases and resulted in the group, where it
was the lessee, recognising all leases on the balance sheet, subject to certain exemptions. See note 1 for the group’s new accounting
policy, note 16 for right of use assets recognised on the balance sheet under IFRS 16 and note 30 for the transition impact.
At 31 July 2019, the group had outstanding off balance sheet commitments for future minimum lease rentals payable under non-
cancellable operating leases, which fell due as follows:
Within one year
Between one and five years
After more than five years
31 July 2019
Premises
£ million
11.1
28.9
4.5
Other
£ million
4.6
6.1
–
44.5
10.7
In the year ended 31 July 2019, minimum operating lease payments recognised in the consolidated income statement amounted to
£9.5 million.
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Other commitments
Subsidiaries had contracted capital commitments relating to capital expenditure of £28.9 million (2019: £8.9 million).
24. Related Party Transactions
Transactions with key management
Details of directors’ remuneration and interests in shares are disclosed in the Directors’ Remuneration Report on pages 87 to 114.
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
2020
£ million
2019
£ million
4.0
0.4
3.6
1.5
9.5
0.9
3.9
0.5
3.4
2.1
9.9
1.7
10.4
11.6
Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled
£4.2 million (2019: £4.1 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 2020 attributable, in aggregate, to key management were £0.3 million
(31 July 2019: £0.1 million).
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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.
Defi ned contribution schemes
During the year the charge to the consolidated income statement for the group’s defined contribution pension schemes was
£14.5 million (2019: £12.6 million), representing contributions payable by the group and is included in administrative expenses.
Defi ned benefi t 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 2020 this scheme had 33
(31 July 2019: 37) deferred members and 52 (31 July 2019: 49) 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
2020
%
3.1
2.4
1.4
1.4
23.9
25.6
24.8
26.9
2019
%
3.4
2.4
2.0
2.0
23.9
25.5
24.7
26.8
1 Based on market yields at 31 July 2020 and 2019 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 (2019: SAPS S2 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 (2019: CMI 2017) 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
2020
£ million
2019
£ million
2018
£ million
2017
£ million
2016
£ million
14.0
32.3
0.3
46.6
(39.2)
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)
7.4
6.7
5.1
3.6
1.2
1 There are no amounts included within the fair value of scheme assets relating to the financial instruments of Close Brothers Group plc.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 Movement in the present value of scheme liabilities during the year:
Carrying amount at 1 August
Interest expense
Benefits paid
Actuarial losses
Carrying amount at 31 July
Movement in the fair value of scheme assets during the year:
Carrying amount at 1 August
Interest income
Benefits paid
Administrative costs paid
Return on scheme assets, excluding interest income
Carrying amount at 31 July
Historical experience of actuarial gains/(losses) are shown below:
161
2020
£ million
(36.5)
(0.8)
1.3
(3.2)
2019
£ million
(36.4)
(0.9)
2.2
(1.4)
(39.2)
(36.5)
2020
£ million
43.2
0.9
(1.3)
(0.3)
4.1
2019
£ million
41.5
1.0
(2.2)
(0.4)
3.3
46.6
43.2
Experience gains on scheme assets
Experience gains on scheme liabilities
Impact of changes in assumptions on scheme liabilities
Total actuarial (losses)/gains on scheme liabilities
2020
£ million
4.1
–
(3.2)
(3.2)
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)
Total actuarial gains/(losses)
0.9
1.9
1.7
2.7
(1.9)
Total actuarial gains have been recognised in other comprehensive income. Income of £0.1 million (2019: £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 2020 and 2019 is set out below. The analysis reflects the variation of the individual assumptions. The variation in price
inflation includes all inflation-linked pension increases in deferment and in payment.
Impact on defined benefit obligation
increase/(decrease)
2020
2019
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
%
(4.2)
1.8
4.0
£ million
(1.6)
0.7
1.6
%
(4.2)
1.8
4.0
£ million
(1.5)
0.7
1.5
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 quoted equities, 69% in
quoted bonds and 1% in cash (2019: 30% global equities, 69% bonds and 1% cash) 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 (2019: 17 years).
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26. Share-based Awards
The Save As You Earn (“SAYE”), Long Term Incentive Plan (“LTIP”), Deferred Share Awards (“DSA”) and Share Matching Plan (“SMP”)
share-based awards have been granted under the group’s share schemes. The general terms and conditions for these share-based
awards are described in the Directors’ Remuneration Report on pages 87 to 114.
