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Close Brothers Group plc
Annual Report 2021
Contents
Strategic Report
Financial Highlights
Chairman’s Statement
Chief Executive’s Statement
Business Model
The Foundations of Our Business
Our Purpose
Our Culture
Our Strategy
Strategy and Key Performance Indicators
01
02 Our Businesses
04
08
12
14
15
16
17
20
22 Our Responsibility
Sustainability Report
24
35
Non-Financial Information Statement
36 Our Stakeholder and Board Engagement
42
46
52
54
56
Financial Overview
Banking
Asset Management
Securities
Risk Report
Governance Report
68
70
71
76
89
91
94
97
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
126
134 Consolidated Income Statement
135 Consolidated Statement of Comprehensive Income
136 Consolidated Balance Sheet
137 Consolidated Statement of Changes in Equity
138 Consolidated Cash Flow Statement
139 Company Balance Sheet
140 Company Statement of Changes in Equity
141 The Notes
191 Glossary and Definition of Key Terms
195
195 Cautionary Statement
Investor Relations
01
£265.2m
£140.9m
£264.7m
£271.2m
£262.5m
134.8p
72.8p
133.5p
136.2p
130.2p
£202.1m
£109.5m
£201.6m
£202.3m
£191.2m
Financial Highlights
for the year ended 31 July 2021
Adjusted1 Operating Profit
£270.7m
Operating Profit Before Tax
£265.2m
2021
2020
2019
2018
2017
£270.7m
£144.0m
£270.5m
£278.6m
£268.7m
2021
2020
2019
2018
2017
Adjusted1 Basic Earnings per Share
140.4p
2021
2020
2019
2018
2017
Return on Opening Equity2
14.5%
2021
2020
2019
2018
2017
Ordinary Dividend per Share3
60.0p
2021
2020
2019
2018
2017
Basic Earnings per Share
134.8p
140.4p
74.5p
136.7p
140.2p
133.6p
2021
2020
2019
2018
2017
Profit Attributable to Shareholders
£202.1m
2021
2020
2019
2018
2017
14.5%
8.0%
15.7%
17.0%
18.1%
60.0p
40.0p
66.0p
63.0p
60.0p
1 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, and any exceptional and other adjusting items which do not reflect underlying trading performance. Please refer to page 43 for further
details on items excluded from the adjusted performance metrics.
2 Adjusted operating profit attributable to shareholders divided by opening equity, excluding non-controlling interests.
3 Represents the final dividend proposed for the respective years together with the interim dividend declared and paid in those years.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 02
Our Businesses
Close Brothers is a leading UK merchant banking group
providing lending, wealth management services and
securities trading. We employ over 3,700 people across
47 offices predominantly in the UK, Ireland and Germany.
Property
Operating profit
£87.8m
2020: £59.5m
The Property business specialises in
short-term residential development finance
through Property Finance, and also offers
refurbishment and bridging loans through
Commercial Acceptances.
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.
Loan book: £1.5 billion
Average loan size: c.£1.2 million
Typical loan maturity2: 6 to 18 months
Read more about Banking
See pages 46 to 51
Retail
Adjusted operating profit
£71.9m
2020: £34.9m
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.
Loan book: £1.9 billion
Average loan size: c.£7,000
Typical loan maturity2: 4 years
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: £1.0 billion
Average loan size: c.£500
Typical loan maturity2: 10 months
Banking
Commercial
Adjusted operating profit
£52.8m
2020: £4.8m
The Commercial businesses lend principally
to small and medium-sized enterprises
(“SME”), both through their direct sales force
and via broker distribution channels. Our
highly specialist sales force operates from
offices throughout the UK, Ireland and
Germany.
The Asset Finance business has c.25,000
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, green
energy production, and aircraft and marine
vessels.
Loan book1: £2.8 billion
Average loan size: c.£58,000
Typical loan maturity2: 3 to 4 years
The Invoice and Speciality Finance business
works with c.5,300 businesses, providing debt
factoring, invoice discounting and asset-based
lending. It also includes our smaller specialist
businesses such as Novitas Loans (“Novitas”)4,
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: £1.1 billion
Average loan size3: c.£456,000
Typical loan maturity2,3: 3 months
1 Excludes operating lease assets of £1.3 million (31 July 2020: £2.9 million) which relate to Asset Finance and £221.6 million (31 July 2020: £219.0 million) to Invoice and Speciality Finance.
2 Typical loan maturities for new business on a contractual basis, except core Invoice Finance which are on a behavioural basis.
3 Average loan size and typical loan maturity include the Invoice Finance business only.
4 Following the strategic review of Novitas’ products and services, in July 2021 the group decided to cease permanently the approval of lending to new customers across all of the products
offered by Novitas, a wholly owned subsidiary of Close Brothers acquired in 2017, and withdraw from the legal services financing market.
Close Brothers Group plc Annual Report 2021
03
Asset Management
Securities
Close Brothers Asset
Management (“CBAM”)
Adjusted operating profit
£23.7m
2020: £20.4m
CBAM is a vertically integrated top 20 UK
wealth manager, providing financial advice
and investment management services to
private clients in the UK. Our clients range
from mid to high net worth individuals.
Our core capabilities are advice, multi-asset
investment management and custody which
we combine to create different propositions
tailored to client preference and client size.
Our strategic aim is to gather assets into our
investment management and platform
through three main distribution channels: our
own financial advisers; our private client
investment managers; and via third party
financial advisers.
We are a national business operating out of
11 locations with c.90 advisers, 65
investment professionals and over 700
employees in total.
Total client assets: £17.0 billion
Managed assets: £15.6 billion
Read more about Asset Management
See pages 52 and 53
Winterflood
Operating profit
£60.9m
2020: £47.9m
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. We also offer sales trading
services to institutional clients both in the UK
and in the US.
Our investment trust team provide the full
range of services of corporate finance,
corporate broking, sales and research, as
well as market-making. We act as corporate
broker and adviser to over 55 corporate
clients with a diverse range of conventional
and alternative asset classes.
Winterflood Business Services has been
operating for over 10 years and provides
outsourced dealing and custody solutions.
Average bargains per day: c.101,000
Total counterparties: c.600
Read more about Securities
See pages 54 and 55
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
04
Chairman’s Statement
A distinctive
culture
Michael N. Biggs Chairman
Close Brothers Group plc Annual Report 2021A relentless customer focus and a long-term approach to everything we do are embedded throughout the organisation. 05
The ongoing impact of the pandemic has been felt
during the year both by our businesses and among
our people. In the face of this uncertain environment,
the benefits of the group’s disciplined adherence to
the business model have been evidenced by the
strong performance delivered this year.
The lending business has delivered
significantly higher profit as a result of
increased income and lower impairment
charges while continuing to progress strategic
investments; Asset Management continued to
grow and attract client assets and new hires;
and Winterflood achieved an exceptional
trading performance as it benefited from the
heightened market activity for most of the
year and the expertise of our traders.
After exceptional and other adjusting
items, statutory operating profit before tax
increased by 88% to £265.2 million (2020:
£140.9 million). The adjusted operating profit
increased 88% and returned to pre-Covid-19
levels at £270.7 million, corresponding to a
return on opening equity of 14.5% (2020:
8.0%). In light of this year’s performance and
to reflect the board’s continued confidence
in the group’s business model and financial
position, we are pleased to recommend a
final dividend of 42.0p per share. If approved
at the Annual General Meeting, this will take
the full-year dividend to 60.0p per share, a
50% increase on last year.
The Right Model, the Right Strategy
The group has navigated the crisis well,
and this is a testament to Adrian and his
management team, who led the group during
this challenging period, maintaining the passion
and engagement of our people and continued
support for customers and clients.
In his first year as the group’s chief executive,
Adrian undertook a review with the objective
of evolving the group’s strategy to reflect the
focus on growth in line with Close Brothers’
business model, as well as incorporating the
group’s approach to sustainability. As a result,
the framework for articulating the group’s
priorities evolved to “protect”, “grow” and
“sustain” our successful business model.
This framework captures our commitment to
deliver disciplined growth and to sustain our
business for the long term.
The executive team also recently held an
Investor Event to explain these strategic
priorities and to give details of how it plans
to deliver disciplined growth. Continuity and
consistency of the business model are two
very important tenets for the board, and I am
pleased to see these being articulated and
executed. I am confident that we have the
right strategy and business model to continue
delivering for all of our stakeholders.
A Distinctive Culture
One of the most valuable assets of Close
Brothers is our distinctive culture. A relentless
customer focus and a long-term approach
to everything we do are embedded
throughout the organisation and play a key
role in the achievement of such a successful
performance, throughout the years and in this
challenging environment.
I was pleased to see the results of our most
recent employee opinion survey (“EOS”).
We pride ourselves on our excellent levels
of service, with 93% of the respondents
saying they see colleagues go the extra mile
to meet the needs of customers and clients.
We also believe in trustworthy behaviour
and always “doing the right thing”, with 97%
of our colleagues agreeing that our culture
encourages them to treat customers and
clients fairly. These are really strong numbers
and we take great pride in the fact that our
culture and the values that underpin it are
embraced by our colleagues, every day. You
can read more about the EOS highlights on
page 16 of this report.
During the pandemic, the preservation of
this culture and our colleagues’ wellbeing
have been at the top of the board’s agenda.
The directors received frequent updates
on employee issues arising from Covid-19,
including the review and discussion of a
quarterly culture dashboard. You can read
more about this and other stakeholders’
matters considered by the board during
the year on page 36.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 06 Close Brothers Group plc
Annual Report 2021
Chairman’s Statement continued
The right model, the right
strategy
07
I am confident that we have the right strategy
and business model to continue delivering for
all of our stakeholders.
Board Composition
Adrian Sainsbury was appointed to succeed
Preben Prebensen on 21 September 2020
following the announcement of Preben’s
planned departure and an extensive search
process undertaken by the board. Adrian has
demonstrated expert leadership as the group
makes the most of the opportunities arising
and continues to deliver disciplined growth.
After more than nine years’ dedicated service
on the board, Geoffrey Howe decided not to
seek reappointment at the 2020 AGM and
ceased to be a director on 19 November
2020. In December 2020, the board was
pleased to appoint Mark Pain as a successor
to Geoffrey. Mark joined the board as an
independent non-executive director with
effect from 1 January 2021. Mark brings to
the board more than 30 years’ executive and
non-executive experience in financial services,
including in retail banking and insurance,
with strong finance, risk management and
commercial credentials.
Once again, I would like to thank Preben and
Geoffrey for their contribution to the group
over many years.
We were also pleased to welcome Tesula
Mohindra and Patricia Halliday as independent
non-executive directors with effect from 15 July
2021 and 1 August 2021, respectively.
Promoting an inclusive culture and supporting
new ways of working and social mobility are
some of the objectives we set ourselves and I
am particularly pleased with the great
progress we are making in these areas.
Addressing the threat of climate change, as
well as identification of the risks and
opportunities it poses to our business, is at the
forefront of the directors’ and the executive
team’s agendas. We are supportive of the
goals of the Paris Agreement and have set
ourselves targets for our operational emissions,
with good progress made in lowering those
emissions over the last financial year. Over the
next few months, we will continue to work
towards improving our understanding of our
indirect Scope 3 emissions, which will help
shape our roadmap for lowering emissions
from our business activity and setting more
ambitious targets in the future.
I have been impressed by the commitment
and hard work demonstrated by our
colleagues while adapting to new ways of
working, and for this I wish to extend my
gratitude. Our people are critical to the
continued long-term success of the group
and I am confident that, together, we will
continue to deliver on our purpose.
Michael N. Biggs
Chairman
28 September 2021
Tesula has over 25 years’ experience in the
financial sector and brings extensive financial
and commercial expertise gained in a broad
range of organisations, from investment
banks to start-ups. Patricia has over 30
years’ experience in risk management across
the investment, corporate and retail banking
sectors, both in the UK and internationally,
with a deep understanding of the regulatory,
risk and governance environment in which
the group operates.
The appointments of Mark, Tesula and
Patricia further strengthen the range of
skills, backgrounds and experience on the
board, and demonstrate our orderly and
proactive approach to succession planning.
Diversity and inclusion remains an area of
focus for the board’s succession planning
while ensuring continuity in the stewardship
of the group. I am pleased that we comply
with the recommendations of the Hampton-
Alexander and Parker Reviews in terms of
the composition of the board.
Doing the Right Thing
At Close Brothers we believe we have the
responsibility to help address the social,
economic and environmental changes facing
our business, employees and customers,
both now and into the future.
We strive to build that responsibility into
everything we do. During the year, the board
and management team maintained the focus
on the group’s sustainability agenda, with
good progress on our programmes and
initiatives. These are aimed at addressing our
key priorities such as inclusion, social mobility,
supporting customer needs, reducing our
impact on the environment, and responding
to the threats of climate change.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 08
Chief Executive’s Statement
A proven and
resilient model
C opy to be supplied
Adrian Sainsbury Chief Executive
Close Brothers Group plc Annual Report 2021Our priority has been to ensure the group remained in a strong position to support our people and customers while making the most of the opportunities arising. 09
We have delivered strong results in the 2021 financial
year, which once again highlight the strengths of our
proven and resilient business model.
Covid-19 continued to present challenges for
colleagues, customers and clients this year
and our priority has been to ensure the group
remained in a strong position to support our
people and customers while making the most
of the opportunities arising as the economy
recovers.
We have supported our people throughout
these challenging times with a constant focus
on their wellbeing. I am truly grateful for our
colleagues’ hard work and commitment
which has allowed us to continue to support
our customers and clients. Face-to-face
interaction and excellence in customer service
remain key features of our relationship-
driven model and we are looking forward to
increased direct contact as restrictions ease,
with the safety of our colleagues, customers
and clients remaining our highest priority. We
are now in the process of adapting to and
implementing future ways of working, taking
into account the different needs of customers
and our businesses, to suit the diverse nature
of our group.
We have supported our customers when they
needed us most, with over 130,000 Covid-19
related concessions totalling £2.0 billion
offered since the beginning of the pandemic
and over £1.1 billion lent under government
support schemes. We are pleased to now
see most of these customers coming out of
forbearance as the economy reopens. At the
same time, we have experienced heightened
trading volumes in Winterflood, enhanced
our Socially Responsible Investment (“SRI”)
offering in Close Brothers Asset Management
(“CBAM”) to capture customer interest in that
space and made the most of demand in our
core banking markets, such as Motor Finance
and Asset Finance.
Supply and demand dynamics in our
lending markets have been impacted by
the unprecedented levels of government
support, which have been crucial to small
and medium-sized businesses. It is in this
context that the impact of the withdrawal of
the government schemes on customer and
competitor’s behaviour has yet to fully play
out. While we still cannot know how the next
phase of the cycle will take shape, we are
operationally and strategically prepared for it.
Historically, this is when we have maximised
the benefits of the consistent application of
our business model and I am confident that
we have the right approach and foundations
in place to take advantage of opportunities as
they arise.
Financial Performance
We delivered a strong performance in
evolving market conditions. After exceptional
and other adjusting items, statutory operating
profit before tax increased 88% to £265.2
million (2020: £140.9 million). Adjusted
operating profit increased 88% to £270.7
million (2020: £144.0 million). This is back
to pre-pandemic levels, corresponding to a
return on opening equity of 14.5% (2020:
8.0%). Our performance benefited from
higher income levels and significantly lower
impairment charges.
Income grew across all divisions, with overall
group income 10% higher than the prior
year. The Banking division achieved 10.9%
loan book growth, reflecting high new
business volumes, while maintaining pricing
discipline with a strong net interest margin
of 7.7%. Income in Asset Management was
up, reflecting an increase in client assets,
driven by good net inflows of 7% (2020: 9%)
and positive market movements. Although
activity has slowed over the last few months,
Winterflood delivered an exceptional trading
performance, benefiting from elevated
volumes for most of the year and the
expertise of our traders.
Costs increased 10%, broadly in line with
income growth, mainly driven by continued
investment and higher compensation as
performance improved. In Banking and Asset
Management, costs increased, reflecting
our continued investment and higher
performance-related costs. Winterflood’s
operating expenses also increased, due to
higher variable costs.
We have seen a significant reduction in
impairment charges and experienced strong
underlying credit performance across the
Commercial, Retail and Property businesses,
as well as a reduction in Covid-19 provisions.
The bad debt ratio of 1.1% (2020: 2.3%)
included the impact of a significant increase
in credit provisions against the Novitas Loans
(“Novitas”) loan book within the Commercial
business.
We have maintained a strong balance sheet,
and a prudent funding and liquidity position.
Our common equity tier 1 ratio rose to 15.8%
(31 July 2020: 14.1%), significantly ahead of
applicable minimum regulatory requirements.
We successfully issued a £350 million, 10-year
senior unsecured bond in December 2020,
and in June 2021 we raised £200 million of
subordinated debt in the form of Tier 2 notes,
replacing and concurrently repurchasing most
of the outstanding securities. Our strong
financial resources leave us in a good position
to deliver on our strategy.
Following the group’s strong performance
in the year, and to reflect the continued
confidence in our business model and
financial position, the board is proposing a
final dividend of 42.0p per share, resulting
in a full-year dividend per share of 60.0p
(2020: 40.0p), an increase of 50%.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 10
Chief Executive’s Statement continued
Keeping Our Model Safe While
Taking it Forward
Earlier this year, we introduced the evolution
of our strategic priorities to “Protect”, “Grow”
and “Sustain” our business model to continue
to deliver on our purpose of helping the
people and businesses of Britain thrive over
the long term.
At our recent Investor Event we set out how
we plan to build on the core strengths of our
business and take it forward. The disciplined
application of our lending criteria, our focus
on service and personal approach, our
distinctive culture and our diversified portfolio
of businesses have proven their value
throughout the crisis.
We continued to invest to protect our
business model and maintain our operational
and financial resilience. The playbooks and
simulations run in prior years benefited our
agile response to the changing environment
we are in. We have made good progress on
our multi-year investment programmes, which
included the submission of our initial Internal
Ratings Based (“IRB”) application to the PRA
in December. Our investment projects have
also helped us strengthen our customer
proposition and drive operational efficiency in
Motor and Asset Finance.
As evidenced by our strong performance,
we are focused on maximising the growth
opportunities in each of our businesses.
In the last year we have, for example,
extended the product offering in our Savings
franchise, launching 35 Day Retail Notice
Accounts and Fixed Rate Cash Individual
Savings Accounts (“ISAs”), which supported
an increase in customer deposits of 12% in
the year. In line with our plans to maximise
long-term growth potential in the Asset
Management business, we have completed
the acquisition of PMN Financial Management
LLP (“PMN”), an IFA business with c.£300
million of client assets. Winterflood Business
Services (“WBS”) has continued to grow its
assets under administration, now at £6.2
billion.
Alongside continued growth in our existing
market niches, we will continue to assess
potential new initiatives. I see good
opportunities arising in the sustainability sector,
building on our position as an active provider of
finance for the green energy and renewables
sector.
Close Brothers Group plc Annual Report 2021 11
Our proven and resilient model and strong
balance sheet, combined with our deep
experience in navigating a wide range of
economic conditions, leave us well placed
to continue supporting our colleagues,
customers and clients over the long term.
We are also committed to reducing our
impact on the environment and responding
to the threats and opportunities of climate
change. We are supportive of the Paris
Agreement goals on net zero and are
targeting becoming operationally net
zero through our Scope 1 and Scope
2 carbon emissions by 2030. We have
already achieved a 23% reduction for
the 2021 financial year, exceeding the
targets we set ourselves last year and
building on several consecutive years of
lowering our operational emissions. Over
the coming months, we will undertake an
initial assessment of our indirect Scope
3 emissions, to provide us with a deeper
understanding of the emissions impact of our
supply chain and business activity.
Outlook
Looking ahead, we are encouraged by
the improvement in the economic outlook
although the trajectory remains uncertain.
In Banking, we are well positioned to
maximise opportunities in the current cycle
and remain confident in the long-term growth
prospects of our businesses. We will continue
to assess opportunities for potential new
initiatives alongside growth in our existing
market niches.
In Asset Management, our business is
aligned with the long-term trends in the
wealth management space and we remain
committed to our growth strategy.
Winterflood has seen a slowing in volumes
and moderation of trading performance over
the last few months. Winterflood remains well
positioned to continue trading profitably in a
range of market conditions but, due to the
nature of the business, it remains sensitive to
changes in the market environment. We remain
focused on growing WBS.
Our proven and resilient model and strong
balance sheet, combined with our deep
experience in navigating a wide range of
economic conditions, leave us well placed
to continue supporting our colleagues,
customers and clients over the long term.
Adrian Sainsbury
Chief Executive
28 September 2021
We have recently taken our investors through
our new “Model Fit Assessment Framework”.
This is a set of criteria we continuously evaluate
our businesses and initiatives against to ensure
they are aligned with the key attributes that
have and will continue to generate long-term
value. This framework was used as a key
tool in our strategic review of Novitas, which
concluded that the overall risk profile of the
business is no longer compatible with our long-
term strategy and risk appetite, particularly
given the recent credit performance of the
business. Accordingly, in July 2021, the group
decided to cease permanently the approval
of lending to new customers across all of the
products offered by Novitas and to withdraw
from the legal services financing market.
Focus on the Long Term
Our long-term approach defines the way we
do business. It is reflected in how we invest
for growth and also in how we operate our
business and engage with our stakeholders. It
is key to ensuring we can sustain and future-
proof our business.
We have made good progress on helping
to address the social, economic and
environmental challenges facing our
business, employees and customers. You
can read more about “Our Responsibility”
in action on pages 22 and 23 of this Annual
Report. We have announced several
sustainability objectives and I am pleased
with the progress we have made against
those over the past year. For example, as
part of our commitment to further increase
our diversity and nurture our inclusive culture,
we have broadened our inclusion remit to
focus on disability inclusion through joining
the Valuable 500 initiative and signing up to
the Mental Health at Work commitment.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 1212
Business Model
Close Brothers has a proven and resilient business model,
delivering excellent service in sectors we know and
understand. Our distinctive strengths ensure we are well
positioned to continue delivering on our long-term track
record of growth and profitability.
Our distinctive strengths
Disciplined underwriting and
pricing through the cycle
In Banking, our success is supported by our disciplined pricing
and underwriting criteria. We consistently apply these criteria at all
stages of the economic cycle. Our lending is predominantly secured
or structurally protected, with conservative loan to value ratios,
small loan sizes and short maturities. We do not operate in the
undifferentiated, volume-driven markets which are dominated by
the larger banks, and prioritise pricing and margins over volume.
Distinctive culture
A key asset of Close Brothers is our distinctive culture.
It brings out the very best in our people and our customer-
centric and long-term approach to everything we do
is embedded throughout the organisation. Our people
are engaged in the business and embody the values
that enable us to help our customers thrive. Our culture
is key to the foundations of our successful business
model and in driving our strong financial performance.
Diversified portfolio
of businesses
Our diversified portfolio of businesses is an important part
of our success and resilience over the years. We lend
in a variety of sectors, locations and asset classes, and
also provide wealth management services and securities
trading. Close Brothers Asset Management and Winterflood
provide additional income streams and contribute to the
diversification of the group. This diversification supports
the stability of earnings and dividends, particularly in
challenging times, while also allowing us to continue
investing to grow the business through the cycle.
Prudent management
of financial resources
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 liquidity management and funding, as we focus on
diversity of funding sources and a prudent maturity profile. This
enables us to protect, grow and sustain our business model.
Service, expertise and relationships
Our focus on service and personal approach gives us a deep
understanding of the needs of our customers, clients and
partners. It allows us to offer high service levels and flexible
solutions across all of our businesses. As we deliver a human-
fronted, tech-enabled approach, we are experts in the industry
sectors we serve. In Banking, this leads to fast lending decisions
and access to funds when customers need them most. Close
Brothers Asset Management and Winterflood are strong examples
of the expertise of our people in their specialist fields, which
underpins their success in wealth management and trading.
Strong performance across our diversified
portfolio of businesses
High net interest margin and
low bad debt ratio in Banking
We do not manage our businesses to a growth target, but instead
prioritise the consistency of our lending criteria and maintaining
strong returns. The 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.
Close Brothers Group plc Annual Report 2021 1313
A key point of difference at Close Brothers is our long-term
approach and the rigorous discipline behind our proven
and resilient business model. This supports our long-term
track record of growth, profitability and returns to
shareholders over many years.
Our track record
Each of our distinctive strengths has contributed to our long-term track record, enabling us
to deliver loan book growth, profitability and returns to shareholders over many years, with
each of our businesses supporting our overall performance as a group.
Strong customer satisfaction
Net promoter scores (“NPS”)
Long-term growth
Loan book (£ million)
Asset Finance
Property Finance1
Motor Finance (dealers)
+72
+87
+70
1 Property Finance NPS score excludes the Commercial Acceptances business.
We listen to our customers, putting their needs at the heart
of our business. Our customer-centric approach is reflected
in the strong customer satisfaction and net promoter
scores we continue to achieve across our businesses.
9,000
6,750
4,500
2,250
0
08 09 10 11 12 13 14 15 16 17
18
19
20 21
We have a strong track record of delivering
disciplined growth by maximising the opportunity in
existing markets, as well as continuously exploring
new opportunities that fit with our model.
Strong returns through the cycle
Return on opening equity (%)
Long-term dividend track record
Dividend per share (p)
20
15
10
5
0
08 09 10 11 12 13 14 15 16 17
18
19
20 21
80
60
40
20
0
08 09 10 11 12 13 14 15 16 17
18
19
20 21
The disciplined application of our business
model and diversified portfolio of businesses
have supported consistently strong returns
at all stages of the financial cycle.
While dividend decisions in the 2020 and 2021 financial years
have reflected the unprecedented uncertainty
caused by Covid-19, we aim to return to delivering
long-term, progressive and sustainable dividend
growth in the future, in line with our policy.
Strong net inflows
in CBAM
We have seen strong growth in our Asset Management
business with net inflows as a percentage of opening
managed assets ranging from 7% to 12% over the past five
years. We continue to increase the scale and profitability
of the Asset Management division, capitalising on our
vertically integrated and multi-channel distribution.
Long-term income generation
in Winterflood
Winterflood has a long track record of profitable trading
and good levels of income generation in a wide range
of market conditions, with only one loss day in the
last financial year despite volatile trading conditions.
The business has made the most of the volatility
and surge in retail trading seen since Covid-19.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 14
The Foundations of Our Business
Our culture, our strategy and our responsibility
underpin the foundations of our success, enabling
us to deliver on our purpose: to help the people
and businesses of Britain thrive over the long term.
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 help our customers thrive
over the long term.
Our long-term strategic approach places
exceptional service at the heart of
everything we do. Each of our diverse,
specialist businesses all 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
enable them to thrive, rather than simply
survive, whatever the market conditions.
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.
These guiding principles are the
foundations of our success and enable us
to continue delivering for our stakeholders.
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 Culture
Combines expertise,
service and relationships
with teamwork, integrity
and prudence.
Our Strategy
To provide exceptional
service to our customers
and clients across lending,
savings, trading and
wealth management.
Close Brothers Group plc Annual Report 2021 15
Our Purpose
Our purpose is to help the people
and businesses of Britain thrive
over the long term.
Our purpose is at the heart of our business
and guides every decision we make. We
take a long-term approach to managing
our business.
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. It also means that
we continue to be there for the long term,
whatever the economic climate, making
decisions that are right for today and for
generations to come.
Our customers are the people and
businesses of Britain and we recognise that
putting their needs and interests at the heart
of our business is central to our success.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 16
Close Brothers Group plc
Annual Report 2021
Our Culture
Our distinctive culture and long-term
approach are embedded throughout
the organisation.
It combines our values of service, expertise and relationships with our
ways of working: teamwork, integrity and prudence. These values ensure
we continue to provide excellent service for our customers and clients
over the long term, bringing out the best in our people and supporting
our strong reputation.
Service
Expertise
Relationships
We pride ourselves on our
excellent level of service
and thinking that is both
entrepreneurial and disciplined.
We are committed to fostering a
culture that attracts and retains
talent, whilst also growing and
building the expertise of our people.
We take the time to understand
and build strong long-term
relationships with our customers
and clients.
93%
say colleagues go the extra
mile to meet the needs of
customers and clients
97%
of colleagues believe they have
the skills and knowledge to do
their job well
High customer satisfaction
and strong levels of repeat
business across the group
Teamwork
Integrity
Prudence
We promote teamwork in a fair
and open environment, where
individuals and their contributions
are valued and respected.
We insist on trustworthy
behaviour and always acting with
integrity – “doing the right thing”,
internally and externally.
We always take a prudent,
robust and transparent
approach to risk
management.
96%
of colleagues believe their
immediate team work well
together to get the job done
97%
of colleagues believe our culture
encourages them to treat customers
and clients fairly
94%
of colleagues believe we are
committed to prudent risk
management
92%
believe our senior leaders act in
line with our values; 14% higher
than the benchmark1
1 External benchmark calculated by our survey provider ETS based on responses to the same questions asked to different organisations.
All scores are taken from Close Brothers’ Employee Opinion Survey, with the survey closing in March 2021.
Strategic Report
Our Strategy
Close Brothers Group plc
Annual Report 2021
17
To protect, grow and sustain our proven
and resilient business model so that it
continues to deliver in the long term.
Protect
Keeping it safe
Maintaining and enhancing the key
strengths of our business model
Our key strengths differentiate our proven and
resilient business model and have contributed
to our long-term track record, enabling us
to deliver growth, profitability and returns to
shareholders over many years.
Our high levels of personal service and
specialism are key points of differentiation.
Our people have deep knowledge of the
industry sectors and asset classes we
cover, leading to lending decisions informed
by experts and faster access to funds when
our customers need them most.
We run our business prudently,
maintaining a strong funding, liquidity
and capital position. Our loan book is
predominantly secured or structurally
protected, with a focus on maintaining
strong credit quality.
We adopt a consistent and disciplined
approach, as we maintain prudent
underwriting and pricing in our lending.
Whilst our focus on the strict management of
costs remains unchanged, it is essential that
we continue to invest in protecting the key
attributes of our model and maintain regulatory
compliance and enhance our operational and
cyber resilience. Our investments and cost
base support the generation of our strong
margins, enabling our operational and financial
resilience, while also supporting our ability to
maximise opportunities as they arise.
Protect
Keeping
it safe
Maintaining and
enhancing the key
strengths of our
business model
Grow
Delivering
disciplined
growth
Maximising opportunities
in existing and new
markets; loan book growth
remains an output of the
business model
Sustain
Doing it
responsibly
Securing the long-term
future of our business,
customers and the world
we operate in
Our multi-year investment programmes that are in progress include:
Motor Finance transformation
Improving the service proposition, enhancing operational
efficiency and increasing sales effectiveness.
Asset Finance transformation
Enhancing sales effectiveness through improved data
capabilities and technology.
Asset Management technology projects
Continued investment in technology to improve operational
leverage, efficiency and resilience.
IRB
Transitioning to IRB approach to better
reflect the risk profile of our lending.
Cyber resilience
Investing to enhance cyber security
and operational resilience.
Data centre transformation
Investing in new data centres and
the Cloud.
Governance ReportFinancial Statements 18
Our Strategy continued
To protect, grow and sustain our proven
and resilient business model so that it
continues to deliver in the long term.
Whilst we remain operationally and strategically
well positioned to continue supporting our
customers and delivering for our shareholders,
we continually assess existing and new markets
for growth opportunities that fit with our model.
We have a long history of delivering disciplined
growth and, to support us in building on this
track record, we have developed our “Model
Fit Assessment Framework”. This framework
supports our review of opportunities, assessing
their fit with our model, culture and responsible
way of doing business, alongside their
suitability from a strategic perspective.
Ensuring the right fit
These eight criteria are all factors that
we consider when assessing growth
opportunities. They capture the key
strengths of our model and so by taking
these into account, it ensures we are
following a disciplined approach to growth
and preserving the attributes that generate
value for our shareholders.
Grow
Delivering
disciplined growth
Maximising opportunities in
existing and new markets
Our focus on delivering disciplined growth is
critical in enabling us to protect the model,
whilst still maximising opportunities and
taking the business forward. It allows us to
prioritise consistent and prudent underwriting
criteria and maintain strong returns across our
businesses. We do not manage the group
to a growth target, with loan book growth
remaining an output of the business model.
Model Fit Assessment Framework
Long-term
growth
prospects
Strong
track record
Expert,
relationship
based,
specialist
Cultural
fit
Strong
margin
Diversified
business
Conservative
funding
profile
Prudent
underwriting
and secured
lending
Close Brothers Group plc Annual Report 2021 19
To protect, grow and sustain our proven
and resilient business model so that it
continues to deliver in the long term.
Sustain
Doing it
responsibly
Securing the long-term future of our
business, customers and the world
we operate in
Our long-term approach is embedded
throughout our organisation and guides all of
our decisions, so it is important that we evolve
our business to sustain it for the long term.
For our customers, this involves recognising
and responding to changes in their behaviour,
adapting our business accordingly and
improving our digital capabilities and the
customer journey to enhance their user
experience. We continue to value the
importance of long-standing relationships
with our customers, providing them with
exceptional service and the deep industry
knowledge and expertise of our people.
For our people, this means maintaining
our focus on employee engagement to
support the wellbeing and needs of our
colleagues. We will continue to enable the
ongoing development of our people, as
we look to retain talent and support our
succession planning, whilst also nurturing
an inclusive culture where our people feel
valued and respected.
We are also focused on our impact. We
create value in our local communities by
understanding the needs of SMEs and
helping them achieve their ambitions, and by
creating equal opportunities for all, regardless
of background. We maintain our focus on
reducing our environmental impact and
responding to the risks and opportunities
brought by climate change.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 20
Close Brothers Group plc
Annual Report 2021
Strategy and Key Performance Indicators
Our long-term strategic approach focuses on ways to protect,
grow and sustain our model, enabling us to continue delivering
excellent stakeholder outcomes.
How we are Achieving This
The Progress we are Making
Future Priorities
Key performance indicators
Creating long-term shareholder value
Protect
Keeping it safe
• Effective response to Covid-19 through
agility and operational and financial
resilience, benefiting from playbooks and
simulations run in preparation for a
downturn.
• Maintaining a strong funding, liquidity
• Strengthening of our funding base and
and capital position
• Consistently applying our prudent
business model through our disciplined
approach to underwriting and pricing
• Balancing investment needs and
active management of our capital position
with a £350 million senior bond issuance
and £200 million subordinated debt raise
via Tier 2 notes, coupled with a liability
management exercise.
• Ongoing focus on pricing and
underwriting discipline.
• Continue to maintain our strong funding,
liquidity and capital position.
• Disciplined management of costs whilst
continuing to invest in strategic
programmes that help protect the key
attributes of our model.
• Ongoing preparations for a transition to the
IRB approach.
• Compliance with ongoing regulatory
cost discipline
• Submission of our initial IRB application to
change.
• Maintaining regulatory compliance,
the PRA in December 2020.
whilst enhancing operational and cyber
resilience
• Investing in core technology, operational
and cyber resilience whilst retaining
rigorous focus on cost management.
• Continue to invest in our operational
resilience, core technology and regulatory
compliance.
• Monitor and mitigate external threats,
including the ongoing impact of Covid-19
on the UK economy and competition from
both established and emerging players.
Grow
Delivering
disciplined growth
• Maximising opportunities available to
us in the current environment
• Capitalising on cyclical opportunities
in each business
• Extending our product offering and
launching new initiatives
• Assessing opportunities for disciplined
growth in existing and new markets
• Strong new business volumes in
• Continue to capitalise on cyclical and
Banking, with over £800 million of loan
book growth, making the most of
demand in our core markets.
• Lent over £1.1 billion across more than
5,700 loans under government support
schemes.
• Investing in new hires in CBAM, with one
infill acquisition completed in the 2021
financial year.
structural growth opportunities in each of
our businesses.
• Assess opportunities in new
and existing markets, in line with the
“Model Fit Assessment Framework”.
• Evaluating opportunities in sustainable
finance, including renewables and
Alternatively Fuelled Vehicles.
• Continuing to grow CBAM through hiring
• Capitalising on increasing trading volumes
and selective acquisitions.
• Further growth of Winterflood Business
Services and expansion of institutional
sales trading.
in Winterflood.
• Growth of Winterflood Business Services,
with £6.2 billion of assets under
administration.
• Expanded product range in Savings
franchise, launching 35 Day Retail Notice
Accounts and Cash ISAs.
• Decision to cease permanently the
approval of lending to new customers
across all of the products offered by
Novitas following a strategic review, which
concluded that the overall risk profile of the
business is no longer compatible with our
long-term strategy and risk appetite.
Sustain
Doing it
responsibly
• Strong employee engagement as reflected
by the scores in our recent Employee
Opinion Survey.
• On track to achieve our target of 36% of
female senior managers by 2025.
• Retain and attract staff and maximise
productivity by engaging, training and
developing our people, nurturing an
inclusive and diverse culture and investing
in tools and technology.
• Promoting an inclusive culture and
• Supporting the wellbeing of our employees
• Undertake an assessment of our indirect
supporting new ways of working and
social mobility
• Reducing our impact on the environment
and responding to the threats and
opportunities of climate change
• Promoting financial inclusion, helping
borrowers that might be overlooked and
enabling savers and investors to access
financial markets and advice to plan for
their future
• Supporting our customers, clients and
partners in the transition towards more
sustainable practices
throughout Covid-19 with events and
initiatives from internal networks, virtual
workshops and online fitness classes.
Scope 3 emissions to enable us to
develop a transition roadmap.
• Meeting the recommendations of the Task
• Adapting to new ways of working, offering
flexible working arrangements and training
focused on managing teams remotely.
• Refreshed our customer principles to
clearly articulate the experience we strive to
deliver for our customers and partners.
• Maintaining high levels of service as we
continued to support our customers and
partners through Covid-19.
Force on Climate-related Financial
Disclosures (“TCFD”).
• Achieve a net zero company car fleet by
2025 and become operationally net zero
through our Scope 1 and 2 emissions by
2030.
• Continue to adapt to the evolving needs
of our customers and clients and take into
account the feedback they provide.
Strategic Report
Close Brothers Group plc
Annual Report 2021
21
How we are Achieving This
The Progress we are Making
Future Priorities
Key performance indicators
Creating long-term shareholder value
• Effective response to Covid-19 through
• Ongoing focus on pricing and
agility and operational and financial
underwriting discipline.
resilience, benefiting from playbooks and
• Continue to maintain our strong funding,
simulations run in preparation for a
liquidity and capital position.
downturn.
• Disciplined management of costs whilst
• Maintaining a strong funding, liquidity
• Strengthening of our funding base and
continuing to invest in strategic
and capital position
active management of our capital position
programmes that help protect the key
• Consistently applying our prudent
with a £350 million senior bond issuance
attributes of our model.
business model through our disciplined
and £200 million subordinated debt raise
• Ongoing preparations for a transition to the
approach to underwriting and pricing
via Tier 2 notes, coupled with a liability
IRB approach.
• Balancing investment needs and
management exercise.
• Compliance with ongoing regulatory
cost discipline
• Submission of our initial IRB application to
change.
• Maintaining regulatory compliance,
the PRA in December 2020.
• Continue to invest in our operational
whilst enhancing operational and cyber
• Investing in core technology, operational
resilience, core technology and regulatory
resilience
and cyber resilience whilst retaining
rigorous focus on cost management.
compliance.
• Monitor and mitigate external threats,
including the ongoing impact of Covid-19
on the UK economy and competition from
both established and emerging players.
• Strong new business volumes in
• Continue to capitalise on cyclical and
Banking, with over £800 million of loan
structural growth opportunities in each of
book growth, making the most of
demand in our core markets.
• Lent over £1.1 billion across more than
our businesses.
• Assess opportunities in new
and existing markets, in line with the
“Model Fit Assessment Framework”.
• Evaluating opportunities in sustainable
• Maximising opportunities available to
5,700 loans under government support
us in the current environment
schemes.
• Capitalising on cyclical opportunities
• Investing in new hires in CBAM, with one
finance, including renewables and
in each business
infill acquisition completed in the 2021
Alternatively Fuelled Vehicles.
• Extending our product offering and
financial year.
• Continuing to grow CBAM through hiring
launching new initiatives
• Capitalising on increasing trading volumes
and selective acquisitions.
• Assessing opportunities for disciplined
in Winterflood.