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 2020, 0.7 million (31 July 2019: 0.7 million) and 1.7 million
(31 July 2019: 2.1 million) of these shares were held respectively and in total £33.9 million (2019: £37.7 million) was recognised within the
share-based payments reserve. During the year £11.9 million (2019: £10.9 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 £18.3 million
(2019: £19.5 million). The share-based awards charge of £2.1 million (2019: £3.7 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 2018
Granted
Exercised
Forfeited
Lapsed
Weighted
average
exercise
price
–
1,157.9p
1,120.3p
1,156.2p
1,156.1p
Number
1,168,885
412,343
(275,697)
(143,688)
(4,449)
Number
1,432,029
449,411
(75,888)
(197,158)
(339,164)
At 31 July 2019
1,157,394
–
1,269,230
Granted
Exercised
Forfeited
Lapsed
1,635,667
(212,792)
(654,673)
(4,490)
933.7p
1,114.2p
1,132.4p
1,157.2p
451,925
(124,951)
(19,447)
(203,638)
At 31 July 2020
1,921,106
–
1,373,119
Exercisable at:
31 July 2020
31 July 2019
93,424 1,232.5p
1,133.0p
13,259
1,334
–
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
694,405
394,686
(270,776)
(32,704)
–
785,611
391,315
(325,610)
(13,751)
(746)
836,819
7,742
4,129
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
744,644
–
(172,767)
(47,557)
(193,547)
330,773
–
(208,397)
–
(122,376)
–
–
–
The table below shows the weighted average market price at the date of exercise:
SAYE
LTIP
DSA
SMP
2020
2019
1,484.7p
1,355.9p
1,373.8p
1,351.6p
1,474.7p
1,537.5p
1,493.4p
1,547.0p
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The Notes continuedClose Brothers Group plcAnnual Report 2020
The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are as follows:
163
SAYE
Between £8 and £9
Between £9 and £10
Between £11 and £12
Between £12 and £13
LTIP
Nil
DSA
Nil
SMP
Nil
Total
2020
Options outstanding
2019
Options outstanding
Weighted
average
remaining
contractual
life
Years
4.0
3.2
1.7
0.5
Number
outstanding
1,245,235
150,010
426,893
98,968
Number
outstanding
–
1,611
1,011,814
143,969
1,373,119
2.1
1,269,230
836,819
1.8
785,611
–
–
330,773
4,131,044
2.6
3,543,008
Weighted
average
remaining
contractual
life
Years
–
–
2.4
1.5
2.2
1.9
1.2
2.1
For the share-based awards granted during the year, the weighted average fair value of those options at 31 July 2020 was 581.0p
(31 July 2019: 1,097.3p). The main assumptions for the valuation of these share-based awards comprised:
Exercise period
SAYE
1 Dec 2022 to 31 May 2023
1 Dec 2024 to 31 May 2025
1 Jun 2023 to 30 Nov 2023
1 Jun 2025 to 30 Nov 2025
LTIP
3 Oct 2022 to 2 Oct 2023
DSA
2 Oct 2020 to 1 Oct 2021
2 Oct 2021 to 1 Oct 2022
2 Oct 2022 to 1 Oct 2023
28 Feb 2022 to 27 Feb 2023
28 Feb 2023 to 27 Feb 2024
Share price
at issue
Exercise
price
Expected
volatility
Expected
option life
in years
Dividend
yield
Risk free
interest rate
1,355.0p
1,355.0p
1,111.0p
1,111.0p
1,366.4p
1,366.4p
1,366.4p
1,366.4p
1,281.0p
1,281.0p
1,084.0p
1,084.0p
888.0p
888.0p
–
–
–
–
–
–
21.0%
23.0%
28.0%
27.0%
20.0%
–
–
–
–
–
3
5
3
5
3
–
–
–
–
–
4.6%
4.6%
4.7%
4.6%
0.5%
0.5%
0.0%
0.0%
4.3%
0.5%
–
–
–
–
–
–
–
–
–
–
Expected volatility was determined mainly by reviewing share price volatility for the expected life of each option up to the date of grant.
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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 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
Increase/(decrease) in interest payable and accrued expenses
Net cash inflow from trading activities
(Increase)/decrease 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
2020
£ million
31 July
2019
£ million
140.9
–
(86.6)
95.8
(14.5)
(12.9)
0.3
15.2
264.7
0.8
(55.6)
73.5
(4.8)
(29.2)
15.8
(3.5)
138.2
261.7
(13.3)
(87.8)
(45.6)
(45.2)
(22.7)
142.6
93.4
284.3
(21.4)
6.9
429.4
1.9
(416.6)
(62.7)
9.8
–
9.1
2.8
141.2
9.5
63.7
20.4
(4.6)
(3.6)
0.5
0.5
87.6
87.6
1,362.8
98.5
1,094.9
93.4
1,461.3
1,188.3
1 Excludes Bank of England cash reserve account and amounts held as collateral.
During the year ended 31 July 2020, the non-cash changes on debt financing amounted to £16.2 million (31 July 2019: £18.6 million)
arising largely from interest accretions and fair value hedging movements.
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The Notes continuedClose Brothers Group plcAnnual Report 2020
165
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 Report on pages 48 to 52. 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) Classifi cation
The following tables analyse the group’s assets and liabilities in accordance with the categories of financial instruments in IFRS 9.
At 31 July 2020
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
–
–
–
–
–
–
–
35.3
–
35.3
–
–
–
–
–
–
–
16.3
–
16.3
–
–
–
–
24.4
30.0
–
4.6
2.7
61.7
17.4
–
–
–
–
–
–
4.5
–
21.9
–
–
–
–
72.2
–
–
–
–
1,375.8
619.7
125.8
7,616.7
285.9
–
45.8
–
51.1
1,375.8
619.7
125.8
7,616.7
382.5
30.0
45.8
39.9
53.8
72.2
10,120.8
10,290.0
–
–
–
–
–
–
–
–
–
–
587.5
152.8
5,917.7
497.9
1,870.3
17.9
223.0
–
172.0
604.9
152.8
5,917.7
497.9
1,870.3
17.9
223.0
20.8
172.0
9,439.1
9,477.3
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28. Financial Risk Management continued
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
(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 2020
Fair
value
£ million
227.0
1,885.8
Carrying
value
£ million
223.0
1,870.3
31 July 2019
Fair
value
£ million
234.1
1,891.2
Carrying
value
£ million
221.6
1,860.1
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”).
Instruments classified as Level 1 predominantly comprise sovereign and central bank debt and liquid listed equity shares. The fair value
of these instruments is derived from quoted prices in active markets.
Instruments classified as Level 2 predominantly comprise less liquid listed equity shares, investment grade corporate bonds and
over-the-counter derivatives. The fair value of equity shares and bonds are derived from quoted prices in less active markets in
comparison to level 1. Over-the-counter derivatives largely relate to interest rate and exchange rate contracts (see note 14 for further
information). The valuation of such derivatives includes the use of discounted future cash flow models, with the most significant input
into these models being interest rate yield curves developed from quoted rates.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 167
Instruments classified as Level 3 predominantly comprise contingent consideration payable and receivable in relation to the acquisitions
and the disposal of subsidiaries.
The fair value 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 2020 and 2019.
The tables below show the classification of financial instruments held at fair value into the valuation hierarchy.
At 31 July 2020
Assets
Debt securities:
Long trading 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 2019
Assets
Debt securities:
Long trading 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
Level 1
£ million
Level 2
£ million
Level 3
£ million
Total
£ million
23.1
72.2
6.1
–
–
101.4
6.3
3.1
–
–
9.4
1.3
–
23.6
39.9
–
64.8
2.0
6.0
20.8
–
28.8
–
–
0.3
–
2.7
3.0
–
–
–
3.5
3.5
24.4
72.2
30.0
39.9
2.7
169.2
8.3
9.1
20.8
3.5
41.7
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
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168
The Notes continued
Close Brothers Group plc Annual Report 2020
28. Financial Risk Management continued
Movements in financial instruments categorised as Level 3 were:
At 1 August 2018
Total losses recognised in the consolidated income statement
Purchases and issues
Sales and settlements
At 31 July 2019
Total gains recognised in the consolidated income statement
Purchases and issues
Sales and settlements
At 31 July 2020
Equity shares
£ million
0.5
–
–
(0.2)
Contingent
consideration
£ million
(3.3)
(1.2)
0.4
0.2
0.3
–
–
–
0.3
(3.9)
0.7
(0.6)
3.0
(0.8)
The losses recognised in the consolidated income statement relating to instruments held at the year end amounted to £0.4 million (2019: £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. Details of average tenor and loan size by business can be found on page 2 and 3 of the strategic
report. This ensures concentration risk is controlled in both the loan book and associated collateral. Currently credit risk appetites are set
around unsecured lending to ensure the secured lending position is under regular review. Unsecured lending accounts for 11.3% of assets,
although 77% of this total benefits from some degree of structural protection. Whilst not necessarily comprising formal, tangible security,
this protection provides various degrees of loss mitigation. Examples include so-called “soft” assets and After The Event insurance cover.
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 investment grade 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
2020
£ million
31 July
2019
£ million
1,375.8
619.7
125.8
7,616.7
382.5
45.8
39.9
53.8
10,260.0
1,106.4
562.9
108.9
7,649.6
314.4
42.5
30.1
50.4
9,865.2
210.4
196.9
10,470.4
10,062.1
Assets pledged and received as collateral
The group pledges assets for repurchase agreements and securities borrowing agreements which are generally conducted under
terms that are customary to standard borrowing contracts.
At 31 July 2020, the group was a participant of the Bank of England’s Term Funding Scheme and Term Funding Scheme with Additional
Incentives for SMEs. Under these schemes, asset finance loan receivables of £758.5 million (31 July 2019: £790.6 million) and retained
notes relating to Motor Finance loan receivables of £109.0 million (31 July 2019: £35.4 million) were positioned as collateral with the
Bank of England, against which £262.0 million of cash (31 July 2019: £490.0 million) was drawn under the Term Funding Scheme and
£228.0 million (31 July 2019: £nil) under the Term Funding Scheme with Additional Incentives for SMEs. 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.
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169
The group has securitised without recourse and restrictions £1,601.1 million (31 July 2019 restated: £1,418.9 million) of its insurance
premium and motor loan receivables in return for cash and asset-backed securities in issue of £1,037.1 million (31 July 2019: £949.8
million). This includes the £109.0 million (31 July 2019: £35.4 million) retained notes positioned as collateral with the Bank of England.
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.
The majority of loans and advances to customers are secured against specific assets. For more information on collateral held see
page 173. 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 regular review of appetites and policy, and oversight and 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 predominantly 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 asset securing 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. Additional resource has been allocated to this activity in light of the increase in
required concessions relating to Covid-19.
Covid-19 approach
The past few months have been unprecedented in their severity and uncertainty with a large number of our customers approaching us
for additional financial support. Further information on the support and concessions this comprises can be found in the forbearance
section below entitled “Additional support for customers impacted by Covid-19”.
As the global pandemic has progressed, the impact on our customers has been progressively assessed. We have been tracking closely
the payment performance of our customers and the uptake of concessions, and have also deployed contact strategies to reach out to
try and ascertain the short to medium term intentions of our customers with regard to resuming normal payments, or indeed the need
for further concessions. The result of these individual contacts has informed our assessment of staging at an individual facility level.
Appropriate cure periods associated with these concessions have been determined based on in-depth knowledge of portfolios and
sub-portfolios.
The Central Credit Risk function monitors uptake of Covid-19 specific concessions and reports on these to the CRMC and GRCC,
which utilise this enhanced forbearance reporting for tactical and strategic planning, and to assess the impacts of concessions granted.
Our additional reporting tracks the trajectory of Covid-19 specific forbearance across our businesses and examines sector and asset
concentrations.
In addition to the Covid-19 specific forbearance measures covered below, following accreditation, we have been able to offer many of
our customers facilities under the UK government-introduced Coronavirus Business Interruption Loan Scheme (“CBILS”), the
Coronavirus Large Business Interruption Loan Scheme (“CLBILS”) and the Bounce Back Loan Scheme (“BBLS”), thereby enabling us
to maximise our support for small businesses. We have seen good demand for loans under these schemes with over 1,430 of these
loans approved within our Invoice Finance, Property Finance, and Asset Finance and Leasing businesses.
We maintain a regular reporting cycle of the uptake of these facilities and monitor usage compared to approved overall credit limits. In
addition to facilities already approved and drawn we have a strong pipeline of applications that are undergoing eligibility assessment.
At 31 July 2020 lending under the CBILS and associated schemes totalled £194 million across 901 loans noting that CBILS constitutes
the vast majority of such exposures. Additionally, at 31 July 2020, £159 million across 529 loans had been credit approved and were
awaiting drawdown.
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The Notes continued
28. Financial Risk Management continued
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 reports on forborne exposures as either performing or non-performing in line with regulatory requirements. A
forbearance policy is maintained 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.
Additional support for customers impacted by Covid-19
The economic conditions resulting from Covid-19 have been unprecedented in terms of the financial support required by our customers
who find themselves in difficulty, and we have introduced a range of additional forbearance measures to support them. Concessions
granted to customers as a consequence of Covid-19 are varied across our lending businesses. In all instances, where further support is
required this is considered on a case-by-case basis as we seek to assist our customers during these unpredictable times. The number
of customers supported via concessions offered has increased to 66,153.