• Further growth of Winterflood Business
growth in existing and new markets
• Growth of Winterflood Business Services,
Services and expansion of institutional
with £6.2 billion of assets under
sales trading.
administration.
• Expanded product range in Savings
franchise, launching 35 Day Retail Notice
Accounts and Cash ISAs.
• Decision to cease permanently the
approval of lending to new customers
across all of the products offered by
Novitas following a strategic review, which
concluded that the overall risk profile of the
business is no longer compatible with our
long-term strategy and risk appetite.
Common equity tier 1 capital ratio
Common Equity Tier 1 Capital Ratio
Per cent
Per cent
2021
2020
2019
15.8
14.1
13.0
Funding cover of loan book
Funding Cover of Loan Book
Per cent
Per cent
2021
2020
2019
131
135
129
Group return on opening equity
Group return on opening equity
Per cent
Per cent
2021
2020
2019
14.5
8.0
15.7
Net interest margin
Net Interest Margin
Per cent
Per cent
2021
2020
2019
7.7
7.5
7.9
Banking expense/income ratio
Banking expense/income ratio
Per cent
Per cent
2021
2020
2019
52
52
50
Bad debt ratio
Bad Debt Ratio
Per cent
Per cent
2021
2020
2019
1.1
2.3
0.6
Loan book growth
Loan book growth
Per cent
Per cent
2021
2020
2019
11
0
6
Net inflows
Net inflows
Per cent of opening AUM
Per cent of opening AUM
2021
2020
2019
7
9
9
Adjusted basic earnings per share
Adjusted basic earnings per share
Pence
Pence
2021
2020
2019
140.4
74.5
136.7
• Strong employee engagement as reflected
• Retain and attract staff and maximise
by the scores in our recent Employee
Opinion Survey.
productivity by engaging, training and
developing our people, nurturing an
• On track to achieve our target of 36% of
inclusive and diverse culture and investing
female senior managers by 2025.
in tools and technology.
• Promoting an inclusive culture and
• Supporting the wellbeing of our employees
• Undertake an assessment of our indirect
supporting new ways of working and
social mobility
throughout Covid-19 with events and
initiatives from internal networks, virtual
Scope 3 emissions to enable us to
develop a transition roadmap.
• Reducing our impact on the environment
workshops and online fitness classes.
• Meeting the recommendations of the Task
and responding to the threats and
opportunities of climate change
• Adapting to new ways of working, offering
Force on Climate-related Financial
flexible working arrangements and training
Disclosures (“TCFD”).
• Promoting financial inclusion, helping
focused on managing teams remotely.
• Achieve a net zero company car fleet by
borrowers that might be overlooked and
• Refreshed our customer principles to
2025 and become operationally net zero
enabling savers and investors to access
financial markets and advice to plan for
clearly articulate the experience we strive to
through our Scope 1 and 2 emissions by
deliver for our customers and partners.
2030.
their future
• Maintaining high levels of service as we
• Continue to adapt to the evolving needs
• Supporting our customers, clients and
continued to support our customers and
of our customers and clients and take into
partners in the transition towards more
partners through Covid-19.
account the feedback they provide.
sustainable practices
Employee engagement
Employee engagement
Per cent
Per cent
2021
2020
2019
91
86
88
Net promoter scores
Net promoter scores
Per cent
2021
Retail Savings
Property Finance1
Asset Finance
Motor Finance
(dealer)
0
+72
+87
+72
+70
79
Dividend per share
Dividend per share
Pence
Pence
2021
2020
2019
60.0
40.0
66.0
Reduction in overall Scope 1 and 2 emissions
Reduction in overall scope 1 and 2 emissions
Per cent
Per cent
2021
2020
2019
23
23
12
1 Property Finance NPS score excludes the Commercial Acceptances business.
Governance ReportFinancial Statements
22 Close Brothers Group plc
Annual Report 2021
Our Responsibility
Responsibility is key to
our success
Acknowledging this responsibility
broadens our perspective and
encourages us to look at how we
operate our business and the
decisions we take.
Adrian Sainsbury Chief Executive
Strategic Report
Close Brothers Group plc
Annual Report 2021
23
Our responsibility to help address the
social, economic and environmental
challenges facing our business,
employees, customers and clients,
now and into the future.
Social mobility is an issue that is closely linked
to many other aspects of inclusion. I truly
believe that recognising many are not afforded
the opportunities of others, and trying to
help level the playing field, is a remarkable
thing to be able to do. That’s why I am really
proud that we, as a company, are partnering
with organisations like the Social Mobility
Foundation and UpReach, connecting us with
a new pool of talented young people from
disadvantaged backgrounds.
We are particularly proud of our charitable
giving and following our donation of £1 million
to NHS Charities Together last year we have
continued to support those most severely
impacted by the pandemic through more
recent donations to Bookmark and The
Trussell Trust.
Acting responsibly and sustainably is not a
new concept for our business; it has always
been our business. The last year has made
it abundantly clear that we can do amazing
things when we support each other and
when we work together. But while this is not
the beginning of our responsibility journey, it is
one that I want to emphasise the importance
of, as I firmly believe it will be one of the keys
to our future long-term success.
Adrian Sainsbury
Acknowledging this responsibility and
making it part of our DNA broadens our
perspective and encourages us to look
at how we operate our business and the
decisions we take, in the best interests of all
our stakeholders, the environment and the
society we operate in.
In doing so, we can and will make a greater
difference and a positive impact as a business
every day, and we already have some great
foundations and much to be proud of.
From an environmental perspective, we are
supportive of the goals of the Paris Agreement
and are targeting becoming operationally
net zero through our Scope 1 and 2 carbon
emissions by 2030. We have already lowered
these emissions by 23% over the last financial
year, an achievement which builds upon
several consecutive years of reductions.
We take great pride in helping SMEs
achieve their ambitions and recognise that
putting customers’ interests at the heart
of our business is central to our success.
By aiming to create long-term value and a
lasting, positive impact on society, engaging
with local communities is integral to how we
operate and conduct business.
We recognise the value of a diverse and
inclusive workplace, and have made
commitments to further increase our diversity
through signing up to the Women in Finance
Charter, the 30% Club campaign and the Race
at Work Charter. We are making great progress
towards our targets in these areas, while our
ongoing partnerships with organisations such
as the Business Disability Forum continue to
help us nurture our inclusive culture.
Pride in Our Charitable GivingWe are proud of the positive impact we have through our charitable partnerships, and to date we have collectively raised over £500,000 for Cancer Research as part of our long-standing partnership with them. In recognition of this achievement and being named joint Corporate Fundraising Team of the Year, Close Brothers received a Flame of Hope Award from Cancer Research UK. Thanks to staff efforts, we have also helped grant 49 wishes through the Make-A-Wish Foundation by donating over £122,000 over the last two years.In addition to supporting our two main charity partners, we have increased our overall charitable commitment this year and made donations of £100,000 to two charities we feel faced significant challenges through the pandemic: the children’s literacy charity Bookmark, which we have worked with for some time, and the foodbank The Trussell Trust. Both charities make a material difference to children’s and families’ lives throughout the UK and these donations enable us to help support some of the most vulnerable in our communities.This year, we were proud to continue to support the NHS Charities Together, in recognition of the vital role that NHS frontline and support staff have in combating Covid-19, by encouraging staff to participate in the NHS’ 73rd birthday celebrations and match fund donations from colleagues to this charity.Governance ReportFinancial Statements 24
Sustainability Report
Sustainability is
fundamental
to our purpose
Our Sustainable Objectives
At Close Brothers, behaving responsibly
is integral to our actions and decision-
making and this is reflected across
the sustainable objectives that we set
ourselves as a business:
• Promoting an inclusive culture in
everything we do, and supporting new
ways of working and social mobility
• Reducing our impact on the
environment and responding to the
threats and opportunities of climate
change
• Promoting financial inclusion, helping
borrowers that might be overlooked by
larger finance providers and enabling
savers and investors to access financial
markets and advice to plan for their
future
• Supporting our customers, clients and
partners in the transition towards more
sustainable practices
During the year we have maintained a strong
focus on progressing with our wide-ranging
sustainability agenda, driving forward with
programmes and initiatives that address key
priorities such as inclusion, social mobility,
supporting customer needs and responding
to the threat of climate change.
We take a long-term approach to managing our
business, with an ambition to make a lasting
positive impact, both now and into the future.
Our values encourage and support diversity and
inclusion at all levels of our organisation, helping
the communities we operate in and reducing
our environmental impact.
Sustainability matters regularly appear
on the senior management agenda, with
dedicated group Executive Committee
sessions on sustainable themes and
scheduled quarterly environmental,
social and governance (“ESG”) updates
presented to the board Nomination and
Governance Committee. Topics covered
include opportunities to expand our range
of sustainable products and services,
managing risks such as those posed
by climate change, ensuring we remain
compliant with current and upcoming
regulation and our strategic approach to
sustainability more broadly.
Embedding Sustainability
We consistently strive to act responsibly,
ethically and with integrity, and this
commitment to sustainable behaviours is
embedded within our corporate culture
and supported by a wide range of
policies and procedures.
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.
Close Brothers Group plc Annual Report 2021 25
Within our Asset Management division, ESG
considerations have been embedded into
our in-house research since 2018 and form
a key part of our formal stewardship code,
voting strategy and responsible investment
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.
The division has offered several Socially
Responsible Investment (“SRI”) funds for a
number of years now and continues to expand
its ESG product offerings with two recently
launched sustainable funds. We are signatories
to the internationally recognised United Nations
Principles for Responsible Investment (“UN
PRI”), which demonstrates our commitment
to responsible investment and aligns us with
a global community seeking to build a more
sustainable financial system.
At a group level, we participate in and
engage with a number of external
sustainability rating agencies and indices,
including the CDP, DJSI and MSCI.
Sustainable Development Goals
Our sustainable priorities make reference to
the United Nations Sustainable Development
Goals (“SDGs”); a global framework that
promotes action to address worldwide
challenges related to poverty, inequality,
climate and prosperity.
This framework guides our thinking and
helps us better understand our impact
and where our contributions can be most
effective in supporting global goals for a
more sustainable future.
Our Targets
Throughout the year we have continued to
make good progress, as demonstrated by
our performance against the targets we set
ourselves last year. Going forward, we will
continue to set stretching targets over the
longer term to focus our efforts and maintain
our momentum.
Our targets are also linked to executive pay
through the sustainability objectives we set
within our executives’ Long-Term Incentive Plan.
Our Priorities
Our 2021 Targets5
Our Progress
Our Future Targets
Link to UN SDGs
Ensuring we
are a diverse
and inclusive
employer
36% female senior
managers4 by 2025
32% female senior
managers as at
31July 2021
36% female senior
managers4 by 2025
Increasing our ethnicity
data disclosure to above
60% of our employees
75% ethnicity data
disclosure level
attained
14% of our managers to
be of an ethnic minority
background by 2025
Reducing our
impact on the
environment
and tackling
climate change
Achieve a 10% reduction
in group-wide overall
Scope 1 and 2 emissions
by 31 July 20211
Achieve a further 10%
reduction in average fleet
vehicle CO2 emissions by
31 July 20212
41% reduction in overall
Scope 1 and 2 emissions vs
2019 financial year levels
Become operationally
net zero through
our Scope 1 and 2
emissions by 2030
25% reduction in average
fleet vehicle CO2 emissions
vs 2020 financial year levels
Achieve a net zero
company car fleet by
2025
Serving the
needs of our
customers
Maintain or improve
strong customer
satisfaction scores across
our businesses
Property Finance NPS3 +87
Asset Finance NPS +72
Retail Savings NPS +72
Premium Finance NPS +63
Maintain or improve
strong customer
satisfaction scores
across our businesses
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.
3 Excludes Commercial Acceptances.
4 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.
5 Targets for the 2021 financial year, measured at 31 July 2021 unless otherwise stated.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 26
Sustainability Report continued
Our People
Valuing our Colleagues
Our people are fundamental to the continued
success of our business and we place great
focus on recognising and valuing their
contributions; the expertise they share, the
consistently high levels of service they deliver
and the long-lasting relationships they build
with our customers, clients and all our
stakeholders. We celebrate diversity and are
committed to creating an inclusive culture
where all of our employees can feel proud to
work for us, regardless of their gender, age,
ethnicity, disability, sexual orientation or
background.
We value our partnerships with leading
diversity organisations, including Stonewall and
the Business Disability Forum, to help inform
our thinking and subsequent actions. We
continue to run inclusive leadership training
sessions for our managers, senior managers
and group executives, highlighting how actions
and behaviours can shape our inclusive
culture. We deliver training around our group
Code of Conduct, the Close Brothers Way, to
ensure all colleagues understand what
behaviours are expected to build and sustain
our culture.
We want colleagues to feel comfortable
speaking up and are delivering ongoing training
around psychological safety to build the
resilience of our people and ensure everyone
feels included, valued and able to thrive.
We are committed to attracting a diverse talent
pool through advertising our roles on more
specialist job boards, ensuring that all of our
job applications and adverts are inclusive and
partnering with agencies that share our
commitment to inclusion. We have also
developed a psychometric tool with an
external partner, focusing on the competencies
and behaviours necessary for success, and to
help remove subjectivity and reduce
unconscious bias in our selection process.
We have established working groups and
networks focused on each of our diversity
and inclusion pillars. Each are chaired by an
executive sponsor and take responsibility for
driving our inclusion initiatives across the
organisation.
Employee Engagement
Engaging with our colleagues has been more
important than ever during the unprecedented
times we have all experienced recently. As well
as regular pulse surveys to understand how
our people are feeling, in February 2021 we
ran our latest full Employee Opinion Survey to
gather feedback and ensure we are listening
closely to the views of our colleagues.
Our latest group-wide survey results showed
our engagement levels are high at 91% and
above the external benchmark of 82%. Our
response rate also remained strong at 89%,
enabling us to draw meaningful insight from
our results.
Overall results improved since our last survey
with higher than benchmark scores in a
number of areas including teamwork,
leadership, wellbeing and acting in line with
our values and business principles. Feedback
supports our positive and inclusive culture
with high scores against our cultural attributes
and the Financial Services Culture Board
characteristics. Results show 95% of our
colleagues believe people of all cultures and
backgrounds are respected and valued at
Close Brothers and 97% of colleagues
believe our culture encourages us to treat
customers and clients fairly.
Racial Equality
Last 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.
As part of this commitment, we set a target of
increasing our ethnicity disclosure levels to cover
60% of our employees by July 2021. This also
formed part of our Long-Term Incentive Plan
objectives and we have exceeded this target
with disclosure levels of over 70%, allowing us
to more accurately measure our ethnic balance
to inform our thinking and future actions. We are
also working towards improving representation
of colleagues of an ethnic minority background
at all levels of the organisation, and are targeting
at least 14% of our managers to be of an ethnic
minority background by 2025.
We have also completed a successful reverse
mentoring scheme led by our group-wide
ethnicity working group. With positive
feedback received from both mentors and
mentees, the programme provided our senior
leadership with valuable insight from the
real-life experiences of our minority ethnic
colleagues. Following the success of our
working group, we have launched our first
ever ethnic diversity network. We hope this
will continue to give all of our colleagues the
chance to take part in improving and
progressing the ethnic diversity and inclusion
agenda at Close Brothers.
We are committed to supporting the career
progression of our ethnically diverse colleagues
and place great focus on diversity throughout
our talent and succession processes. We also
prioritise inclusive talent acquisition and have
partnered with the 10,000 Black Interns project
to offer internship opportunities for students in
our Asset Management division. The board
continues to support the recommendations of
the Parker Review and the composition of the
board is in line with the advice to have at least
one director of colour. The board will continue
to take opportunities to further strengthen the
diversity of backgrounds and experience
among its directors as part of future board-
level recruitment searches.
Close Brothers Group plc Annual Report 2021 27
Employee engagement
91%2020: 86%
Gender Diversity
As part of our commitment to maintaining our
inclusive culture, we are focused on reducing
our gender pay gap. The gender pay gap
shows the difference in average earnings
between women and men, which is an
important differentiation to pay equality. We
remain confident that women and men are
paid equally for performing equivalent roles.
Reducing our gender pay gap is one way in
which we review our progress on improving
gender balance across our organisation.
Our 2021 gender pay gap report shows our
mean group-wide gender pay gap was
37.2% at 5 April 2020. At Close Brothers, the
gap is predominantly driven by a higher
proportion of male incumbents in our senior
and front office roles. We are committed to
improving our gender balance at all levels of
the organisation and are pleased to continue
to see an increase in female managers and
females in higher pay ranges.
At Close Brothers, we recognise that gender
identity is broader than male and female and,
although the government regulations do not
require us to report in this way, we want to
affirm that we welcome colleagues of all
gender identities.
Further details of our gender pay gap can be
found on our website.
As signatories of the Women in Finance
Charter, we remain confident that we are on
track to achieve 36% of senior manager roles
being held by a female by 2025. At the end of
the financial year 40% of our board members
were female, exceeding the government’s
target of 33%, and we remain broadly in line
with Hampton-Alexander gender targets for
executives and their direct reports.
We have also created a gender balance
network to further support the career
progression of women through personal
development and networking opportunities. In
addition, we also focus on providing a range
of training and mentoring programmes to
support our talented females to thrive and
accelerate their careers. Our partnerships
help us continue to create diverse talent pools
and further promote gender balance at all
levels of the organisation. Our participation in
the 30% Club’s leading cross-company
mentoring scheme is one such partnership.
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
Total
31 July 2021
Male
6
61
177
1,874
2,118
Female
4
14
91
1,641
1,750
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 37 male and eight female employees who are reported under directors or subsidiary directors.
We are also delighted to have had three
winners, including our retail chief executive, at
the latest Inspiring Automotive Women
Awards organised by the Automotive 30%
Club. We strive to achieve a 50:50 gender
split for our entry level and formal training
programmes including our Aspire school
leaver programme, our graduate schemes
and our summer internships.
Our workforce remains diverse, with 45%
female employees, and we have a broad age
range of employees, with 24% of our
employees being under 30 years old and
19% over 50.
Developing our People
This year, we focused on supporting employees
and line managers by running a number of
virtual wellbeing workshops. Throughout the
pandemic, we have adapted our programmes
and initiatives to work effectively in a remote
environment. 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.
To adapt to new ways of working, we have
upskilled our managers in relation to
managing remote teams and have also
focused on individual career development to
ensure our colleagues remain engaged.
The average number of training hours across
the group has increased by 52% to 14 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, we 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. To support
inclusivity, we have opened up application
processes for these talent programmes,
rather than the previous approach reliant
upon nominations. We have also relaunched
our Sales Academy programme within our
Commercial division.
To support our inclusive culture through
further embedding our code of conduct, we
launched our “Close Brothers Way” e-learning
module for all employees, focusing on our
cultural attributes and expected behaviours.
Supporting our People
Throughout the pandemic we have continued
to prioritise the safety and wellbeing of our
colleagues. By offering flexible working
arrangements in combination with robust
systems and technology, we have enabled
the vast majority of our employees to work
from home effectively, ensuring we have
continued to deliver excellent service to our
customers and clients.
We understand the impact Covid-19 has had
on everyone and have ensured a range of
support options have been available to
colleagues. Our recent Employee Opinion
Survey showed that 90% of participants felt
well supported by Close Brothers through the
pandemic, a score which was materially
higher than the external benchmark of 76%.
Our internal networks have played vital roles in
providing support to colleagues by creating
communities to share experiences and
resources. Our group-wide Working Parents
and Carers Working Group, sponsored by our
group legal counsel, collaborate on initiatives to
ensure that our colleagues who balance family
and caring responsibilities with working life feel
supported. Our group-wide Mental Wellbeing
Working Group, sponsored by the Close
Brothers Asset Management chief executive,
has continued to run webinars and panel
discussions to raise awareness and encourage
colleagues to speak up and reach out.
Maintaining the positive mental wellbeing of
our colleagues is of great importance to us
and we now have over 80 trained Mental
Health First Aiders across the group as well
as an employee assistance programme
offering a range of confidential support.
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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 28
Sustainability Report continued
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
have also made our group income protection
provision available to all employees.
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. Participation rates in our long-term
ownership schemes remain strong at 51% 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
We believe in maintaining high standards of
service, delivering specialist expertise and
building long-lasting relationships with our
customers and partners. This philosophy has
guided our activities as we continue to deliver
organisational resilience through Covid-19 and
as we rapidly responded to changing customer
needs since the onset of the pandemic.