In Retail, concessions in Motor Finance have typically taken the form of a period of breathing space without payments, followed by a
payment plan to meet the revised outstanding balance, with the customer enjoying deferral of payment without the compounding of
interest on the outstanding balance. Similarly, in Premium Finance, affected customers have been offered revised repayments over a
short-term horizon. In Commercial, for Asset Finance customers, a capital repayment holiday has been the most common form of
concession offered. In Invoice Finance customers have been offered the option to flex repayment percentages and overpayments
where required. Finally, in Property fee concessions on extensions have been granted. Our Commercial and Property businesses
account for the vast majority of our forborne loan balances.
The cure periods of these forborne exposures are subject to expert judgement and are underpinned by carefully considered
assumptions. Our cure approach varies dependent on divisional split and ranges from instant cure when concession ends (subject to
confirmation of no adverse performance) to a three-month cure period applicable in other circumstances. In some instances where the
facility is of short tenor the exposure may remain forborne for the residual life of the facility.
Other forbearance (non-Covid-19)
The Banking division has historically offered a range of concessions to support customers which vary depending on the product and
the customer’s status. Such concessions include 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, as well as other forms of forbearance
such as moratorium, covenant waivers, and rate concessions.
Loans are classified as forborne at the time a customer in financial difficulty is granted a concession and 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;
3.
None of the customer’s exposures with Close Brothers are more than 30 days past due at the end of the probation period; and
4.
The regulatory requirement for an additional 12-month cure period for a non-performing forborne exposure to become performing-
forborne is also applied where required in addition to the above.
Forbearance analysis
At 31 July 2020 the gross carrying amount of exposures with forbearance measures was £1,596.2 million (31 July 2019: £174.5 million).
The key driver of this increase is Covid-19 related forbearance which comprises 88% (£1,410.4 million) of forborne exposures at 31 July
2020. As set out on page 134, a Covid-19 related concession does not in itself constitute a significant increase in credit risk; accordingly
26% and 72% of these loans are in stages 1 and 2 respectively.
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Close Brothers Group plcAnnual Report 2020 171
An analysis of forborne loans as at 31 July 2020 is shown in the table below:
31 July 2020
Non-Covid-19 forbearance
Covid-19 forbearance
31 July 2019
Non-Covid-19 forbearance
Covid-19 forbearance
Gross loans
and advances
to customers
£ million
7,855.4
7,855.4
7,753.9
7,753.9
Forborne
loans
£ million
185.8
1,410.4
1,596.2
174.5
–
174.5
Forborne loans
as a percentage
of gross loans and
advances to
customers
%
Provision on
forborne loans
£ million
Number of
customers
supported
2.4%
18.0%
20.3%
2.3%
–
2.3%
34.5
71.9
106.4
18.7
–
18.7
3,039
66,153
69,192
3,612
–
3,612
The following is a breakdown of forborne loans by segment split by those driven by Covid-19 compared to concessions that have arisen
in the normal course of business:
Commercial
Retail
Property
The following is a breakdown of the number of customers supported by segment:
Commercial
Retail
Property
31 July 2020
Covid-19
£ million
Non-Covid-19
£ million
832.8
251.0
326.6
1,410.4
50.1
4.1
131.6
185.8
Total
forborne
loans
£ million
882.9
255.1
458.2
1,596.2
31 July 2019
Total
forborne
loans
£ million
70.9
5.9
97.7
174.5
31 July 2020
Covid-19 Non-Covid-19
Total number
of customers
supported
31 July 2019
Total number
of customers
supported
7,322
58,644
187
66,153
284
2,700
55
3,039
7,606
61,344
242
69,192
265
3,308
39
3,612
The following is a breakdown of forborne loans by concession type split by those driven by Covid-19 compared to concessions that
have arisen in the normal course of business:
Extension outside terms
Refinancing
Moratorium
Other modifications
31 July 2020
Covid-19
related
Non-Covid-19
related
440.1
0.5
969.8
–
1,410.4
138.0
15.2
28.6
4.0
185.8
Forborne
loans
578.1
15.7
998.4
4.0
1,596.2
31 July 2019
Forborne
loans
130.3
26.2
14.2
3.8
174.5
Segmental credit risk
Commercial is a combination of several specialist, predominantly 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 or refundable lending. The majority of the loan book is comprised of loans less than
£20,000 and includes both regulated and unregulated agreements. Credit issues are identified via largely automated monitoring and
tracking processes. Collections processes and actions (focused on good and fair customer outcomes) are designed and implemented
to promptly restore customers to a performing status, with recovery methods applied to minimise potential loss.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 172
28. Financial Risk Management continued
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 Residential Development loans of less than £10 million. All loans are regularly reviewed to ensure that they
are performing satisfactorily, with Residential Development facilities monitored, broadly, on a monthly basis by independent Close
Brothers appointed Project Monitoring Surveyors (“PMS”) to certify build payments and the residual cost-to-complete. This ensures the
thorough supervision of all live developments and facilitates the monthly checking of on-site progress against original build plan.
In Commercial and Property, 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 2020
Gross loans and advances to customers
Low risk
Medium risk
High risk
Ungraded
Undrawn commitments
Low risk
Medium risk
High risk
Trade receivables1
Low risk
Medium risk
High risk
At 31 July 2019
Gross loans and advances to customers
Low risk
Medium risk
High risk
Ungraded
Undrawn commitments
Low risk
Medium risk
Trade receivables1
Low risk
Medium risk
High risk
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
5,777.5
112.5
5.1
11.5
5,906.6
1,163.7
–
–
1,163.7
3.7
–
–
3.7
1,134.1
345.3
89.6
5.2
1,574.2
12.2
7.6
–
19.8
–
4.5
–
4.5
34.7
25.0
309.6
5.3
374.6
10.6
0.1
1.1
11.8
–
–
2.6
2.6
6,946.3
482.8
404.3
22.0
7,855.4
1,186.5
7.7
1.1
1,195.3
3.7
4.5
2.6
10.8
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
1. Lifetime expected credit losses are recognised for all trade receivables under the IFRS 9 simplified approach.
Low risk loans and advances to customers represent 89% of the overall portfolio (31 July 2019: 95%), reflecting the strong quality of the
portfolio with the remaining 12% of loans in medium risk, high risk and ungraded (31 July 2019: 5%). The shift in loans to higher risk
grades is primarily due to macroeconomic and case-specific effects of Covid-19.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 173
Low risk and Stage 2 represent 14% (31 July 2019: 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. Covid-19 forbearance
has precipitated migration from Stage 1 to Stage 2 in line with our approach outlined on page 134, which can be seen in the lower
balances in low risk Stage 1 category compared to last year, and a resultant higher balance in the low risk Stage 2 category year on
year. 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 6% (31 July 2019: 4%) of total loans and advances to customers. 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.
High risk agreements account for 5% (31 July 2019: 1%) of total loans and advances to customers with the majority corresponding with
Stage 3, largely driven by increased defaults as a result of Covid-19. The increase in high risk Stage 2 exposure partly reflects the
impact of Covid-19, as well as enhancements made to our internal risk models which provide greater differentiation between accounts.
Collateral held
The group mitigates credit risk through holding collateral against loans and advances to customers. The group has internal policies on the
acceptability of specific collateral types, the requirements for ensuring effective enforceability and monitoring of collateral in-life. Internal
policies define, amongst other things, legal documentation requirements, the nature of assets accepted, loan to value and age at origination,
and exposure maturity and in-life inspection requirements. 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 divisions
include residential and commercial property and charges over business assets such as equipment, inventory and accounts receivable.
Within the Retail division 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. Collateral values and time to realise assets are likely
to have been impacted by Covid-19 though it is not currently anticipated that this will materially impact the quality of the collateral held.
Analysis of gross loans and advances to customers by LTV ratio is provided below. 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.
LTV1
60% or lower
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Structurally protected2
Unsecured
At 31 July 2020
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
407.1
256.0
265.4
589.0
997.1
251.0
255.1
151.1
158.5
160.6
335.6
1,152.8
389.3
230.1
424.9
54.0
953.0
685.5
67.1
2.9
20.7
48.6
–
–
1,518.6
1,102.1
668.1
1,744.7
1,407.1
529.7
680.0
205.1
3,171.8
2,905.8
1,777.8
7,855.4
1 Government lending scheme facilities are allocated to a low LTV category reflecting the nature of the Government guarantee and resultant level of lending risk.
2 Exposures are considered structurally protected when, in management’s judgement, they have characteristics which mitigate the credit risk of the exposure to a significant
extent, in spite of not representing tangible security.
LTV1
60% or lower
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Structurally protected
Unsecured
At 31 July 2019
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
209.3
276.1
363.8
696.5
916.9
267.9
157.1
155.5
149.9
159.1
344.2
1,109.9
370.0
241.0
378.7
95.0
1,126.5
626.8
74.0
7.1
7.6
21.0
–
–
1,485.7
1,062.0
782.0
1,813.5
1,294.5
529.9
535.8
250.5
3,043.1
2,847.8
1,863.0
7,753.9
1 Restated to aid comparability. The analysis in the 2019 Annual Report included gross loans and advances to customers where exposure at origination exceeded £1.0 million only.
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28. Financial Risk Management continued
Gross loans and advances to customers which are credit-impaired split by LTV ratio:
LTV
60% or lower
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Structurally protected
Unsecured
At 31 July 2020
LTV1
60% or lower
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Structurally protected
Unsecured
At 31 July 2019
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
4.8
11.5
16.2
22.8
32.5
23.4
10.0
5.2
1.0
1.7
5.3
14.3
8.6
5.9
6.1
0.5
68.7
42.2
23.8
0.7
20.7
48.7
–
–
74.5
55.4
45.3
37.8
61.8
78.0
16.1
5.7
126.4
43.4
204.8
374.6
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
1.9
4.8
8.3
17.5
21.3
17.3
5.3
8.3
84.7
0.4
0.7
2.2
9.5
4.3
5.1
3.7
0.6
26.5
10.1
29.8
12.5
1.6
–
21.0
–
–
75.0
12.4
35.3
23.0
28.6
25.6
43.4
9.0
8.9
186.2
1 Restated to aid comparability. The analysis in the 2019 Annual Report included gross loans and advances to customers where exposure at origination exceeded £1.0 million
only.
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 investment grade and in
Stage 1.
Financial assets: Settlement balances and loans to money brokers against stock advanced
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.
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.
Loans to money brokers against stock advanced of £45.8 million (31 July 2019: £42.5 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 credit risk of this financial asset is therefore limited.
The following table shows the ageing of settlement balances:
At 31 July 2020
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
Impairment
provisions
£ million
Total
£ million
598.9
18.4
–
–
617.3
–
–
0.7
–
0.7
–
–
–
2.0
2.0
–
–
–
(0.3)
598.9
18.4
0.7
1.7
(0.3)
619.7
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The Notes continuedClose Brothers Group plcAnnual Report 2020 175
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
Impairment
provisions
£ million
529.5
31.8
–
–
561.3
–
–
0.6
–
0.6
–
–
–
1.0
1.0
–
–
–
–
–
Total
£ million
529.5
31.8
0.6
1.0
562.9
(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.
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 (“ALCO”) 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 assets and
liabilities; and
• basis risk occurs where there is a mismatch in the interest rate reference rate for assets and liabilities.
Interest rate risk within the Banking book is assessed by applying key behavioural and modelling assumptions including but not limited
to fixed rate loans subject to prepayment risk, behaviour of non-maturity assets, treatment of own equity and the expectation of interest
rate options. This is performed across a range of regulatory prescribed and internal interest rate shocks approved by ALCO.