Continuing to Support Customers
For the last year the impact of Covid-19
continued to create a challenging environment
for many of our customers and partners. We
continue to support them as they navigate
through these uncertain times, and we
continue to provide new processes or
products to maintain our high levels of service
in innovative ways.
For the past 18 months, we continued to offer
a variety of government-backed loan
schemes to support customers with access
to first year interest-free loans. Further to what
has already been offered, recently our Asset
Finance business introduced the Recovery
Loan Scheme to customers, which aims to
aid economic recovery and improve the terms
on offer to borrowers where they have been
impacted by Covid-19.
The world has changed significantly over the
last year, not least in terms of the speed of
adoption of new, digital and emerging
technologies. Consumers have rapidly been
forced to interact in new ways and at Close
Brothers, our core commitment of supporting
customers, partners and clients to thrive
remains fundamental to our purpose.
During the last year we continued to support
our customers and clients with a broad range
of forbearance and other measures to assist
those who found themselves in difficulty. The
concessions we offer reflect our diverse
products, sectors and customers, and we
continue to tailor our support to ensure it
remains most appropriate.
1 Source: Customer Gauge 2019
Our operational ways of working have been
improved to enable more staff to service
customers remotely, including enabling
electronic signing across more areas of the
Banking division. We have expanded our
automation capability to include integration
with web services and the use of SMS
messaging for improved customer
communication in Premium Finance.
Leading Through Purpose
Our purpose to help the people and
businesses of Britain thrive over the long term
is a fundamental commitment to our
customers that we will be there for them in
both the good times and the bad. Our purpose
is underpinned by our group-wide “customer
principles”, which guide how we deliver
experiences to our customers and partners,
and the Close Brothers customer journey,
which helps us measure how effectively we are
performing across key touchpoints.
Listening to Our Customers and
Improving Experience
We collect a broad range of customer
satisfaction scores that help inform day-to-
day changes as well as longer term strategic
decisions to improve customer experience.
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. The average NPS score in
financial services is +50, which all our
businesses surpass1. We also perform better
than average in other metrics such as
customer satisfaction scores (“CSAT”).
Close Brothers Group plc Annual Report 2021 29
Our Customer Principles
This year we refreshed our customer
principles to clearly articulate the
experience we strive to deliver for our
customers and partners:
We do the right thing for customers,
clients and partners
This principle is not only fundamental to us
fulfilling our regulatory obligations but also
critical in putting customers at the heart of
what we do. A recent complaints
benchmarking report revealed strong
performance with our resolution times 17
days quicker than the average consumer
finance firm and our uphold rate the
lowest measured at 14.1%1.
Recently we won gold for the “Best Use of
Customer Insight and Feedback” at the
UK Complaint Handling Awards,
illustrating our strong focus on improving
the complaint process and using customer
insight to drive business improvements.
We are flexible, responsive and execute
with speed
In responding to customer needs, this year
our Savings business launched online
self-service functionality for onboarding and
account servicing. Key customer benefits
include a simplified application process,
reduced onboarding timescales from five
days to one, immediate email confirmation
and better use of SMS messaging and
secure messaging online.
We make decisions informed by our
specialist expertise
To remain constantly aware of how we can
continue to help our customers and partners
thrive in an ever-evolving landscape and to
identify areas of improvement, we rely on our
Voice of Customer programme to provide
actionable insights across the group. The
programme is also built into a broader
feedback process linked to employee
engagement.
In Invoice Finance we gather insight as
part of an iterative process to implement
business improvements. Examples include
using customer feedback to alter
processes to provide customers with
greater clarity and product information at
appropriate points in the journey.
We build relationships based on quality
and trust
We continue to prioritise our high touch
engagement model, and relationships
with our customers, clients and partners
are a key part of what we do. In our
Property Finance business, we use our
extensive knowledge of the market and
expertise to build tailored finance
solutions to fit the needs of our
customers and their specific projects.
Customer Satisfaction Scores
Premium
Finance
NPS
Retail
Savings
NPS
Motor
Finance
dealer NPS
Asset
Finance
NPS
Property
Finance2
NPS
Online
Savings
CSAT (%)
Invoice
Finance
CSAT (%)
Asset
Finance
CSAT (%)
N/A
N/A
+63
+56
+72
+72
+70
+75
+72
+72
+87
81%
89%
87%
81%
73%
2021
2020
Note: All scores as at June each year. Prior year scores not
collected for Property Finance NPS or Online Savings CSAT.
We were also pleased to see continued
strong repeat business, which increased to
82% in Property Finance, while Winterflood
maintained strong investment company
corporate client retention at 55 in total (2020:
56).
The investment expertise of our Asset
Management division allowed us to navigate
unprecedented volatility, dealing volumes and
geopolitical uncertainty for the benefit of our
clients during the last year, while primarily
operating remotely.
The division delivered over 450 financial
education events during the year, speaking to
over 9,700 people. 87% of delegates stated
they would recommend us to their colleagues
and the majority reported that our services
helped improve employee financial wellbeing
within their organisation.
Looking Ahead
Our purpose of helping the people and
businesses of Britain thrive has guided us
through the good times and the bad for over
140 years. We continue to ensure we support
our customers through unprecedented
challenges, and looking to the future, we are
committed to helping them recover and adapt
to a world that is uncertain but open to
opportunities.
We will continue to support our customers
out of the pandemic and build an agile and
adaptable organisation that is ready for
whatever is on the horizon. The group will
continue its unwavering focus on customers
and partners in several key ways:
• Further embedding our customer operating
framework which delivers clearer ownership
and accountability and measurement of
metrics for the various customer journeys
and improvements
• Leveraging our market-leading expertise
to provide tailored advice for our SME
customers and partners on how to
navigate their recovery efforts
• Continuing to augment traditional channels
with digital self-service capabilities to give
customers the flexibility to engage with
us the way they want to, particularly by
introducing improved chat functionality and
self-service in some instances
• Providing fair financing options, considering
customers’ circumstances (including
those that are vulnerable) and responding
with empathy and compassion to all our
customers who have suffered since the
outset of the pandemic.
The group has put in place measures to
review and enhance its arrangements to
ensure good outcomes for customers in
line with the FCA’s guidance on vulnerable
customers and associated legislation. We are
also carefully considering future developments
and are seeking to enhance areas such
as employee training and information on
customer outcomes.
Engaging our Suppliers
We engage with our most important 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
January 2021 and remains anonymous to
ensure we gather honest and candid
feedback.
The 2020 survey focused upon how Close
Brothers performs as a client, and how our
suppliers feel about doing business with us.
Results were positive throughout,
demonstrating that our suppliers recognise
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. We were pleased that the majority of
our suppliers would recommend us as a
client, scoring 8.2 out of 10 for this measure.
Feedback indicates that our suppliers value
greater transparency around our strategy and
a holistic view of our businesses. With this in
mind, going forward we have selected
specific areas of focus around communication
and harnessing the knowledge and innovation
of our most strategic suppliers, to keep our
suppliers informed.
Survey results show that our suppliers benefit
from our frequent contact and reviews of
service, with 78% of respondents rating our
approach to transparency and fairness as
good or excellent. 71% 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
1 Source: Huntswood Complaints Outlook Benchmarking Report, February 2021.
2 Excludes Commercial Acceptances.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
30
Sustainability Report continued
Supporting Social Mobility
We are proud to be an inclusive organisation
that supports social mobility and creates
equal opportunities for all, regardless of
background. Social mobility is one of our
inclusion pillars, with executive sponsorship
from our Commercial chief executive.
We continue our partnership with UpReach; a
charity committed to transforming social
mobility. Our summer internship programme
offers six-week placements for second or final
year university students from lower socio-
economic backgrounds. In the past, a
number of individuals who have taken part in
the scheme have also gone on to secure
full-time roles within the organisation as
graduates. In addition, we are running work
experience placements for students through
the Social Mobility Foundation.
To extend our commitment to social mobility,
we are offering a number of mentoring
opportunities to our current employees.
Individuals will also be able to volunteer on a
more informal basis through signing up to the
Social Mobility Network as part of our
UpReach partnership.
Our successful Aspire school leaver
programme continues to run annually and
provides those individuals not going to
university with an opportunity to gain
experience of different business lines on a
rotation basis alongside being supported
through professional qualifications. We are
focused on optimising our diverse and
inclusive talent pool to ensure we create equal
opportunities for all who apply.
Our Employees in the Community
We are committed to creating a positive
impact in our communities and recognise that
employee volunteers are often the driving force
behind many community and charity activities.
We actively encourage our colleagues to
fundraise and volunteer for the causes that are
important to them and provide additional
support to make this possible.
We are supportive of our colleagues giving
their time and expertise to fulfill trustee roles for
various charities. In return, employees gain
board-level experience to support their
personal development and career progression.
In support of the collective response to
tackling Covid-19, a number of employees
have volunteered to help with the vaccine
rollout across the UK.
Charitable Activities
Within our regular employee opinion surveys,
we ask our employees to choose their
preferred community and health charity
partners. After the 2021 colleague vote, these
are once again Make-A-Wish Foundation,
who grant wishes for children with life-
threatening illnesses, and Cancer Research
UK, which we have now supported for nine
consecutive years.
suppliers to help them understand our direction
and give greater clarity on our structure.
operate that sets us apart and is integral to
how we operate and conduct business.
Recently, we have 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”).
Social responsibility in
the community
A Lasting, Positive Impact on Society
Central to our purpose to help the people and
businesses of Britain thrive over the long term
is the close relationships and understanding
we have of the customers and clients we
serve. It is this familiarity and appreciation of
the local communities and regions where they
The creation of long-term, lasting value in the
communities where we operate remains a key
priority for the group. This sense of purpose
underpins the growing range of programmes
and initiatives we maintain to support the
causes that benefit those around us.
Supporting SMEs
We take great pride in understanding the
needs of SMEs and our ability to help them
achieve their goals and realise their ambitions.
By helping SMEs thrive in local communities
across the UK we support the creation of jobs
and opportunities in regions that may
otherwise be overlooked by larger and less
specialist finance providers.
Our specialist expertise and deep industry
knowledge allow us to better understand the
small businesses we work with, helping us to
support their commercial plans and facilitate
their ambitions for growth. By appreciating
the unique and individual requirements of our
customers and the communities in which
they operate, our local teams can make fast,
reliable lending decisions when our
customers need them most.
The Close Brothers SME Apprentice
Programme is a further example of our
long-standing commitment to supporting
SMEs and local regions 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 SMEs to secure the skills they need
for the future.
Close Brothers Group plc Annual Report 2021 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.
We match 50% of funds that our colleagues
raise for charities under the Close Brothers
Matched Giving Scheme. We also encourage
our employees to collaborate on raising
money for causes that are most meaningful to
them by matching funds raised through locally
organised fundraising events and activities.
For every hour of voluntary time we donate £8
directly to the charity under our Matched
Giving Scheme, and we also encourage
people to take advantage of one paid
volunteering day each year through our
Employee Volunteering Policy.
Following a charitable donation of £100,000
to the children’s literacy charity, Bookmark,
we encouraged our employees to get
involved through delivering voluntary reading
sessions. Our colleagues have now delivered
180 sessions to children who have fallen
behind with their reading during the pandemic
and one of our colleagues has also now
joined the Bookmark Advisory Board.
In addition, our Payroll Giving Scheme
matches charitable contributions while
allowing employee donations to be made
directly from pre-tax salary. Approximately
13% of employees across the group are
signed up to Payroll Giving as at 31 July
2021, achieving us an eleventh consecutive
year of the Payroll Giving Quality Mark Gold
Award and ensuring that we have achieved
our target of maintaining this standard.
Climate
Our Climate Responsibilities
We recognise the importance of addressing the
threat of climate change, and our ongoing work
to identify the risks and opportunities it poses to
our business model remains a key area of focus
for the board and senior management.
We take our responsibility towards the
environment seriously, and as a group we are
supportive of the goals of the Paris Agreement
to achieve net zero by 2050. We are conscious
that the emissions impact of the assets and
sectors that we finance can contribute to
climate change, and as a financial services
provider we recognise the role we have to play
in supporting the climate agenda. 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.
Careful consideration of environmental factors
and potential risks 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.
Understanding and Disclosing
Our Impact
In order to set out our own transition pathway
towards lower emissions, we first need to
understand the Scope 3 emissions impact
of our supply chain and business activity. To
support this objective, we intend to undertake
an initial assessment of our indirect Scope
3 emissions during the first half of our next
financial year. This will improve our visibility on
the steps we can take and help shape our
roadmap for lowering the emissions from our
business activity.
We are also undertaking work to assess the
climate exposure of our loan book, including
scenario analysis for key areas across
our business. This will support progress
towards meeting the recommendations of
the Taskforce on Climate-related Financial
Disclosures (“TCFD”), which we plan to align
with by the end of our next reporting period, in
line with regulatory expectations.
The TCFD encourages consistent, reliable,
and clear measurement and reporting
of climate-related financial risks. Its
recommendations provide an important
framework for understanding and analysing
how climate change impacts our customers,
our own operations and our strategy.
We recognise there is much work to be
done and we are committed to making
regular, transparent TCFD disclosures to
communicate our progress as we develop
our climate capabilities. We will continue to
encourage our customers, suppliers and the
industry to do the same.
Recognising Our Progress
Last year we set ourselves a target of reducing
our group-wide Scope 1 and 2 emissions by
10% by 31 July 2021, benchmarked against
the 2019 financial year. We are pleased that
this year we comfortably exceeded this target.
Our group-wide Scope 1 and 2 emissions
totalled 2,616 tCO2e and reduced 41% on the
2019 financial year, while also being a 23%
reduction year-on-year.
In recognition of our support for the Paris net
zero goals, this year we have committed to
becoming operationally net zero through our
Scope 1 and 2 emissions by 2030. As a nearer-
term milestone on this journey, we are also now
setting ourselves a target of achieving a net zero
company car fleet by the end of 2025.
Total Scope 1 and 2 emissions reduction
23%
2020: 23%
As in prior years, we continue to participate
in the CDP, which allows us to disclose our
greenhouse gas emissions and our approach
to managing climate-related impact on a
voluntary basis. We were pleased to be
awarded a B- in the latest CDP scores, in
recognition of the positive ongoing progress
we are making in addressing the threat of
climate change.This year, we were also proud
to be included in the inaugural Financial Times
European Climate Leaders index, recognising
our position as one of the top 300 European
companies at reducing their Scope 1 and 2
emissions since 2014.
Our Journey Towards TCFD Alignment
Over the course of the last year we have
continued to focus on the development of
an effective and regulatory-compliant climate
risk framework. Our climate programme has
been expanded to better identify and manage
climate risks and opportunities, and to embed
climate consideration into policies, standards,
processes and ways of working.
As part of our framework we are refining our
credit assessment approach in the Banking
division, with a view to ensuring appropriate
consideration of climate risk as part of the
underwriting process. Additionally, we are
building climate stress testing and scenario
analysis capabilities and are currently
undertaking a pilot exercise across our Motor
and Asset Finance businesses over a range of
varying, long-term scenario pathways. Outputs
from this exercise will deliver insights that
support both our business strategy and risk
decision making.
To support framework development, we
recognise the need to further enhance data,
modelling and infrastructure capabilities over
time, and plan to achieve this by working
collaboratively with our customers, suppliers
and strategic partners.
Notwithstanding, the approach adopted
to date will enable us to make further
improvements over time, incorporating
lessons learned, while providing the flexibility
to address new and evolving standards. Going
forward it will also enable us to embed climate
considerations in core business strategy,
customer engagement, and as part of financial
and strategic planning processes.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
32
Sustainability Report continued
Our impact
on the environment
Our Environmental Business Decisions
We are an active provider of finance for the
green energy and renewables sector, having
lent over £750 million to schemes such as
wind, solar and hydro power developments
since 2014, and this market remains a key
contributor to our Asset Finance business.
Our Motor Finance business already finances
electric and hybrid vehicles and we expect
this component of our portfolio to grow as
these models filter through to our target price
and age range of second-hand vehicles. We
have close working relationships with our
dealer partners and are well placed to help
support the transition of this sector by
providing thought leadership and guidance for
our dealer partners on the various electric and
hybrid vehicles on the market, features of the
technology and considerations specific to
alternative fuel vehicle ownership.
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
existing guidelines outline sectors where the
group has limited or no appetite as well as
industries or product groups where enhanced
due diligence is required (including fossil fuel
exposure, defence, chemicals and tobacco
amongst others). We have negligible direct
exposure to high carbon intensive industries
such as oil and gas, which do not tend to fit
with our typical loan sizes, risk and return
lending criteria or terms of business, and we
have no direct exposure to mining or fossil
fuel extraction companies.
Reducing Our Operational Impact
We are pleased to have a growing number of
initiatives and improvement programmes to
continue lowering our emissions, reducing our
energy use and enhancing our energy
efficiency. This year we completed a significant
phase of consolidating our London property
footprint, bringing additional energy savings,
efficiencies and water use reductions.
The effects of Covid-19 have not only
benefited our overall emissions impact from
reduced commuting in the year but have also
allowed us to identify opportunities for
optimising our office space and implementing
flexible working, with associated environmental
benefits. We are conscious of the
environmental impact of staff travel, our supply
chain and our office network, and we
encourage our employees to make positive
change by leasing low emission cars and
participating in the cycle to work scheme.
We encourage waste recycling in all our
offices and 100% of the waste contractors we
use across our offices send zero waste to
landfill. This year, we have continued to broaden
our engagement with our supply chain on
environmental matters, while working with those
who share our ambitions to efficiently use
resources and combat the adverse effects of
climate change. We are extending the
emissions data we collect from our suppliers
and continue to explore ways in which we can
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, demonstrating 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, focusing 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
GHG Emissions and Energy Usage
We gather our environmental data and
compile our greenhouse gas (“GHG”)
emissions with the support of an independent
third-party analytics and reporting consultant.
Close Brothers Group plc Annual Report 2021 33
GHG Emissions and Energy Use Summary3
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)1
Total energy use (kWh) 2
GHG emissions source
Fuel (Buildings)
Fuel (Owned vehicles)
Electricity
Company electric
vehicles
Employee vehicles
Electricity transmission
and distribution
Other4
2021
712
345
1,502
57
83
129
230
3,058
3,713
0.82
2020
711
1,069
1,633
–
140
141
–
3,694
3,521
1.05
2,972
3,765
16,661,583 17,223,864
Geographic breakdown
Total GHG emissions (tCO2e)
Total energy use (kWh)2
2021
2020
UK
2,946
16,399,765
Overseas
112
UK
3,627
261,818 16,961,329
Overseas
67
262,535
1 2020 market based emissions figure restated to reflect updated residual mix emissions factors
2 Energy use reported includes kWh from Scope 1, Scope 2 and Scope 3 employee vehicles only (as required by SECR
standards)
3 This work is partially based on the country-specific CO2 emission factors developed by the International Energy Agency, ©
OECD/IEA 2020 but the resulting work has been prepared by Close Brothers plc and Avieco Ltd and does not necessarily
reflect the views of the International Energy Agency
4 Other Scope 3 categories calculated for the first time in 2021 consist of water, paper, waste, rail and flights
GHG Emissions by Division (tCO2e)
Banking
Asset
Management
Securities
Group
1,797
2,146
548
664
370
438
343
446
2021
2020
This enables us to verify the accuracy of our
data, while helping us monitor our
performance and develop action plans based
on strategic insights. We continue to meet the
requirements of the Streamlined Energy and
Carbon Reporting (“SECR”) standards in our
reporting for enhanced transparency in how
we disclose our environmental impact.
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. Our
reported Scope 3 emissions include those
related to employee vehicles and electricity
transmission and distribution, with further
categories such as water and waste
calculated for the first time this year.
In the 2021 financial year, our total location
based GHG emissions were 3,058 tonnes of
carbon dioxide equivalent (“tCO2e”), equating
to 0.82 tCO2e per employee, down 17%
overall and 22% per employee since 2020.
This year we saw the full impact of switching
a number of our key sites to 100% renewable
electricity sources, which has resulted in
further reductions to our GHG emissions
under a market based approach of 21% to
2,972 tCO2e . Emissions in the year also
continued to reflect lower usage arising from
UK lockdown measures in response to
Covid-19, resulting in the temporary closure
of offices and reduced staff travel.