The table below sets out the earnings at risk (“EaR”) due to a parallel shift in interest rates at 31 July 2020:
0.5% increase
0.5% decrease
2020
£ million
(9.8)
1.7
2019
£ million
(4.0)
5.1
The average impact in 2020 on our EaR measure due to a parallel 0.5% increase or decrease in interest rates was a £8.2 million (2019:
£4.3 million) decrease and £5.7 million (2019: £5.2 million) increase respectively.
In March 2020 the Bank of England reduced base rate twice from 0.75% to 0.10% following the onset of Covid-19 causing market rates
to fall. This resulted in an increase in EaR under a 0.5% increase due to embedded floors on some variable rate loans becoming more
profitable in the lower rate environment. This additional profit is at risk should rates rise back up and is reflected in a higher EaR measure.
In the event of market rates decreasing further, additional profits would be generated primarily due to the optionality within some variable
rate loans. No floor is applied to the stressed yield curves.
The table below sets out the assessed impact on our base case economic value (“EV”) due to a shift in interest rates at 31 July 2020:
0.5% increase
0.5% decrease
2020
£ million
(3.1)
3.3
2019
£ million
–
–
The average impact in 2020 on our base case EV measure due to a parallel 0.5% increase or decrease in interest rates was a
£2.2 million (2019: £0.4 million) increase and £2.2 million (2019: £0.4 million) decrease respectively.
The EV measure used for monitoring was changed from a ‘parallel shift up 0.5%’ to a ‘Short rates down, long rates up’ yield curve
stress in 2019 to reflect the bank’s repricing profile and external interest rate environment. The impact on our base case EV due to a
‘Short rates down, long rates up’ shift in interest rates at 31 July 2020 was a reduction in the EV of £3.4 million (31 July 2019: reduction
of £6.4 million).
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.
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28. Financial Risk Management continued
A change in the euro exchange rate would decrease the group’s equity by the following amounts:
20% strengthening of sterling against the euro
2020
£ million
(2.8)
2019
£ million
(4.3)
The group has additional material currency assets and liabilities primarily as a result of treasury operations in the Banking division. These
assets and liabilities are matched by currency, using exchange rate derivative contracts where necessary. Details of these contracts are
disclosed in note 14. Other potential group exposures arise from share trading settled in foreign currency in the Securities division, and
foreign currency equity investments. The group has policies and processes in place to manage foreign currency risk, and as such the
impact of any reasonably expected exchange rate fluctuations would not be material.
Market price risks
Trading financial instruments: Equity shares and debt securities
The group’s trading activities relate to Winterflood. The following table shows the group’s trading book exposure to market price risk:
For the year ended 31 July 2020
Equity shares
Long
Short
Debt securities
Long
Short
For the year ended 31 July 2019
Equity shares
Long
Short
Debt securities
Long
Short
Highest
exposure
£ million
Lowest
exposure
£ million
Average
exposure
£ million
Exposure
at 31 July
£ million
45.5
22.1
22.6
4.8
33.9
9.1
20.8
4.3
31.2
12.3
18.9
23.4
6.2
17.2
29.2
9.1
20.1
24.4
8.3
16.1
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
With respect to the long and short positions on debt securities £12.4 million and £0.3 million (2019: £12.6 million and £0.4 million) were
due to mature within one year respectively.
The average exposure has been calculated on a daily basis. The highest and lowest exposures occurred on different dates and
therefore a net position of these exposures does not reflect a spread of the trading book.
Based upon the trading book exposure given above, a hypothetical fall of 10% in market prices would result in a £2.0 million decrease
(2019: £2.4 million decrease) in the group’s income and net assets on the equity trading book and a £1.6 million decrease (2019: £1.6
million decrease) on the debt securities trading book. However, the group’s trading activity is mainly market-making where positions are
managed throughout the day on a continuous basis. Accordingly, the sensitivity referred to above is purely hypothetical.
Non-trading financial instruments
Net gains and losses on non-trading financial instruments are disclosed in notes 12 and 13.
(e) Liquidity risk
Liquidity risk is the risk that liabilities cannot be met when they fall due or can only be met at an uneconomic price and arises mainly in
the Banking division.
The group has a prudent liquidity position with total available funding at 31 July 2020 of £10.2 billion (31 July 2019: £9.9 billion). This funding
is significantly in excess of its loans and advances to customers at 31 July 2020 of £7.6 billion (31 July 2019: £7.6 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.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 177
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 2020
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
Lease liabilities (note 30)
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
–
25.1
543.2
6.9
–
17.9
–
–
0.1
13.0
587.5
123.3
1,105.8
1.1
38.4
–
1.7
5.3
5.5
95.2
–
0.3
1,358.0
0.1
523.3
–
4.1
1,464.5
0.2
416.1
–
3.7
3.9
3.4
4.2
–
5.4
8.3
5.2
3.0
–
–
1,511.5
490.9
667.6
–
43.3
22.8
30.6
20.4
In more
than five
years
£ million
–
–
–
–
284.3
–
234.6
5.2
11.0
2.0
Total
£ million
587.5
152.8
5,983.0
499.2
1,929.7
17.9
288.7
45.5
55.8
137.8
Total
606.2
1,963.8
1,896.9
1,906.8
2,787.1
537.1
9,697.9
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
–
12.5
69.7
19.0
–
14.3
–
0.1
11.6
In less
than three
months
£ million
547.6
15.7
1,235.7
10.9
32.9
–
1.7
7.6
89.5
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
–
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
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 2020
At 31 July 2019
In more than
three months
but not more
than six
months
£ million
3.5
88.8
In less
than three
months
£ million
79.5
163.3
In more than
six months
but not more
than one year
£ million
In more than
one year but
not more than
five years
£ million
7.6
8.6
21.9
34.8
On
demand
£ million
–
5.6
In more
than five
years
£ million
5.2
9.0
Total
£ million
117.7
310.1
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28. Financial Risk Management continued
(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 2020
Derivative financial assets
Derivative financial liabilities
At 31 July 2019
Derivative financial assets
Derivative financial liabilities
Gross
amounts
recognised
£ million
Master netting
arrangements
£ million
Financial
collateral
£ million
Net amounts
after offsetting
£ million
39.9
20.7
30.1
20.6
(14.2)
(14.2)
(25.0)
(4.0)
(14.9)
(14.9)
(12.4)
(5.4)
0.7
2.5
2.7
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 £4,821 million at
31 July 2020 (31 July 2019: £4,843 million). Included in revenue on the consolidated income statement is management fee income of
£33.4 million (2019: £31.3 million) from unconsolidated structured entities managed by the group.
30. Implementation of IFRS 16
The group adopted IFRS 16 from 1 August 2019. The standard has been applied on a modified retrospective basis and comparative
information has not been restated. More information on changes to the group’s accounting policies can be found in note 1.
At transition date, the group applied the option to measure right of use assets at an amount equal to the lease liability, adjusted for
prepaid or accrued payments. This resulted in the recognition on the balance sheet of right of use assets of £44.8 million and lease
liabilities of £47.4 million, with no impact on shareholders’ equity. The right of use assets and lease liabilities, which largely relate to
properties previously accounted for as operating leases, are included within Property, plant and equipment and Other liabilities
respectively.
The weighted average incremental borrowing rate applied to lease liabilities at transition date was 2%. At 31 July 2019, IAS 17 operating
lease commitments as disclosed on page 138 of the Annual Report 2019 amounted to £55.2 million. The difference between this and
total lease liabilities recognised at 1 August 2019 on transition largely relates to the impact of discounting.
The group did not reassess whether a contract is, or contains, a lease on transition as permitted by IFRS 16. In addition, the following
practical expedients were applied on transition:
• Reliance on previous assessment of whether a lease is onerous;
• Recognition exemption for leases with a remaining term of less than 12 months at transition date;
• Exclusion of initial direct costs from the measurement of right of use assets;
• Use of hindsight in determining lease term if the contract contains options to extend or terminate; and
• Application of a single discount rate to a portfolio of leases with reasonably similar characteristics.
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The Notes continuedClose Brothers Group plcAnnual Report 2020 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 2020, which
are all wholly owned and incorporated in the UK unless otherwise stated.
179
Securities
W.S. (Nominees) Limited3
Winterflood Client Nominees Limited3
Winterflood Gilts Limited3
Winterflood Securities Holdings Limited3
Winterflood Securities Limited3
Winterflood Securities US Corporation (Delaware, U.S.A.)18
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
Group
Close Brothers Holdings Limited1
Banking
Air and General Finance Limited2
Armed Services Finance Limited5
Arrow Audit Services Limited1
Brook Funding (No.1) Limited12, 19
Capital Lease Solutions Limited1
CBM Holdings Limited1
Close Asset Finance Limited2
Close Brewery Rentals Limited6
Close Brothers Asset Finance GmbH (Germany)15
Close Brothers Factoring GmbH (Germany)15
Close Brothers Finance plc1
Close Brothers Limited1
Close Brothers Military Services Limited5
Close Brothers Premium DAC (Ireland)18
Close Brothers Technology Services Limited1
Close Brothers Vehicle Hire Limited14
Close Business Finance Limited2
Close Credit Management (Holdings) Limited1
Close Finance (CI) Limited (Jersey)16
Close International Bank Holdings Limited (Guernsey)4
Close Invoice Finance Limited1
Close Leasing Limited13
Close Motor Finance Limited5
Close PF Funding I Limited11, 19
Commercial Acceptances Limited7
Commercial Finance Credit Limited2
Corporate Asset Solutions Limited1
Finance for Industry Limited1
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 plc12, 19
Orbita Funding 2017-1 plc12, 19
Orbita Funding 2020-1 plc12, 19
Orbita Holdings Limited12, 19
Surrey Asset Finance Limited2
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 Saltire Court, 3rd Floor, West Wing, 20 Castle Terrace, Edinburgh, Scotland EH1 2EN, United Kingdom.
10 Wilmington House, High Street, East Grinstead, West Sussex RH19 3AU, United Kingdom.
11 10th Floor, 5 Churchill Place, London E14 5HU, United Kingdom.
12 1 Bartholomew Lane, London EC2N 2AX, United Kingdom.
13 Olympic Court Third Avenue, Trafford Park Village, Manchester M17 1AP, United Kingdom.
14 Lows Lane, Stanton-By-Dale, Ilkeston, Derbyshire DE7 4QU, United Kingdom.
15 Grosse Bleiche 35-39, 55116, Mainz, Germany.
16 Conway House, Conway Street, St Helier JE4 5SR, Jersey.
17 1209 Orange Street, Wilmington 19801, New Castle, Delaware, U.S.A.