Our Scope 2 electricity consumption is our
largest source of GHG emissions but
continues to reduce on previous years,
demonstrating 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 2021
GHG emissions and energy use, together
with corresponding data for 2020, is shown in
the table above.
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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021Electrifying Our FleetThe improving emissions of our company car fleet continues to be a success story that we are proud of, with the majority of our vehicles now being plug-in hybrids or fully electric. We offer an increasing range of these options and incentivise our staff to return older and more polluting vehicles free of charge in exchange for an electric alternative. Pure petrol or diesel vehicles are no longer available options in our company car fleet, with hybrids and fully electric vehicles being the only choice available to employees. We expect to further restrict choices to only fully electric vehicles during the coming months, other than in exceptional circumstances. Our Scope 1 fuel emissions from company fleet vehicles continue to fall, as a result of our significant efforts towards growing the number of fuel-efficient, electric and alternative fuel vehicles in the fleet over several years now. We are pleased to have lowered our associated vehicle emissions by 68% since the start of the 2021 financial year, continuing to benefit from both our increased range of hybrid and electric vehicles, as well as the reduction in staff travel due to UK lockdown periods.In 2020, we set ourselves a target of reducing our average fleet vehicle CO2 emissions by a further 10% on last year’s levels by 31 July 2021. We are pleased that this year we comfortably exceeded this target, as the average CO2 emissions from our vehicles reduced 25% on last year to 57.3 gCO2/km (2020: 76.6 gCO2/km), further benefiting from our removal of all pure petrol and diesel vehicle options from our company car fleet in August 2020. These figures build on several consecutive years of reductions, with our associated Scope 1 fuel emissions down 89% since 31 July 2016 and our average fleet vehicle CO2 emissions down 51% in the same period.
34
Sustainability Report continued
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:
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, training, career
development and promotion 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.
Employee Health and Safety Policy
Our Health and Safety Policy demonstrates
our commitment to ensuring our employees
and visitors are safe and sets the framework
for our safety culture. We continue to provide
a safe and healthy working environment for
our employees and visitors in accordance
with The Management of Health and Safety
at Work Regulations 1999.
The Health and Safety Committee continues to
meet on a quarterly basis and we are proud of
the ongoing progress in successfully raising the
profile of health and safety across the
business. This year we recorded 103 incidents
across all of our sites. Of these,15 were
reportable and all arising from Covid-19 within
the workplace reportable requirements. 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 lifecycle.
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.
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.
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.
Close Brothers Group plc Annual Report 2021
Non-Financial Information Statement
35
Reporting Requirement
Policies and Standards
Environmental
Matters
Employees
• Bank Credit Policy Underwriting Standards
• Environmental Policy
• 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
• Human Rights and Modern Slavery Act
• Privacy and Data Protection Policy
• Cyber Security Policy
• Anti-Money Laundering Policy
• Anti-Bribery and Corruption Policy
• Cyber Security Policy
Respect for
Human Rights
Anti-Corruption
and Anti-Bribery
Description of Principal
Risks and Impact of
Business Activity
Description of the
Business Model
Non-Financial Key
Performance Indicators
Information Necessary to Understand
our Impact and Outcomes
• Our Responsibility, page 23
• Sustainability Report, pages 31 to 33
• Our Stakeholders and Board
Engagement, pages 36 to 41
• Business Model, pages 12 and 13
• The Foundations of our Business, page 14
• Our Culture, page 16
• Our Responsibility, page 23
• Our Stakeholders and Board
Engagement, pages 36 to 41
• Sustainability Report, pages 26 to 28
and 34
• Corporate Governance Report, page 79
• Our Responsibility, page 23
• Sustainability Report, pages 30 and 31
• Our Stakeholders and Board
Engagement, pages 36 to 41
• Sustainability Report, page 34
• Sustainability Report, page 34
• Principal Risks, pages 60 to 64
• Emerging Risks and Uncertainties,
pages 65 to 67
• Risk Committee Report, pages 89 and 90
• Business Model, pages 12 and 13
• The Foundations of our Business, page 14
• Our Purpose, page 15
• Our Culture, page 16
• Strategy and Key Performance
Indicators, pages 20 and 21
• Our Responsibility, page 23
• Sustainability Report, page 25
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021In 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. 36
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 their perspective and take this into account when making decisions. We undertake a comprehensive
programme of stakeholder engagement and consider the feedback provided, embedding this in the decision-making process 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 3,700 employees around the UK, Ireland, the Channel Islands and
Germany. We have a diverse and motivated workforce which delivers the highest levels 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 for their
contributions
• Opportunities for training and development
• Long-term successful performance of
the group
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, Germany and the
US 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, our specialist expertise and maintaining high standards of service. As such, central to
all decision-making is understanding how our actions can help them and their businesses thrive.
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, whilst also allowing them to access
innovative products and services.
Engagement with our suppliers enables the group to develop and maintain long-term and
sustainable relationships. This engagement enables our suppliers to better understand and
align to our risk management requirements and operate responsibly.
• A customer-led proposition
• A focus on treating customers fairly and
doing the right thing
• Strong personal relationships and
specialist expertise
• Consistent and supportive customer
service whatever the market conditions
• A responsive service with solutions that are
flexible, responsive and executed with speed
• Relationships are built on quality and trust
• Strong and sustainable relationships with
Close Brothers
• Fair and equitable conduct of business
• Appropriate and clear payment procedures
• An understanding of the group’s purpose
and strategy
• Robust risk management framework
Regulators and Government
The group values an open and transparent relationship with all our regulators, including the
Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”), as well
as government authorities and trade associations.
It is important that 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.
Engaging with 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 ambitions, whilst also building employee engagement. We firmly believe that environmental
considerations should form an integral part of the decisions we make as a business and employees
across the group are actively engaged on responsible behaviours and environmental issues.
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.
• 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
• 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
Close Brothers Group plc Annual Report 2021 37
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. Listening to our colleagues and acting
upon their feedback is essential to maintaining employee engagement,
whether this is through undertaking regular employee opinion surveys
or management leading engagement activities to provide updates on
business performance. Training and mentoring programmes are in
place to support the development of all employees.
As lockdown restrictions have changed, engaging with employees has
been paramount. Throughout the year, our focus has been on employee
wellbeing and morale, ensuring our employees feel supported and
engaged, both at a team and business level given the challenges of remote
working for many. An active programme of engagement has been in place
that has included virtual wellbeing workshops, webinars and initiatives
run by our internal networks, and online fitness classes. We also ran a full
Employee Opinion Survey in February/March 2021 to gather feedback
from our colleagues and ensure we are listening closely to their views.
Read more about the ways we have engaged with our colleagues:
See pages 26 to 28.
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 refreshed customer principles by
conducting extensive research and analysis of feedback, captured
through our customer and partner operating framework. This enables
us to improve experiences in the moment as well as plan for changes
to our service and proposition into the future.
Maintaining close contact with our customers, clients and partners
throughout the year has been paramount as we continued to support
those who have found themselves in difficulty through forbearance and
other Covid-19 concessions. We regularly discussed our customers’
positions with them to ensure we were best supporting their needs as they
evolved. We have continued to provide new processes and products to
maintain our high levels of service in innovative ways as we support our
customers, clients and partners through these uncertain times.
Our key supplier relationships are owned by dedicated
relationship managers and are supported by our central third party
management function, which includes regular meetings, as well as
an annual survey to seek feedback on Close Brothers as a client.
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, and have built a strong relationship with the Financial
Ombudsman Service.
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. We
have a range of partnerships with leading organisations dedicated
to creating positive impact via diversity, inclusion and social
mobility schemes, while our regular interactions with industry
bodies and third party consultants help inform our strategy
towards climate change and the environment.
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 the ways we have engaged with our customers,
clients and partners: See pages 28 and 29.
Throughout the last year we have continued to maintain our frequent
contact with our suppliers and conduct regular reviews of service. Our
annual survey of key suppliers was last conducted in January 2021,
focusing on how Close Brothers performs as a client and how our
suppliers feel about doing business with us. We continue to share a
strategic vision with our suppliers to help them understand our direction
and provide clarity, while ensuring that we remain considerate of our
suppliers and the impact of Covid-19 on our supplier relationships.
Read more about the ways we have engaged with our suppliers:
See pages 29 and 30.
We have had close engagement with the regulators as part of our
preparations for applying to use the Internal Ratings Based approach,
with our application submitted to the PRA in December 2020 and initial
interviews conducted in 2021. We have maintained an active dialogue
with the regulator in relation to customer forbearance and have closely
followed relevant regulatory guidance. We have also consulted with the
regulator ahead of making decisions on dividend payments.
Read about our decision to reinstate dividend payments:
See page 40.
During the year, we communicated our support for the ambitions
of the Paris Agreement to reach net zero by 2050 and our target
of reaching net zero by 2030 for our direct operational emissions
(Scopes 1 and 2), alongside our plan to assess our indirect
emissions impact (Scope 3). 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.
Read more about how we engage with our local communities and
consider our impact on the environment: See pages 30 to 33.
We maintained our regular programme of communication including
investor roadshows, analyst presentations and keeping the market up to
date in line with regulation. We hosted an Investor Event in June 2021,
with presentations covering the group and its businesses and providing
investors an opportunity to ask questions of the management team.
We also engaged potential and existing fixed income investors during
roadshows throughout the year, as well as communicating regularly with
credit rating agencies, and provided investors with a channel to submit
questions in the absence of a full AGM due to Covid-19 restrictions.
Read more about engagement with our investors in the Corporate
Governance Report on pages 76 to 88.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
38
Our Stakeholder and Board Engagement continued
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. Among other things,
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, including the matters regularly
considered, can be found on page 80 of the
Corporate Governance Report.
Colleagues
• Regular updates on employee issues
arising from Covid-19, including the
response to lockdowns, the continuation of
home working, reviewing wellbeing issues,
the discussion of employee opinion surveys
and return to workplace planning.
• Discussion of the group’s activities to
identify optimal future working practices for
employees, having regard to customer needs
and the control environment alongside a
desire to encourage team collaboration and
enable greater flexibility for colleagues.
• Regular communications with employees
on financial, strategic and operational
matters via emails and videos, participation
in Town Halls and Q&A sessions by
individual directors.
• Director attendance at committees and
forums below board level to understand
and discuss employee-related issues.
• Extensive consideration of employee-
related issues connected with major
projects and transformation programmes
across the group.
• Review and discussion of a quarterly
• Ongoing activity to encourage employee
participation in the group’s Save As You
Earn (“SAYE”) and Buy As You Earn
(“BAYE”) share schemes.
• 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.
culture dashboard, providing an overview
of matters relating to culture and values.
Customers, clients and partners
• Updates on, and consideration of, the
• 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.
• Regular discussion by the board and
Nomination and Governance Committee on
the group’s approach to diversity, including
the activities of specific networks and
working groups.
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 and Covid-19 related
concessions to customers of the Banking
division and the roll-off of this support.
• Quarterly in-depth customer deep-dives
by the board including review of customer
metrics and engagement scores, and
updates on a wide range of matters relating
to customer issues, including complaints.
• Review of refreshed customer principles.
Close Brothers Group plc Annual Report 2021Section 172 Statement and Statement of Engagement with Employees and Other StakeholdersSection 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).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 with regard to relevant factors under section 172(1) and broader stakeholder considerations. Necessarily in a large and regulated group, some decisions are taken by management or the directors of subsidiary companies. These decisions are taken within parameters set by the board and there is a robust framework that ensures ongoing oversight, monitoring and challenge by the board and its committees (including certain decisions and activities that are always reserved to the board or its committees). The board has regard to relevant factors set out in section 172 in its activities in these areas, including considerations relating to the potential impact of delegated decisions on the long-term success of the group as a whole, the group’s reputation for high standards of business conduct and the consequences of local decisions on the group’s stakeholders. Examples of the board’s oversight of matters related to areas of delegated or subsidiary responsibility in the 2021 financial year include monitoring the development, strategy and performance of individual businesses and subsidiaries, considering management’s response to regulatory initiatives and engagement, and oversight of activities relating to culture, conduct and employee engagement at local level. Once again during the year, the board’s monitoring of the group’s businesses and subsidiaries has been particularly focused on the impact of, and response to, Covid-19.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. 39
• Customer, client and operations updates
in monthly business reports presented to
the board by members of the Executive
Committee.
• 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, and
risk and control issues arising from home
working and “hybrid” home and office
working.
• Oversight by the Audit Committee of
relevant customer, client and partner-related
items arising from reviews undertaken by
the group’s internal audit function.
• Regular discussion on sustainable
commercial opportunities being
considered for our customers, clients and
partners, including at dedicated Executive
Committee meetings.
• 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.
Suppliers
• Updates on, and consideration of, the
impact of Covid-19 and lockdowns on
suppliers and partners.
• Annual deep-dive supplier update to
the board.
• Consideration and approval of material
contracts with suppliers in line with the
Schedule of Matters Reserved to the Board.
• 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 and monitoring of key supplier
relationships by the board and its
committees, including engagement
between the Audit Committee and the
group’s external auditors.
Regulators and government
• Regular updates on regulatory
developments and interactions during
Covid-19, including guidance in relation to
customer forbearance and guardrails on
dividend payments for large UK banks.
• Discussion with the PRA ahead of the
dividend decisions for full year 2020, half
year 2021 and full year 2021.
• Regular engagement with the regulator in
relation to the group’s IRB application.
• Updates on regulatory requirements in
relation to ESG and sustainability and regular
appraisal of the group’s response, including
progress towards disclosure requirements,
such as the Task Force on Climate-related
Financial Disclosures (“TCFD”).
• Regular direct engagement between
individual directors and 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 non-
executive director and senior manager
appointments.
• Provision of regulatory correspondence
to the board and relevant committees,
including review by the board of resultant
recommendations and actions.
• At least an annual update to the Audit
Committee on taxation matters, including
on engagement with HMRC.
Communities and environment
• Quarterly updates on matters relevant to
our communities and the environment
as part of broader ESG and sustainability
updates provided to the Nomination and
Governance Committee.
• Consideration of the significance of ESG
matters to the group’s activities, including
the identification and assessment by
the board of the significant ESG risks to
the group, as well as consideration of
opportunities that may arise.
• Regular discussion by the Nomination and
Governance Committee on the group’s
sustainability targets and progress in
achieving them, including those targets and
initiatives relating to climate change and
local communities.
• Attendance by directors at wider industry/
• Regular updates to the Risk Committee
sector events with regulators.
on matters relating to climate risk and the
group’s response.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 40
Our Stakeholder and Board Engagement continued
• Engagement with proxy advisers and
other groups on ESG matters, including
those relating to local communities and the
environment, on which the Nomination and
Governance Committee is updated.
• Consideration of environmental issues as
part of board discussions on the group’s
London Property Programme.
• Updates to the board on the group’s
charity strategy, including individual
donations during the year.
• Updates to the board on community
engagement programmes, including the
group’s partnership with the social mobility
charity, UpReach.
• Board participation in local charitable and
volunteering activities.
Investors
• Frequent updates on shareholder
engagement, results announcements
and feedback as part of regular investor
relations reporting.
• Comprehensive programme of investor
engagement throughout the year including
meetings between the chairman and major
shareholders focusing on environmental,
social and governance matters and
engagement with current and potential
investors and sell-side analysts following
results announcements.
• Engagement with investors and sell-side
analysts during the group’s Investor Event,
which included a Q&A session with the
executive management team.
• Review of, and input into, the presentations
for the Investor Event by the board, with
feedback provided following the event.
• Remuneration policy consultation with
investors as a result of CRD V requirements.
• Although this was not possible in 2020
due to Covid-19, directors typically attend
the company’s AGM in November each
year, together with presentations from the
chairman and chief executive, investor Q&A
and voting on all resolutions.
• In the absence of a typical AGM in 2020,
a review of company performance by the
chief executive was made available on
the company’s website, with shareholders
encouraged to submit questions ahead of
the AGM.
• Extensive feedback on investor views and
feedback in relation to the company’s Tier
2 debt issuance completed in 2021.
• The expectation of shareholders was taken
into account, with recognition given to the
company’s progressive dividend policy and
strong track record of dividend payments
prior to the cancellation of the 2020 interim
dividend.
• The overall sentiment of employees
was considered given the signal any
decision would send and the impact a
dividend payment may have on overall
remuneration.
• The board acknowledges that a number of
the group’s employees are shareholders,
whether through the SAYE, the BAYE or
through general share ownership, and
recognises the impact for them (and all
shareholders) on whether a dividend is
paid.
• In addition to these stakeholder groups, the
board considered the broader economic
uncertainty and its potential medium and
longer-term impact on the group, as well as
the commentary that should accompany
any decision around future dividends.
The board’s recommendation of a 40.0p per
share dividend in respect of the 2020 financial
year was submitted to shareholders for
approval at the company’s AGM in November
2020 and received approval from 100% of
voting shareholders.
An interim dividend of 18.0p per share
was declared at the half year 2021 results,
reflecting the group’s strong performance
in the first half of the financial year and
continued confidence in the business model
and financial position.
The board has recommended a final dividend
of 42.0p per share in respect of the 2021
financial year, resulting in a full-year dividend
of 60.0p.
Close Brothers Group plc Annual Report 2021In September 2020, the board took the decision to recommend to shareholders the resumption of dividend payments in respect of the 2020 financial year, following the group’s resilient performance in the second half of the year. This reflected the board’s confidence in the business model and strong financial position.This follows the decision taken by the board in April 2020 to cancel the payment of the company’s 2020 interim dividend in recognition of 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.The board had many factors to consider when making this decision, balancing the views of all stakeholders alongside their assessment of the group’s financial performance for the year and their confidence in the company to continue executing its business model in an uncertain external environment. Ensuring that the company had sufficient resources to continue supporting customers, clients, partners and colleagues, whilst maximising opportunities, was of paramount concern. In line with the requirements of section 172(1), the board had regard to the different interests of stakeholders, but with an overarching focus 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.The board also undertook a similar process when determining if an interim and final dividend payment should be made in respect of the 2021 financial year.How the board considered, and had regard to, the interests of key stakeholders and the requirements of section 172(1)The board engaged in extensive discussions with management ahead of making its decision and considered the long-term viability of the group’s position.• On a regular basis, the board was updated on the company’s performance and its capital, funding and liquidity position, as well as expectations for the group’s financial resources in the following financial year, to understand the financial resources it had available and the impact a dividend payment would have in a range of scenarios.• The board was regularly made aware of the position of customers and clients, including the evolution of the forbearance population and our provisioning levels.• The board considered the broader market environment and the perception of UK banks resuming dividend payments, including the views of regulators, rating agencies and other stakeholders, and the guardrails on dividend payments provided to the UK’s systemic banks. Dividend decisions of other FTSE 350 and high profile companies were also acknowledged.• The board considered the position of the regulator and the group discussed its proposal with the PRA ahead of making any decision and recognised the regulator’s interest in ensuring we could continue to support our customers and continue lending given the uncertainty and that any payment had to take into account stakeholder considerations.Principal Board Decision: Resumption of Dividend Payments 41
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021Following the appointment of Adrian Sainsbury as Chief Executive in September 2020, a review was undertaken with the objective of evolving the group strategy to reflect the focus on growth in line with the Close Brothers model, as well as incorporating the group’s approach to responsibility and sustainability.The board was involved in discussing and agreeing the formulation and refinement of both the broader strategy and how it should be articulated. It debated and provided constructive feedback and challenge on different proposals and iterations to ensure it accurately captured the strategic direction of the group, whilst taking appropriate consideration of different stakeholder views and perspectives.As a result of this review, the framework for articulating the group’s future strategic priorities evolved from “protect, improve, extend” to “protect, grow, sustain” to reflect our commitment to the delivery of disciplined growth and the sustainability of our business model over the long term.To support the articulation of how the group plans to deliver disciplined growth, the “Model Fit Assessment Framework” was discussed. This demonstrates how we review opportunities, assessing their fit with the group’s model, culture and responsible way of doing business. Although the filters within the framework are not all mutually exclusive, they ensure that we are following a disciplined approach to growth and preserving the attributes that generate value for all stakeholders.How the board considered, and had regard to, the interests of key stakeholders and the requirements of section 172(1)When considering the evolution of the strategy, the board had regard to the views and perspectives of our key stakeholder groups, for example discussing how the language used to communicate the strategy may be perceived by different parties and ensuring that the strategic priorities were aligned to the group’s objectives and business model.The board considered the likely views of investors, debating the language used to ensure the approach was well articulated and the strategic priority of “disciplined growth” would be understood. The board also acknowledged feedback from shareholders and analysts on the group’s proven and well-established model.Recognition was also given to risk, control and governance issues, ensuring that the strategic priority of “disciplined growth” was aligned to the group’s current approach and risk appetite.The board acknowledged that incorporating “sustain” as one of the group’s strategic priorities gave recognition to the considerations paid to key stakeholders in the group’s decision-making and the importance placed on operating sustainably and making a positive impact across the business. The board also highlighted the importance of incorporating further references to customers and clients to reflect the group’s regard for their interests.The board also considered the perspective of employees, highlighting the need to appropriately communicate the evolution of the strategy internally so it was well understood and embedded at all levels of the group’s operations.Principal Board Decision: Evolution of Strategic Narrative 42
Financial Overview
Close Brothers delivered a strong performance in
an evolving environment, making the most of
opportunities as the economy recovers from the
Covid-19 crisis.
Return on opening equity
14.5%
2020: 8.0%
Summary Group Income Statement1
Operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profit
Banking
Commercial
Retail
Property
Asset Management
Winterflood
Group
Amortisation and impairment of intangible assets on
acquisition
Goodwill impairment
Exceptional item: HMRC VAT refund
Operating profit before tax
Tax
Profit after tax
Profit attributable to shareholders
Adjusted basic earnings per share2
Basic earnings per share2
Ordinary dividend per share
Return on opening equity
Return on average tangible equity
2021
£ million
952.6
(592.1)
(89.8)
270.7
212.5
52.8
71.9
87.8
23.7
60.9
(26.4)
(14.2)
(12.1)
20.8
265.2
(63.1)
202.1
202.1
140.4p
134.8p
60.0p
14.5%
16.5%
2020
£ million
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
109.5
74.5p
72.8p
40.0p
8.0%
9.4%
Change
%
10
10
(51)
88
114
1,000
106
48
16
27
12
358
–
–
88
101
85
85
88
85
50
1 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; and any
exceptional and other adjusting items which do not reflect underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found in Note 3.
2 Refer to Note 8 for the calculation of basic and adjusted earnings per share.
Operating Profit and Returns
Adjusted operating profit increased 88% to
£270.7 million (2020: £144.0 million), primarily
reflecting higher income across all divisions
and significantly lower impairment charges in
Banking, partially offset by increased costs.
After exceptional and other adjusting items,
statutory operating profit before tax increased
by 88% to £265.2 million (2020: £140.9
million). The group delivered a strong return
on opening equity of 14.5% (2020: 8.0%) and
return on average tangible equity of 16.5%
(2020: 9.4%).
Adjusted operating profit in the Banking
division increased by 114% to £212.5
million (2020: £99.2 million) primarily due
to lower impairment charges and strong
income growth, partially offset by continued
investment in the business. The Asset
Management division achieved good net
inflows of 7%, delivering adjusted operating
profit of £23.7 million (2020: £20.4 million),
16% higher than the prior year, as growth
in operating income more than offset the
cost of continued investment to support the
long-term growth potential of the business.
Winterflood delivered a very strong trading
performance, with operating profit up 27%
to £60.9 million (2020: £47.9 million), as the
business benefited from elevated market
activity for most of the year. Group net
expenses, which include the central functions
such as finance, legal and compliance,
risk and human resources, increased
on the prior year at £26.4 million (2020:
£23.5 million), primarily driven by higher
performance-related compensation and
share-based award payments.
Operating Income
Operating income increased 10% to £952.6
million (2020: £866.1 million), with growth in
all divisions. Income in the Banking division
increased by 8%, reflecting high new
business volumes and a strong net interest
Adjusted operating profit
£270.7m
2020: £144.0m
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; and any exceptional and
other adjusting items which do not
reflect underlying trading performance.
Please refer to page 43 for further
details on items excluded from the
adjusted performance metrics.
margin of 7.7% (2020: 7.5%). Income in the
Asset Management division was up 9%,
reflecting an increase in client assets. Income
in Winterflood increased by 20% as a result
of elevated trading volumes and very strong
trading performance.
Adjusted Operating Expenses
Adjusted operating expenses increased
10% to £592.1 million (2020: £538.4 million),
mainly driven by higher costs in Banking and
Winterflood. In the Banking division, costs
increased by 8%, mainly driven by continued
investment to protect, grow and sustain
the business. Costs increased 8% in the
Asset Management division, primarily driven
by continued hiring of portfolio managers
and increases in variable costs, as well as
investment in technology. Winterflood’s
operating expenses increased by 17%
due to higher variable costs such as staff
compensation and settlement costs. Overall,
the group’s expense/income ratio was in line
with the prior year period at 62% (2020: 62%)
and the group’s compensation ratio increased
marginally to 38% (2020: 37%). Statutory
operating expenses increased to £597.6
million (2020: £541.5 million).
Impairment Charges and IFRS 9
Provisioning
Impairment charges decreased significantly
in the year to £89.8 million (2020: £183.7
million), corresponding to a bad debt ratio of
1.1% (2020: 2.3%).
Close Brothers Group plc Annual Report 2021 43
We experienced strong underlying credit
performance across Commercial, Retail and
Property as well as a reduction in Covid-19
provisions. The bad debt ratio of 1.1%
reflected an increase in provisions against the
Novitas loan book, which accounted for a
significant portion of the impairment charge
for the year.
Our approach to provisioning continues
to reflect the application of our models
overlaid with expert judgement to
determine the appropriate allocation of
loan book balances between stages, to
macroeconomic scenario updates and
weightings, and to provision coverage at
the individual portfolio level.
We have revised the macroeconomic scenarios
and the weightings assigned to them, with the
resulting position being 20% upside (of which
10% was moved to the upside at 31 January
2021), 40% baseline, and 40% downside, to
reflect a reduced level of economic uncertainty,
the Covid-19 vaccination developments and
easing of restrictions.
There was a marginal increase in overall
provision coverage to 3.2% (31 July
2020: 3.0%) which included reductions in
Covid-19 provisions, reflecting improved
macroeconomic outlook and encouraging
performance of the forborne loan book,
more than offset by a significant increase in
provisions against the Novitas loan book.
We believe this represents an appropriate
level of provision, reflecting an improved but
still uncertain economic outlook.
We remain confident in the quality of our
loan book, which is predominantly secured,
prudently underwritten, diverse and supported
by the deep expertise of our people.
Exceptional and Other Adjusting Items
We have recognised an exceptional gain
of £20.8 million reflecting a VAT refund
from HMRC in relation to hire purchase
agreements in the Motor Finance and Asset
Finance businesses. This follows HMRC’s
new policy framework in respect of the
judgment from the Court of Justice of the
European Union regarding Volkswagen
Financial Services (UK) Ltd and has been
agreed with HMRC in respect of 2009 to
2020.
Following the strategic review of Novitas’
products and services, the group decided to
cease permanently the approval of lending
to new customers across all of the products
offered by Novitas. As a result of this decision
and the impact on the future cash flow profile
of the business, we recorded an impairment
charge of £12.1 million relating to the full write
down of goodwill allocated to Novitas and
a £10.1 million impairment charge relating
to the remaining value of intangible assets
recognised on acquisition. These charges
are recognised as other adjusting items in
the presentation of the group’s adjusted
performance.
Tax Expense
The tax expense was £63.1 million (2020: £31.4
million), which corresponds to an effective tax
rate of 23.8% (2020: 22.3%). The effective
tax rate in the 2021 financial year is above
the UK corporation tax rate primarily due to
the surcharge applying to most of the group’s
profits, partly offset by a write-up in deferred
tax assets, reflecting an increase in the UK
corporation tax rate from 19% to 25% applying
from April 2023 passed into law earlier this year.
The government has indicated that it will
legislate in Finance Bill 2021-22 to ensure that
the combined rate of tax on banks’ profits,
which comprises the standard corporation
tax rate and banking surcharge, does not
increase substantially from its current level.
This legislation would partially reverse the
abovementioned deferred tax asset increase,
and income statement benefit, however
the precise quantum and timing of such a
reversal remains uncertain.
Earnings per Share
Prior to adjusting for exceptional and other
items including the impairment of goodwill
and intangible assets on acquisition and
the VAT refund from HMRC, basic earnings
per share (“EPS”) increased 85% to 134.8p
(2020: 72.8p). After adjusting for these items,
adjusted EPS increased 88% to 140.4p
(2020: 74.5p).
Dividend
The board is proposing a final dividend of
42.0p per share, resulting in a full-year dividend
per share of 60.0p (2020: 40.0p), up 50%
on the prior year. This reflects the group’s
strong performance in the year and continued
confidence in our business model and financial
position. Subject to approval at the Annual
General Meeting, the final dividend will be paid
on 23 November 2021 to shareholders on the
register at 15 October 2021.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 44
Financial Overview continued
Summary 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
2021
£ million
8,444.5
1,788.2
801.6
1,000.2
31 July
2020
£ million
7,616.7
1,733.9
719.1
1,001.8
12,034.5
11,071.5
6,634.8
2,600.9
690.6
538.9
5,917.7
2,591.2
622.8
490.2
10,465.2
9,621.9
1,569.3
1,449.6
12,034.5
11,071.5
1 Treasury assets comprise cash and balances at central banks and debt securities held to support the Banking division.
2 Market-making assets and liabilities comprise settlement balances, long and short trading positions and loans to or from
money brokers.
Group Capital1
Common equity tier 1 capital
Total capital
Risk weighted assets
Common equity tier 1 capital ratio
Total capital ratio
Leverage ratio
31 July
2021
£ million
1,439.3
1,662.7
9,105.3
15.8%
18.3%
11.8%
31 July
2020
£ million
1,254.0
1,441.0
8,863.2
14.1%
16.3%
11.2%
1 The group’s capital, risk weighted assets and ratios are presented on a transitional basis after the application of IFRS 9
transitional arrangements and the Capital Requirements Regulations qualifying own funds arrangements in force at the
time. Without their application, and excluding the benefit related to the current treatment of software assets, at 31 July
2021 the CET1 capital ratio would be 14.2% and total capital ratio 16.7% (31 July 2020: CET1 capital ratio 13.1% and
total capital ratio 15.1%).
Balance Sheet
The group maintained a strong balance sheet
and remains focused on its prudent approach
to managing financial resources.
The fundamental structure of the balance
sheet remains unchanged, with most of the
assets and liabilities relating to our Banking
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
Winterflood. 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.
Total assets increased 9% to £12.0 billion
(31 July 2020: £11.1 billion), but decreased
marginally on the half year 2021 position
(31 January 2021: £12.3 billion). This increase
in total assets mainly reflected the strong
loan book growth. Total liabilities were up
9% to £10.5 billion (31 July 2020: £9.6
billion) mainly driven by higher customer
deposits. Both market-making assets and
liabilities were up due to increased settlement
balances reflecting the higher trading activity
in Winterflood.
Total equity increased by 8% to £1.6
billion (31 July 2020: £1.4 billion), primarily
reflecting the profit in the year, partially
offset by dividend payments of £86.6 million
(2020: £65.8 million). The group’s return on
assets increased to 1.7%, reflecting higher
profitability in the year (2020: 1.0%).
Group Capital
The prudent management of capital is a core
part of our business model and has been a
key focus in the evolving environment so that
the group can continue to support
customers, clients and colleagues.
Common equity tier 1 (“CET1”) capital
increased 15% to £1,439.3 million (31 July
2020: £1,254.0 million) reflecting strong
capital generation through £202.1 million of
profit, a £50.2 million benefit from regulatory
changes in the treatment of software assets
and a £17.5 million transitional IFRS 9 capital
add-back. This was partially offset by the
regulatory deduction of dividends paid and
foreseen of £89.5 million.
Risk weighted assets (“RWAs”) increased
modestly by 3% to £9.1 billion (31 July 2020:
£8.9 billion) notwithstanding the 10.9%
growth in the loan book, given the significant
portion of government guaranteed loans
under Coronavirus Business Interruption Loan
Scheme (“CBILS”) which attract a lower risk
weighting and a reduction in the Property loan
book due to high levels of repayments.
The CET1 capital ratio increased to 15.8%
(31 July 2020: 14.1%), primarily due to higher
profits and the benefit from regulatory changes
to the treatment of software assets, partly
offset by the increase in RWAs. The total
capital ratio increased to 18.3% (31 July 2020:
16.3%), which also reflected our £200 million
subordinated debt raised in the form of Tier 2
notes, replacing and concurrently repurchasing
most of the outstanding securities.
At 31 July 2021, the applicable minimum
CET1 and total capital ratio requirements,
excluding any applicable PRA buffer, were
7.6% and 11.5%, respectively. Accordingly,
we continue to have significant headroom of
820bps in the CET1 capital ratio, and 680bps
in the total capital ratio, leaving us well placed
to continue to help our customers and clients
and in a position of strength to make the
most of the opportunities in the current
environment.
In line with the amended CRR (“CRR II”),
effective on 23 December 2020, the CET1
capital ratio at 31 July 2021 includes a
c.50bps benefit related to software assets
which are exempt from the deduction
requirement for intangible assets from CET1.
The PRA published PS17/21 “Implementation
of Basel standards” on 9 July 2021,
confirming the reversal to the earlier position.
This will result in the reversal of this benefit
and reduction of the CET1 capital ratio upon
implementation on 1 January 2022.
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
Close Brothers Group plc Annual Report 2021 45
Group Funding1
Customer deposits
Secured funding
Unsecured funding2
Equity
Total available funding
Total funding as % of loan book
Average maturity of funding allocated to loan book3
31 July
2021
£ million
6,634.8
1,333.7
1,539.5
1,569.3
31 July
2020
£ million
5,917.7
1,418.2
1,460.1
1,449.6
11,077.3
131%
10,245.6
135%
24 months 18 months
1 Numbers relate to core funding and exclude working capital facilities at the business level.
2 Unsecured funding excludes £22.7 million (31 July 2020: £7.9 million) of non-facility overdrafts included in borrowings and
includes £295.0 million (31 July 2020: £295.0 million) of undrawn facilities.
3 Average maturity of total funding excluding equity and funding held for liquidity purposes.
Group Liquidity
Cash and balances at central banks
Sovereign and central bank debt1
Certificates of deposit
Treasury assets
31 July
2021
£ million
1,331.0
192.5
264.7
31 July
2020
£ million
1,375.8
72.2
285.9
1,788.2
1,733.9
1 Included in sovereign and central bank debt is £90.2 million encumbered UK Gilts (31 July 2020: £nil).
application of these arrangements. Without
their application, and excluding the benefit
related to the current treatment of software
assets, the CET1 and total capital ratios
would be 14.2% and 16.7% respectively.
The leverage ratio, which is a transparent
measure of capital strength, not affected by
risk weightings, remains strong at 11.8%
(31 July 2020: 11.2%). The leverage ratio
increased on the position at the end of the
2020 financial year, reflecting the strong
capital generation during the period.
We continue to make good progress on our
preparations for a transition to the IRB
approach and, as planned, the initial
application to the PRA was submitted in
December 2020. We are progressing through
the first phase of the PRA application process
and continue to work with the regulator to
support their review. Our Motor Finance,
Property Finance and Energy portfolios, where
the use of models is most mature, have been
submitted with our initial application, with other
businesses to follow in future years.
Group Funding
The primary purpose of our treasury function
is to manage funding and liquidity to support
the Banking 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 securitisations.
We increased total funding in the year to
£11.1 billion (31 July 2020: £10.2 billion) which
accounted for 131% (31 July 2020: 135%) of
the loan book at 31 July 2021. The average
cost of funding reduced to 1.4% (2020: 1.7%)
largely driven by lower market rates, re-pricing
of deposits and wholesale borrowings.
Customer deposits increased 12% overall to
£6.6 billion (31 July 2020: £5.9 billion) with
non-retail deposits increasing by 19% to £3.9
billion (31 July 2020: £3.3 billion) and retail
deposits increasing by 3% to £2.7 billion
(31 July 2020: £2.6 billion).
This has been another successful year for our
online savings portal. The 35 Day Retail Notice
Account and Fixed Rate Cash ISA were both
launched this financial year, with c.39,000
customers, 40% of our retail customer base,
registered for online banking. The online portal
has proven a particularly valuable channel
during Covid-19, mitigating the challenges of a
postal offering whilst working remotely. We are
focused on continuing to extend the product
range, which will support us in growing and
diversifying our retail deposit base and further
optimise our cost of funding and maturity profile.
Secured funding reduced marginally to
£1.3 billion (31 July 2020: £1.4 billion). Our
range of secured funding facilities include
securitisations of our Premium and Motor
Finance loan books, and during the year
we renewed our £500 million Premium
Warehouse securitisation. We transitioned
£262 million of drawings previously under the
Bank of England’s Term Funding Scheme
(“TFS”) to the Term Funding Scheme with
additional incentives for SMEs (“TFSME”)
in October 2020, taking the total drawings
under TFSME to £490 million, and no longer
have any drawings under the TFS.
Unsecured funding, which includes senior
unsecured bonds and undrawn facilities,
remained broadly stable at £1.5 billion
(31 July 2020: £1.5 billion). This was driven
by the successful issuance of a £350 million,
10-year senior unsecured bond in December
2020 and the maturity of a £300 million
unsecured bond in June 2021, as well as
the renewal of our revolving credit facilities
and issuing several private placements.
We also successfully raised £200 million of
Tier 2 debt capital in June 2021, replacing
and concurrently repurchasing most of
the outstanding securities via a liability
management exercise.
We have maintained a prudent maturity
profile. The average maturity of funding
allocated to the loan book remained ahead
of the loan book at 24 months (31 July 2020:
18 months), with the average loan book
maturity at 17 months (31 July 2020: 15
months), in line with our “borrow long, lend
short” principle.
Our strong credit ratings have been upgraded
by Moody’s Investors Services (“Moody’s”)
and affirmed by Fitch Ratings (“Fitch”) during
the year. Moody’s rates Close Brothers
Group ‘‘A2/P1’’ and Close Brothers Limited
‘‘Aa3/P1’’ with a ‘‘negative’’ outlook. Fitch
rates both Close Brothers Group and Close
Brothers Limited ‘‘A-/F2’’, and has upgraded
the outlook for both issuers to ‘‘stable”,
from “negative’’. This reflects the group’s
profitability, capital position, diversified
business model and consistent risk appetite.
Group 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 an improving but
uncertain UK economic outlook, the group
continued to deliberately maintain higher
liquidity relative to historical levels, to provide
additional flexibility as uncertainty persists
whilst enabling us to maximise any
opportunities available. Over the year, treasury
assets increased 3% to £1.8 billion (31 July
2020: £1.7 billion) and were predominantly
held on deposit with the Bank of England.
The proceeds from the senior unsecured
bond issued in December 2020, which
contributed to further elevate the liquidity
levels at the end of the first half, were
deployed to repay the £300 million senior
unsecured bond which matured in June
2021.
We regularly assess and stress test the
group’s liquidity requirements and continue to
comfortably meet the liquidity coverage ratio
(“LCR”) regulatory requirements, with a
12-month average to 31 July 2021 LCR of
1,003% (2020: 823%).
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 46 Close Brothers Group plc
Annual Report 2021
Banking
Delivering disciplined
growth
Key Performance Indicators
Key Financials1
Net Interest Margin
Net Interest Margin
Per cent
Per cent
2021
2020
2019
Bad debt ratio
Bad debt ratio
Per cent
Per cent
2021
2020
2019
Return on net loan book
Return on net loan book
Per cent
Per cent
2021
2020
2019
7.7
7.5
7.9
1.1
2.3
0.6
2.6
1.3
3.3
Operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profit
Net interest margin
Expense/income ratio
Bad debt ratio
Return on net loan book
Return on opening equity
Closing loan book
2021
£ million
631.7
(329.1)
(90.1)
2020
£ million
586.0
(303.4)
(183.4)
212.5
7.7%
52%
1.1%
2.6%
13.7%
99.2
7.5%
52%
2.3%
1.3%
6.5%
8,444.5
7,616.7
Average loan book and operating lease assets
8,253.0
7,854.3
47
Change
%
8
8
(51)
114
11
5
1 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; and
any exceptional and other adjusting items which do not reflect underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found in Note 3.