18 Swift Square, Building 1, Santry Demesne, Northwood, Dublin, DO9 AOE4, Ireland.
Subsidiaries by virtue of control:
19 The related undertakings are included in the consolidated financial statements as they are controlled by the group.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 180
Glossary and Defi nition 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 profi t (“AOP”) Calculated as operating income less adjusted operating expenses and impairment losses on
financial assets
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
Bounce Back Loan Scheme
(“BBLS”)
UK government business lending scheme that helps small and medium-sized businesses to
borrow between £2,000 and £50,000 (up to a maximum of 25% of their turnover)
Buy As You Earn (“BAYE”)
The HM Revenue & Customs-approved Share Incentive Plan that gives all employees the
opportunity to become shareholders in the group
Capital Requirements Directive
IV (“CRD IV”)
Capital Requirements Regulation
(“CRR”)
CET1 capital ratio
European Union regulation implementing the Basel III requirements in Europe, alongside CRR
European Union regulation implementing the Basel III requirements in Europe, alongside CRD IV
Measure of the group’s CET1 capital as a percentage of risk weighted assets, as required by
CRR
Common equity tier 1 (“CET1”)
capital
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
Compensation ratio
Total staff costs as a percentage of adjusted operating income
Coronavirus Business
Interruption Loan Scheme
(“CBILS”)
Coronavirus Large Business
Interruption Loan Scheme
(“CLBILS”)
Credit impaired
UK government business lending scheme that helps small and medium-sized businesses
access loans and other kinds of finance up to £5 million
UK government business lending scheme that helps medium and large-sized businesses
access loans and other kinds of finance up to £200 million
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
Expected credit loss (“ECL”)
The unbiased probability-weighted average credit loss determined by evaluating a range of
possible outcomes and future economic conditions
Expense/income ratio
Total adjusted operating expenses divided by adjusted operating income
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
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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
Funding as % of 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
HM Revenue & Customs
(“HMRC”)
Independent fi nancial adviser
The UK’s tax, payments and customs authority
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 Liquidity Adequacy
Assessment Process (“ILAAP”)
The processes for the identification, measurement, management and monitoring of liquidity
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
Investment costs
Leverage ratio
Lifetime expected credit loss
provision (“Lifetime ECL”)
Liquidity coverage ratio (“LCR”)
Include depreciation and other costs related to investment in multi-year projects, new business
initiatives and pilots and cyber resilience. Excludes IFRS 16 depreciation.
Tier 1 capital as a percentage of total balance sheet assets, adjusted for certain capital
deductions, including intangible assets, and off balance sheet exposures
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 or structurally protected 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 or assets under
management (“AUM”)
Total market value of assets which are managed by Close Brothers Asset Management 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
Modifi cation losses
Modification losses arise when the contractual terms of a financial asset are modified. An
adjustment is required to the carrying value of the financial asset to reflect the present value of
modified future cash flows discounted at the original effective interest rate
Net carrying amount
Loan book value after expected credit loss provision
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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
Adjusted profit attributable to shareholders divided by total closing assets at the balance sheet
date
Return on average tangible
equity
Adjusted profit attributable to shareholders from continuing operations divided by average total
shareholder’s equity, excluding intangible assets
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 (“RWAs”)
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
Signifi cant 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
Represents debt that ranks below, and is repaid after claims of, other secured or senior debt
owed by the issuer
Term Funding Scheme (“TFS”)
The Bank of England’s Term Funding Scheme
Term Funding Scheme for Small
and Medium-sized Enterprises
(“TFSME”)
Term funding
Tier 2 capital
The Bank of England’s Term Funding Scheme with additional incentives for SMEs
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 client assets (“TCA”)
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
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Glossary and Definition of Key Terms continuedClose Brothers Group plcAnnual Report 2020
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
183
Date
November 2020
19 November 2020
24 November 2020
January 2021
31 January 2021
March 2021
May 2021
July 2021
31 July 2021
September 2021
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 (or other professional) 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.
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Financial StatementsGovernance ReportStrategic ReportClose Brothers Group plcAnnual Report 2020 184
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: 0371 664 0300 (calls are charged at the standard geographic rate and will vary by provider)
From overseas: +44 (0)371 664 0300 (calls will be charged at the applicable international rate)
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.linkassetservices.com
Online proxy voting: www.signalshares.com
Registered Offi ce
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
Shareholder Warning
Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that prove to be
worthless or non-existent, or they can offer to buy shares at an inflated price in return for you paying upfront. They promise high profits.
However, if you buy or sell shares in this way, you will probably lose your money.
How to Avoid Share Fraud
• Remember that FCA-authorised firms are unlikely to contact you unexpectedly offering to buy or sell shares.
• Do not converse with them. Note the name of the person and firm contacting you, then end the call.
• To see if the person and firm contacting you are authorised by the FCA, check the Financial Services Register at
www.fca.org.uk/register.
• Beware of fraudsters claiming to be from an authorised firm; copying its website; or giving you false contact details.
• If you want to phone the caller back, use the firm’s contact details listed on the Financial Services Register at www.fca.org.uk/register.
• If the firm does not have contact details on the Register or they tell you the details are out of date, call the FCA on 0800 111 6768.
• Search the list of unauthorised firms to avoid at www.fca.org.uk/consumers/unauthorised-firms-individuals.
• Remember that if you buy or sell shares from an unauthorised firm, you cannot access the Financial Ombudsman Service or
Financial Services Compensation Scheme.
• Get independent financial and professional advice before handing over any money.
• If it sounds too good to be true, it probably is.
Report a Scam
If fraudsters approach you, tell the FCA using the share fraud reporting form at www.fca.org.uk/consumers/reportscam-unauthorised-
firm. You can also find out more about investment scams on the same web page. You can call the FCA Consumer Helpline on 0800 111
6768. If you have already paid money to share fraudsters, call Action Fraud on 0300 123 2040.
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Close Brothers Group plcAnnual Report 2020 Printed by Park Communications on FSC® certified paper.
Park works to the EMAS standard and its Environmental Management System is certified to
ISO 14001.
This publication has been manufactured using 100% offshore wind electricity sourced from
UK wind.
100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for
further use and, on average 99% of any waste associated with this production will be recycled
and the remaining 1% used to generate energy.
This document is printed on Claro Bulk, a paper sourced from well managed responsible,
FSC® certified forests and other controlled sources. The pulp used in this product is bleached
using an elemental chlorine free (ECF) process.
This is a certified climate neutral print product for which carbon emissions have been
calculated and offset by supporting recognised carbon offset projects. The carbon offset
projects are audited and certified according to international standards and demonstrably
reduce emissions. The climate neutral label includes a unique ID number specific to this
product which can be tracked at www.climatepartner.com, giving details of the carbon
offsetting process including information on the emissions volume and the carbon offset project
being supported.
Designed by Emperor Design Consultants Limited.
Typeset by Donnelley Financial Solutions.
Photography by Richard Davies and ITCH media.
Most of 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.
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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
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