Return on opening equity
13.7%
2020: 6.5%
The performance of the forborne book
continues to be encouraging. At 31 July
2021, the total balance of loans classified as
forborne and subject to Covid-19
concessions had reduced to £455 million
(31 July 2020: £1.4 billion).
There was a marginal increase in overall
provision coverage to 3.2% (31 July 2020:
3.0%) which included reductions in Covid-19
provisions, reflecting improved
macroeconomic outlook and encouraging
performance of the forborne loan book, more
than offset by a significant increase in
provisions against the Novitas loan book.
We believe this represents an appropriate
level of provision, reflecting an improved but
still uncertain economic outlook.
Return on opening equity increased
significantly to 13.7% (2020: 6.5%) reflecting
the strong performance of the business over
the year, as we maximised market
opportunities in the current environment to
deliver disciplined growth.
A strong performance, delivering disciplined
growth as we maximised market opportunities.
Banking adjusted operating profit increased
114% to £212.5 million (2020: £99.2 million),
reflecting strong loan book growth at a strong
net interest margin, rigorous cost discipline
and a significant reduction in impairment
charges. Statutory operating profit increased
to £207.2 million (2020: £97.2 million) and
includes adjusting items related to the
impairment of goodwill and intangible assets
on acquisition as a result of the strategic
decision to permanently cease loan origination
at Novitas, as well as the exceptional gain
related to the VAT refund from HMRC.
The loan book grew 10.9% over the year to
£8.44 billion (31 July 2020: £7.62 billion)
driven by high new business volumes,
particularly in the Asset Finance and Motor
Finance businesses, and was further
supported by the demand seen under the
CBILS scheme. The return on net loan book
increased significantly on the 2020 financial
year to 2.6% (2020: 1.3%).
The reported net interest margin of 7.7%
increased on the prior year (2020: 7.5%)
reflecting our continued pricing discipline, as
well as lower cost of funds. Our specialist,
relationship-driven model and consistent,
disciplined pricing position us well to maintain
a strong net interest margin going forward.
As a result, operating income increased 8%
to £631.7 million (2020: £586.0 million).
Adjusted operating expenses increased 8%
to £329.1 million (2020: £303.4 million) as we
continued to invest through the cycle to
protect, grow and sustain our model whilst
maintaining a rigorous focus on cost
discipline. Business as usual (“BAU”) costs
increased by 3% to £255.1 million (2020:
£248.3 million), primarily reflecting higher
performance-driven compensation.
Investment costs increased 34% to £74.0
million (2020: £55.2 million) as we progressed
our strategic projects and incurred related
depreciation charges.2
Our multi-year investment programmes
include ongoing transformation projects in
Motor Finance and Asset Finance and our
transition to IRB, alongside enhancements to
our operational and cyber resilience. We
continue to exercise cost discipline and
expect spend on investment programmes to
stabilise over the next financial years,
although related depreciation will continue to
increase.
Overall, the compensation ratio increased
marginally to 29% (2020: 28%) primarily
driven by an increase in staff expenses related
to higher performance-related costs. The
expense/income ratio remained stable at
52% (2020: 52%).
Impairment charges decreased significantly
to £90.1 million (2020: £183.4 million) as we
experienced strong underlying credit
performance across Commercial, Retail and
Property, as well as a reduction in Covid-19
provisions. The bad debt ratio of 1.1%
(2020: 2.3%) reflected an increase in
provisions against the Novitas loan book,
which accounted for a significant portion of
the impairment charge for the year.
2 Related ongoing costs resulting from investment projects are recategorised from investment costs to BAU costs after one year. For comparison purposes, £2.1 million has been
recategorised from investment costs to BAU costs in the 2020 financial year to adjust for investment projects’ ongoing costs that commenced prior to the 2021 financial year.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 48
Banking continued
Loan Book Analysis
Commercial
Asset Finance
Invoice and Speciality Finance
Retail
Motor Finance
Premium Finance
Property
Closing loan book
Operating lease assets1
31 July
2021
£ million
3,968.1
2,844.6
1,123.5
2,974.3
1,924.4
1,049.9
1,502.1
8,444.5
222.9
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
Closing loan book and operating lease assets
8,667.4
7,838.6
Change
%
30
31
28
5
10
(3)
(13)
11
–
11
1 Operating lease assets of £1.3 million (31 July 2020: £2.9 million) relate to Asset Finance and £221.6 million (31 July 2020:
£219.0 million) to Invoice and Speciality Finance.
Loan book growth continues to be an output
of our business model, as we focus on
delivering disciplined growth whilst continuing
to prioritise our margins and credit quality.
We saw a strong year of growth following the
initial Covid-19 impact, with the loan book up
10.9% in the year to £8.4 billion (31 July
2020: £7.6 billion), reflecting high levels of
new business. Growth in the Commercial and
Retail loan books was driven by strong
customer demand, particularly in the Asset
Finance and Motor Finance businesses, with
the Property loan book contracting.
The Commercial loan book increased 30% to
£4.0 billion (31 July 2020: £3.0 billion),
reflecting growth across both businesses. The
Asset Finance book grew strongly, up 31% to
£2.8 billion (31 July 2020: £2.2 billion), driven
by strong new business volumes, which were
supported by demand under the CBILS
government lending scheme.
At 31 July 2021, over £1.14 billion had been
lent across more than 5,700 loans under the
government support schemes in the
Commercial and Property businesses, with
the vast majority of lending via CBILS. In
addition, £144 million across 686 CBILS
loans has been credit approved and can be
drawn down until 30 November 2021 for
asset finance agreements. We are also
approved to lend under the Recovery Loan
Scheme, but anticipate volumes to be
substantially lower than lending via CBILS.
The business is well positioned to capitalise
on continued demand for asset financing.
Current growth initiatives in the Asset Finance
business include those aligned with the
increasing focus on green energy, electric car
fleets and renewables.
The Invoice and Speciality Finance loan book
increased to £1.1 billion (31 July 2020: £0.9
billion), reflecting good demand under the
government schemes, and improving
utilisation levels in line with the progressive
reopening of the economy, albeit these
remain below those seen prior to Covid-19.
We expect the growth trajectory in Invoice
Finance to follow the economic recovery.
The Retail loan book increased 5% to £3.0
billion (31 July 2020: £2.8 billion), with growth
in Motor Finance more than offsetting a slight
reduction in the Premium Finance loan book.
The Motor Finance book increased 10% to
£1.9 billion (31 July 2020: £1.7 billion) as we
experienced high levels of new business
during the year, with record volumes following
the easing of lockdown restrictions. This
reflected a combination of pent-up demand
and an increasing use of finance in the
second-hand car market, supported by our
investment in the Motor 2020 programme.
The Irish Motor Finance business accounted
for 21% of the Motor Finance loan book
(31 July 2020: 26%). The Irish market
continues to recover from the initial Covid-19
impact, with new business volumes up
year-on-year, albeit lower than pre-Covid-19
levels. We continue to see strong
fundamentals in the second-hand car market
and are exploring opportunities for growth
through the shift to Alternatively Fuelled
Vehicles.
Close Brothers Group plc Annual Report 2021 49
2021
£ million
288.9
(158.2)
(77.9)
52.8
7.7%
55%
2.1%
2020
£ million
246.6
(142.6)
(99.2)
Change
%
17
11
(21)
4.8
1,000
7.6%
58%
3.1%
3,968.1
3,048.0
30
15
Commercial adjusted operating profit
Banking: Commercial1
£52.8m
2020: £4.8m
Operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profit
Net interest margin
Expense/income ratio
Bad debt ratio
Closing loan book
Average loan book and operating leases
3,730.5
3,240.8
1 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; and
any exceptional and other adjusting items which do not reflect underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found in Note 3.
The Premium Finance book remained broadly
stable at £1.0 billion (31 July 2020: £1.1
billion) as Covid-19 restrictions have impacted
customer behaviour, with the suspension of
driving tests and decline in the new car
market reducing demand for car insurance
policies. Following the removal of Covid-19
restrictions, we would expect demand for the
funding of motor insurance policies to recover.
The Property loan book reduced to £1.5
billion (31 July 2020: £1.7 billion) as we saw
high repayment levels, reflecting strong unit
sales by borrowers due to the release of
pent-up demand and buyers taking
advantage of the Stamp Duty temporary
reduced rates and Help to Buy incentives.
This was more than offset by the uptick in
drawdowns seen, particularly in the second
half of the year, which were broadly in line with
pre-Covid-19 average levels. Our pipeline of
undrawn commitments remains solid and the
Property loan book trajectory will continue to
reflect the rate of repayments as well as new
business volumes.
We remain confident in the quality of our
lending, which is predominantly secured or
structurally protected, prudently underwritten
and diverse.
Commercial
The Commercial businesses provide
specialist, predominantly secured lending
principally to the SME market and include
Asset Finance and Invoice and Speciality
Finance.
Adjusted operating profit increased to £52.8
million (2020: £4.8 million), driven by strong
levels of income and a decrease in
impairment charges, following the elevated
levels seen in 2020 as a result of Covid-19.
Statutory operating profit was £35.9 million
(2020: £3.1 million).
Operating income of £288.9 million (2020:
£246.6 million) was 17% higher than the prior
year, driven by the strong growth in the loan
book across both Asset Finance and Invoice
Finance. The net interest margin increased
marginally to 7.7% (2020: 7.6%), primarily
reflecting the lower cost of funds and increased
fee income in the Invoice Finance business.
Adjusted operating expenses increased 11%
to £158.2 million (2020: £142.6 million),
mainly driven by higher volume and
performance-driven compensation, increased
headcount and investment in the Asset
Finance transformation programme. The
expense/income ratio decreased to 55%
(2020: 58%) as growth in operating income
more than offset the cost increase.
Impairment charges decreased 21% to
£77.9 million (2020: £99.2 million),
corresponding to a bad debt ratio of 2.1%
(2020: 3.1%). A significant portion of the
impairment charges reported in Commercial
related to an increase in credit provisions
against the Novitas loan book, reflecting the
latest assumptions on the case failure and
recovery rates in this business. The underlying
credit performance of the rest of the
Commercial loan book remains strong.
The provision coverage increased to 4.2%
(31 July 2020: 3.9%) reflecting a significant
increase in provisions against the Novitas loan
book, which more than offset the benefits of
loan book growth, improved macroeconomic
scenarios and weightings and the
encouraging performance of the forborne
book.
In July 2021, the group decided to cease
permanently the approval of lending to new
customers across all of the products offered by
Novitas, a wholly owned subsidiary of Close
Brothers acquired in 2017, and withdraw from
the legal services financing market.
We will remain focused on supporting
Novitas’ existing customers, working with
their solicitors as well as insurers and
intermediaries, to ensure we manage the
existing book in the best interests of
customers. As of 31 July 2021, Novitas had a
loan book net of provisions of £181.5 million,
representing 2.1% of the group’s total loans.
The future trajectory of the Novitas loan book
will depend on the rate of drawdown on
existing loan agreements, as well as the rate
of repayment on outstanding loans.
The 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 in
the underlying assets and long-standing
industry relationships.
At 31 July 2021, 7% of the Commercial loan
book by value (31 July 2020: 26%) was
classified as forborne and subject to Covid-19
related concessions, with balances of
£287.4 million (31 July 2020: £832.8 million).
These concessions are 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. The majority of those
customers classified as forborne at 31 July
2021 and subject to Covid-19 related
concessions had resumed payments.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 50
Banking continued
Retail
The Retail businesses provide intermediated
finance, principally to individuals and small
businesses, through motor dealers and
insurance brokers.
Adjusted operating profit for Retail increased
over 100% to £71.9 million (2020: £34.9
million), reflecting good levels of operating
income and a significant reduction in
impairment charges, following the Covid-19
related provision increase in the 2020 financial
year. Statutory operating profit was £83.5
million (2020: £34.6 million).
Operating income increased 1% on the
prior year to £219.8 million (2020: £218.4
million), in spite of a marginal decline in net
interest margin to 7.6% (2020: 7.7%), largely
reflecting lower rates as a result of broker
consolidation in the insurance sector and the
waiving of fees due to Covid-19 forbearance
in Premium Finance.
Adjusted operating expenses increased 9%
to £138.0 million (2020: £126.9 million) and
the expense/income ratio increased to 63%
(2020: 58%), reflecting volume-driven costs
and ongoing investment in Motor Finance,
as well as increased regulatory-driven
expenditure. Good progress continues to be
made with the Motor Finance transformation
programme as it nears completion, with the
programme aimed at improving the service
proposition, enhancing operational efficiency,
improving our credit acceptance process and
increasing sales effectiveness.
Impairment charges decreased significantly to
£9.9 million (2020: £56.6 million) with a bad
debt ratio of 0.3% (2020: 2.0%), reflecting
a strong credit performance. The provision
coverage ratio decreased slightly on the
position at the end of the last financial year to
2.2% (31 July 2020: 2.5%), which reflected
the performance of the forborne loan book
and strong new business volumes.
We remain confident in the credit quality of
the Retail loan book. The Motor Finance
loan book is predominantly secured on
second-hand vehicles which are typically
less exposed to depreciation or significant
declines in value than new cars. Our core
Motor Finance product remains hire-purchase
contracts, with less exposure to residual value
risk associated with Personal Contract Plans
(“PCP”), which accounted for only c.12% of
the Motor Finance loan book at 31 July 2021.
The Premium Finance loan book benefits from
various forms of structural protection including
premium refundability and, in most cases,
broker recourse for the personal lines product.
At 31 July 2021, 2% of the Retail loan book
by value (31 July 2020: 9%) was classified
as forborne and subject to Covid-19 related
concessions, principally in the form of payment
deferrals, with balances of £49.2 million (31 July
2020: £251.0 million). The majority of
those customers classified as forborne at
31 July 2021 and subject to Covid-19 related
concessions had resumed payments.
Close Brothers Group plc Annual Report 2021 51
Retail adjusted operating profit
Banking: Retail1
£71.9m
2020: £34.9m
Property operating profit
£87.8m
2020: £59.5m
Operating income
Adjusted operating expenses
Impairment losses on financial assets
Adjusted operating profit
Net interest margin
Expense/income ratio
Bad debt ratio
Closing loan book
Average loan book
Change
%
1
9
(83)
106
2021
£ million
219.8
(138.0)
(9.9)
71.9
7.6%
63%
0.3%
2020
£ million
218.4
(126.9)
(56.6)
34.9
7.7%
58%
2.0%
2,974.3
2,834.5
2,904.4
2,822.6
5
3
1 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; and
any exceptional and other adjusting items which do not reflect underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found in Note 3.
Banking: Property
Operating income
Operating expenses
Impairment losses on financial assets
Operating profit
Net interest margin
Expense/income ratio
Bad debt ratio
Closing loan book
Average loan book
Change
%
2
(3)
(92)
48
2021
£ million
123.0
(32.9)
(2.3)
87.8
7.6%
27%
0.1%
2020
£ million
121.0
(33.9)
(27.6)
59.5
6.8%
28%
1.5%
1,502.1
1,734.2
1,618.2
1,790.9
(13)
(10)
Impairment charges decreased to £2.3
million (2020: £27.6 million), resulting in a bad
debt ratio of 0.1% (2020: 1.5%) reflecting
a strong credit performance and improved
macroeconomic forecasts, partially offset by
an accounting reclassification. The provision
coverage ratio remained broadly stable at
2.6% (31 July 2020: 2.5%).
At 31 July 2021, 50 customers (31 July
2020: 187 customers) accounting for 8%
of the Property loan book by value (31 July
2020: 18%) were subject to Covid-19 related
concessions, 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.
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 market.
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. We
continue to see success from our regional
initiative, with the regional loan book now
making up over 50% of the Property
Finance development portfolio.
The business delivered an operating profit of
£87.8 million (2020: £59.5 million), up 48%,
as impairment charges reduced significantly
from their elevated level in 2020.
Operating income increased marginally to
£123.0 million (2020: £121.0 million), in spite
of the reduction in the loan book, as the net
interest margin increased to 7.6% (2020: 6.8%),
driven by an accounting reclassification, the
unwind of modification losses, and lower cost
of funds.
Operating expenses were 3% lower at £32.9
million (2020: £33.9 million) as we maintained
our focus on cost discipline. The expense/
income ratio reduced slightly to 27% (2020:
28%), as the decline in operating expenses
through disciplined cost control more than
offset the stable level of operating income.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 52
Asset Management
Maximising long-term growth
potential
Key Performance Indicators
Net Inflows
Net Inflows
Per cent of opening AUM
Per cent of opening AUM
2021
2020
2019
Operating margin
Operating margin
Per cent
Per cent
2021
2020
2019
Return on opening equity
Return on opening equity
Per cent
Per cent
2021
2020
2019
Revenue margin
Revenue margin
bps
bps
2021
2020
2019
7
9
9
17
16
18
32
29
32
91
94
93
Asset Management achieved good net inflows
despite reduced face-to-face interaction with
clients and continued to invest to support
long-term growth.
Continued Focus on Maximising
Long-Term Growth Potential
The Asset Management division provides
financial advice and investment management
services to private clients in the UK, including
full bespoke management, managed
portfolios and funds, distributed both
directly via our own advisers and investment
managers, and through third party financial
advisers.
Equity markets have gained significantly
over the year, following the lows of the early
Covid-19 impact, as the actions of central
banks and vaccine rollout programmes have
improved confidence. Despite the improving
market conditions, lower new client flows
have been seen across the industry, as the
ongoing impact of Covid-19 and reduced
face-to-face interaction impacted client
sentiment and inflows. Nevertheless, we
performed well in the year, generating good
net inflows of 7% and growing managed
assets 24% to £15.6 billion.
Adjusted operating profit increased 16%
to £23.7 million (2020: £20.4 million), as
the growth in operating income more than
offset the cost of continued investment in
supporting the long-term growth potential of
the business. The operating margin increased
marginally to 17% (2020: 16%). Statutory
operating profit before tax was £22.4 million
(2020: £19.3 million).
Total operating income increased 9% to
£139.4 million (2020: £128.2 million) as higher
management and advice fees were generated
from the growth in assets under management.
The revenue margin decreased to 91bps
(2020: 94bps) primarily driven by a higher level
of flows into our lower margin products and
lower initial advice and dealing fees.
Adjusted operating expenses increased
8% to £115.9 million (2020: £107.7 million)
primarily driven by new hires, in line with
our growth strategy, and an increase in
performance-related compensation, as well
as investment in our technology and systems.
Close Brothers Group plc Annual Report 2021 53
Total managed assets
£15.6bn
2020: £12.6bn
As a result, the compensation ratio increased
slightly to 56% (2020: 55%) and the expense/
income ratio decreased to 83% (2020: 84%).
Key Financials1
Investment management
Advice and other services2
Other income3
Operating income
Adjusted operating expenses
Impairment (losses)/gains on financial assets
Adjusted operating profit
As we continue to invest in the business to
deliver growth and scale, the cost trajectory will
depend on the rate of hiring, with investment in
technology projects expected to continue.
Revenue margin (bps)
Operating margin
Return on opening equity
Change
%
13
3
(92)
9
8
(300)
16
2021
£ million
102.9
36.4
0.1
139.4
(115.9)
0.2
23.7
91
17%
31.7%
2020
£ million
91.4
35.5
1.3
128.2
(107.7)
(0.1)
20.4
94
16%
28.7%
Good Net Inflows
Although equity markets have improved over
the year, the ongoing impact of Covid-19
has influenced sentiment and inflows across
the industry. Despite this, we achieved good
net inflows of £917 million and a net inflow
rate of 7% of opening managed assets.
This reflected continued demand for both
our investment management and integrated
wealth services as well as good momentum
from our recent portfolio manager hires, aided
by improved conditions and confidence in the
market.
Stronger equity markets meant positive
market movements contributed £2.1 billion to
managed assets in the year. The combined
impact with positive net inflows resulted in
managed assets increasing 24% overall to
£15.6 billion (31 July 2020: £12.6 billion).
Total client assets increased 24% overall to
£17.0 billion (31 July 2020: £13.7 billion).
In July, we completed the acquisition of PMN
Financial Management LLP (“PMN”), an IFA
business with approximately £300 million
of client assets. PMN’s partners, advisers
and support team joined CBAM as part of
the acquisition, as we continue to deliver on
our growth strategy of making selective infill
acquisitions. The acquisition is reflected in
CBAM’s advised only assets, but has had
no impact on managed assets in the 2021
financial year, although we would expect
migration to our investment management
services over time.
Fund Performance
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. Fund performance has been
mixed over the last year, reflecting volatile
equity markets. Over the three-year period
to 31 July 2021, eight of our 14 multi-asset
funds outperformed the relevant peer
group average, with nine of the 14 funds
outperforming over the five-year period
to 31 July 2021. Our bespoke strategy
composites continued to perform well,
largely outperforming their respective peer
groups over a one, three and five-year period,
demonstrating a strong track record.
1 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; and any
exceptional and other adjusting items which do not reflect underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found in Note 3.
2 Income from advice and self-directed services, excluding investment management income.
3 Other income includes net interest income and expense, income on principal investments and other income. Other income
includes a £1.1 million gain on disposal of non-core assets in the 2020 financial year.
Movement in Client Assets
Opening managed assets
Inflows
Outflows
Net inflows
Market movements
Total managed assets
Advised only assets
Total client assets1
Net flows as % of opening managed assets
31 July
2021
£ million
12,594
2,284
(1,367)
917
2,077
15,588
1,435
17,023
7%
31 July
2020
£ million
11,673
2,350
(1,257)
1,093
(172)
12,594
1,118
13,712
9%
1 Total client assets include £6.0 billion of assets (31 July 2020: £5.1 billion) that are both advised and managed.
Our Approach to ESG and Sustainability
Sustainable investment strategies remain a
key focus area across the industry and our
Socially Responsible Investment proposition
continues to be well received. We have also
launched two new sustainable funds this year
(Close Sustainable Balanced Portfolio Fund
and Close Sustainable Bond Portfolio Fund)
which are gaining good traction.
We continue to invest in new hires and
technology to support the long-term growth
potential of the business and, during the year,
have made significant progress in upgrading
and consolidating our technology platform,
which should further enhance our operating
efficiency and improve its capacity, scalability
and resilience, as well as providing client
experience benefits.
Our vertically integrated multi-channel business
model leaves us well positioned to benefit
from proven, continued demand for our
services and the structural growth opportunity
presented by the wealth management industry.
Given the attractive opportunities we see
in the market, we will continue to invest to
support the long-term growth potential of the
business and to drive growth both organically
and through the continued selective hiring
of advisers and investment managers, and
through infill acquisitions.
Earlier this year we became signatories to
the UN-supported Principles for Responsible
Investment, further demonstrating our
commitment to improving the way we
measure, report and manage ESG issues
throughout our investment activities. We
have established a dedicated sustainability
committee with oversight of the division’s
strategy, governance, reporting and operating
model with regard to sustainability, and are
developing a sustainable proposition for our
bespoke investment managers to further
embed ESG considerations into our offerings.
Well Positioned for Future Growth
We have remained committed to providing
excellent service to our clients, and in spite
of the challenges presented by Covid-19 and
reduced face-to-face interactions, we have
maintained high levels of contact with clients
via email, telephone, video, our online portal
and our mobile app.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 54
Securities
Maximising trading
opportunities
Key Performance Indicators
Operating income
Income
£m
£m
2021
2020
2019
Operating margins
Operating margins
Per cent
Per cent
2021
2020
2019
Bargains per day
Bargains per day
’000
´000
2021
2020
2019
Return on opening equity
Return on opening equity
Per cent
Per cent
2021
2020
2019
182.0
151.9
93.4
33
32
21
101
82
56
64
50
21
Winterflood is a leading UK market maker,
focused on delivering high quality execution
services to stockbrokers, wealth managers
and institutional investors.
Maximising Trading Opportunities in a
Dynamic Market Environment
Winterflood is a leading UK market maker,
delivering high quality execution services to
stockbrokers, wealth managers and
institutional investors, as well as providing
corporate advisory services to investment
trusts and outsourced dealing and custody
services via WBS.
Winterflood delivered an exceptionally strong
trading performance in the year, with our
experienced traders successfully navigating
the continued market volatility resulting from
Covid-19 to deliver operating profit of £60.9
million (2020: £47.9 million).
Operating income increased 20% to £182.0
million, a 20-year high, with particularly strong
activity across AIM, Small Cap and
International markets.
The business experienced increased market
volatility and heightened retail trading activity
for much of the year, driven by lockdown
restrictions and increasing investor optimism
regarding the economic recovery, offset by
concerns over inflation, central bank
monetary policy and new Covid-19 variants.
Close Brothers Group plc Annual Report 2021 Maximising trading
opportunities
55
Change
%
20
17
(150)
27
2021
£ million
182.0
(121.2)
0.1
60.9
101
33%
63.5%
2020
£ million
151.9
(103.8)
(0.2)
47.9
82
32%
50.4%
Operating profit
£60.9m
2020: £47.9m
Return on opening equity
63.5%
2020: 50.4%
Key Financials
Operating income
Operating expenses
Impairment (losses)/gains on financial assets
Operating profit
Average bargains per day ('000)
Operating margin
Return on opening equity
The announcement of the successful trial
results for the Pfizer-BioNTech vaccine in
November resulted in a remarkable trading
performance, with Winterflood achieving the
highest daily trade volume on record,
227,000, surpassing the previous high of
186,000 in June 2020 and producing the
highest daily trading revenue of the 2021
financial year.
We continued to make progress in expanding
our institutional client base, particularly in the
UK.
In investment trust, we also saw good levels
of corporate activity over the year with
several large transactions, including the $700
million share placing of the Baillie Gifford
Schiehallion Fund.
Average daily bargains over the year
increased 23% to 100,681 (2020: 82,003)
and the team’s experience and focus on
managing risk resulted in only one loss day
during the year despite significant market
volatility (2020: seven loss days).
Trading volumes were exceptionally high for
most of the financial year, albeit we have
seen a slowdown in activity towards the end
of the period.
WBS, which provides outsourced dealing and
custody services for asset managers and
platforms, has generated strong levels of
income during the year and its assets under
administration have increased significantly to
£6.2 billion (2020: £4.1 billion) as a result of
growth in its new and existing client base. We
continue to see potential for strong growth in
WBS’ assets under administration in years to
come, building on the momentum seen in
2021.
Operating expenses increased 17% to £121.2
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
marginally decreased to 67% (2020: 68%) 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% (2020: 48%).
Winterflood has continued to trade
successfully in the early part of the 2022
financial year, albeit with a continued slowing
in volumes and moderation of trading
performance. Due to the nature of the
business, it remains sensitive to changes in
the market environment.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 56
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
to 14;
• 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
89 and 90.
The group closely monitors its risk profile to
ensure that it continues to align with its
strategic objectives as documented on page
20. 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.
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.
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.
S
t
r
e
s
s
T
e
s
t
i
n
g
Enterprise Risk Management Framework
e
e tit
p
p
Risk A
ort
p
e
R
Ris
and A
I d entify
k C
w
u
lt
a
r
e
u
r
n
e
e
s
s
A
s
s
e
s
s
Principal
Risks
l
o
r
t
n
o
m
al C
ste
C
o ntrol and
M itigate
Intern
Sy
R
e
vie
Ris
M
w and
onitor
k Governance
Close Brothers Group plc Annual Report 2021
57
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 three principal objectives:
1. Inform capital and liquidity planning
– including liquidity and funding risk
assessment contingency planning and
recovery and resolution planning;
2. Support ongoing risk and portfolio
management – including risk appetite
calibration, strategic decisioning and
planning, risk/reward optimisation and
business resilience preparation; and
3. Provide a check on the outputs/accuracy of
risk models – including the identification of
non-linear effects when aggregating risks.
Three Lines of Defence
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 group-wide scenario
analysis to simple portfolio sensitivity analysis.
Stress testing also represents a critical
component of both the firm’s Internal Capital
Adequacy Assessment (“ICAA”) and Internal
Liquidity Adequacy Assessment (“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.
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.
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)
Risk Committee
(Reports to the board)
Audit Committee
(Reports to the board)
The 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.
The Risk Committee delegates to the group
chief risk officer day-to-day responsibility for
oversight and challenge on risk-related issues.
The Audit Committee mandates the head
of group internal audit with day-to-day
responsibility for independent assurance.
Risk functions (including compliance) provide
support, assurance and independent
challenge on:
• the design and operation of the risk
Internal audit provides independent
assurance on:
• first and second lines of defence;
• appropriateness/effectiveness of internal
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
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.
• Promotes a culture of customer focus and
on risk strategies.
appropriate behaviours.
• Ongoing monitoring of positions and
management and control of risks.
• Portfolio optimisation.
• Self-assessment.
• Facilitates constructive check and
challenge – “critical friend”/“trusted
adviser”.
• Oversight of business conduct.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 58
Risk Report continued
Risk Committee Structure
Group Board
Board Risk Committee
Executive Committees
Risk-Specific 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
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
Group Credit Committee
Monitors the group’s credit risk profile, examining current performance and key portfolio trends,
ensuring compliance with risk appetite.
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 appropriate risk
management at each stage of the risk
process lifecycle. They also provide an
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 further strengthen its risk
governance framework and specifically the
organisation’s risk and compliance committees,
both at a group and divisional level. This has
included the refinement of committee Terms of
References and the continued evolution of
reporting packs and MI suites. All committees
continue to work efficiently and effectively.
Internal Control System
Aligned to the risk governance framework,
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.
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.
Close Brothers Group plc Annual Report 2021 59
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.
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
in meeting 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.
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.
Group Policy Framework
ERMF
Group
Group Policies
Group Standards
Divisional / Business
Level Policies
Procedures
Locally embedded
Risks managed in an
open, transparent and
objective manner
Business
Risk Culture
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
The relationship between risk and reward is
also a key priority with all staff evaluated
against both agreed objectives (the what)
and desired behaviours (the how).
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 97 to 125.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 60
Risk Report continued
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,
impact levels of trading activity at Winterflood
or result in additional investment
requirements/higher costs of operation.
Change/Outlook
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’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:
• speed and flexibility of services;
• our local presence and personal approach;
• the experience and expertise of our people;
and
• our offering of tailored and client-driven
product solutions.
Covid-19 has had a significant impact on
the UK economy. While the near-term
outlook has improved, there remains
significant, ongoing uncertainty regarding
the future economic trajectory and the
resulting impact on our customers and
clients.
A number of support measures for
individuals and businesses introduced
during the pandemic are planned to
come to an end during the second half of
2021 and their long-term effectiveness
and impact on the broader competitive
environment remain uncertain.
The group has therefore planned for a
range of different economic and business
scenarios to ensure it has the resources
and operational capability to continue to
perform effectively through this period of
uncertainty. 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 42 to
55. Our business model is set out on
pages 12 to 14.
Close Brothers Group plc Annual Report 2021 61
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
maintains 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 during the year successfully
renewed and increased its Tier 2 capital
instruments.
Further commentary on the group’s capital
is outlined in note 22 on pages 167 to 169.
• 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.
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.
Capital risk is measured using CET1, Tier 1
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 44 and 45.
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 risks (Pillar 2a) together
While Covid-19 may continue to impact
capital due to lower than expected profits,
action by authorities to support lending
through the use of CBILS and similar
schemes has led to a reduction in RWAs.
This is expected to continue in the near to
medium term.
The group is committed to treating all
customers fairly and delivering appropriate
customer outcomes.
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;
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
Regulatory focus and prioritisation of
conduct risk continues to increase. Over
the course of the last year legislation has
been introduced for Debt Respite
(Breathing Space) to be provided to
qualifying customers while the FCA has
finalised its guidance around vulnerable
customers and issued proposals for a new
Customer Duty, all of which directly impact
the group. Workstreams have been
established to ensure the group can meet
all requirements and regulatory
expectations.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
62
Risk Report continued
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
2021 the group had loans and advances to
customers amounting to £8.4 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
We seek to minimise our exposure to credit
losses from our lending by:
• applying strict lending criteria when testing
Our exposures to counterparties are
mitigated by:
• excess liquidity of £1.3 billion placed with
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 or
structurally protected 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.
the Bank of England;
• continuous monitoring of the credit quality
of our counterparties within approved set
limits; and
• Winterflood’s trading relating to exchange
traded cash securities being settled on a
delivery versus payment basis.
Counterparty exposure and settlement
failure monitoring controls are also in place.
Credit losses have reduced in the year to
31 July 2021, although uncertainty remains
and we continue to closely monitor Covid-19
impacts.
Forbearance levels have decreased from
those observed at the peak of the pandemic;
however, they remain above historical,
pre-pandemic levels. Although the economic
outlook has improved, the trajectory in the
short to medium term remains uncertain. In
addition, the cessation of various government
support schemes could have an impact on
both consumers and businesses and the
impact of this on our customers will be closely
observed. These factors could result in higher
credit losses in the future.
Assumptions relating to the Novitas business
provisions have been updated. Other
counterparty exposures are broadly
unchanged, with the majority of our liquidity
requirements and surplus funding placed with
the Bank of England.
Further commentary on the credit quality of
our loan book is outlined on pages 47 to 51.
Further details on loans and advances to
customers and debt securities held are in
notes 11 and 12 on pages 155 to 159 of
the financial statements.
Our approach to credit risk management
and monitoring is outlined in more detail in
note 28 on pages 176 to 189.
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.
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.
Change/Outlook
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 10-year £350 million
senior unsecured bond was issued,
deepening our investor base and franchise
into the debt capital market. Fixed Rate ISAs
and further Notice Accounts were also
launched to strengthen and broaden our
savings proposition.
A strong liquidity position is maintained to
ensure that we remain comfortably within
both internal risk appetites and regulatory
requirements. Liquidity risk is 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.
Elevated levels of liquidity have been
maintained, predominantly via deposits
placed with the Bank of England, to ensure
the maintenance of sufficient headroom to
both internal and external liquidity
requirements. Liquidity has now started to
normalise, trending towards pre-Covid-19
levels.
Further commentary on funding and
liquidity is provided on pages 44 and 45.
Further financial analysis of our funding is
shown in note 19 on page 166 of the
financial statements.
Close Brothers Group plc Annual Report 2021 63
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 delivery of important 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 adapt to changes in these requirements
in a timely fashion, 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 is broadly unchanged.
Base rates remain low, though with
reduced expectation of negative rates
compared to this time last year.
The traded market risk environment
continues to be affected by Covid-19 and
its impact on the economy, although this is
becoming less prominent with focus now
shifting to emerging inflation risks.
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. 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
186 to 188 of the financial statements.
The sensitivity analysis on interest rate
exposures shown in note 28 on page 187
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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 64
Risk Report continued
Risk
Risk Management and Mitigation
Operational Risk continued
Change/Outlook
The continued impacts of Covid-19 may lead
to risks associated with people, third party
suppliers, operational process execution,
information security and fraud. The group
continues to utilise its operational risk
management framework to manage these
risks with oversight by relevant risk
committees.
including further enhancement of
information security management and
strengthening of the firm’s operational
resilience. Process improvements,
including through the use of robotic
process automation, continue to
reduce the likelihood of manual errors
occurring.
The volume and complexity of regulatory and
legal requirements applicable to the group
continues to increase, with management
focused on responding in a timely manner to
changing expectations.
Notwithstanding these stresses,
improvements continue to be made
across the operational risk framework,
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
85 of the Corporate Governance Report.
Change/Outlook
The group’s strong culture, consideration of
all stakeholders and commitment to open
and transparent communication continue
to mitigate potential reputational risk,
including the heightened business, conduct
and operational risks arising from Covid-19.
Our prudent business model also continues
to act as a natural mitigant of reputational
risk.
The group’s focus on acting responsibly
and sustainably enables it to respond and
adapt to a range of stakeholder
expectations with regard to sustainable
practices and address heightened public
interest in businesses taking a proactive,
responsible approach to their operations,
products and services. Internal oversight of
matters relating to employees, the
environment, wider society and community
impact at both an operational and strategic
level ensure the group gives due
considerations to the reputational impact of
its actions.
Note: While Defined Benefit Pension Obligation Risk, Tax Risk and Intra-Group Risk are also classified internally as Principal Risks, none are 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 171
and 172.
Close Brothers Group plc Annual Report 2021 65
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, consider broader market
uncertainties, and support its organisational
readiness to respond.
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
Mitigating Actions and Key Developments
Outlook
Economic Uncertainty
Financial Loss Resulting
from the Physical or
Transitional Impacts of
Climate Change
The group’s business model aims to ensure
that we are able to trade successfully and
support our clients in a wide range of
economic conditions. By maintaining a strong
financial position we aim to be able to absorb
short-term economic downturns, respond to
any increase in activity or market demand, and
in so doing, build long-term relationships by
supporting our clients when it really matters.
The group focuses on quality and returns
rather than overall growth or market share
and continues to invest in the business for the
long term, to support our customers and
clients through the cycle.
We test the robustness of our financial
position by carrying out regular stress testing
on our performance and financial position in
the event of adverse economic conditions.
The group’s strategic priorities are regularly
reviewed and updated to ensure the group
continues to focus on those that support the
business model and adapt to changes in the
external operating environment.
A multi-year programme of work is underway
to implement an appropriate and regulatory-
compliant climate risk framework, overseen by
a Climate Risk Steering Committee. Regular
updates are provided to the Risk Committee,
which retains oversight responsibility, while
senior management responsibility is assigned
to the group chief risk officer.
For further detail on the firm’s action to date with
regard to climate risk, see pages 31 to 33.
Covid-19 has notably impacted economic
activity and there remains ongoing uncertainty
regarding the future economic trajectory 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 to
ensure we have the resources and capability
to continue to perform effectively.
Further commentary on the attributes and
resilience of the group’s diversified business
model is shown on pages 12 to 14 with
commentary on the market environment and
its impact on each of our divisions outlined on
pages 42 to 55.
Climate risk represents an area of increasing
focus, both within the group and across the
industry more broadly. We continue to closely
monitor 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 work to further review
the risks and opportunities posed by climate
change remains ongoing. This includes
continued review of our credit assessment
approach in the Banking division, with a view
to ensuring appropriate consideration of
climate risk as part of the underwriting
process.
Outputs from this review will further shape the
group’s strategic response and support our
planned alignment with the evolving
recommendations of the Task Force on
Climate-related Financial Disclosures (“TCFD”).
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 66
Risk Report continued
Risk
Mitigating Actions and Key Developments Outlook
Transition from
LIBOR
A programme is in place 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.
We continue to make good progress in
making relevant changes to loan
documentation to move away from the use of
LIBOR and, where necessary, have upgraded
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.
Disruption from Scottish
Independence
Monitoring is in place to track changes in the
political landscape with regard to Scottish
independence.
Various movements in the support for
Scottish independence have been observed
in opinion polls over the last year. We continue
to monitor developments closely.
Legal and Regulatory
Change
Evolving Working
Practices
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 and monitoring framework to
identify regulatory and legal changes that
could materially impact its operations,
including legislative and regulatory reform,
changes in regulatory practice and case law
developments. The group engages regularly
with regulators in the jurisdictions in which it
operates, including the PRA and FCA in the
UK, as well as industry bodies and external
advisers to understand relevant changes.
High-level gap and impact analyses are
undertaken to assess new compliance
requirements and identify any changes
required to the group’s systems and controls,
processes and procedures, 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.
Colleagues not deemed essential workers
have predominantly worked remotely since
the onset of the Covid-19 pandemic,
although teams are now coming back
together, where permissible within local public
health rules, on both an ad hoc and
permanent working pattern basis.
Notwithstanding, the group now assesses the
appropriateness of its work patterns on an
ongoing basis through consideration of four
key principles: customer and client outcomes;
risk appetite; culture and collaboration; and
employee choice.
Utilising this framework, hybrid patterns of office
and remote working are now being supported
for certain additional roles that did not regularly
have this flexibility prior to the pandemic.
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, including as a result of the
continued implementation of existing EU
legislation into UK law, and possible future
regulatory and legal divergence. Further
change is also expected as governments and
regulators continue to respond to the impact
of Covid-19 and prepare for equivalent events
that may occur in the future. Changes in
regulation are also expected in other priority
areas identified by regulators in the UK, the
Republic of Ireland and other jurisdictions in
which the group operates.
Public health requirements regarding the
extent of allowable office-based working may
require the company to continue adapting its
approach over time.
Extensive work has been completed to risk
assess hybrid working patterns, enabling the
identification and mitigation of any risks arising.
Management continues to monitor market
expectations regarding work patterns.
Evolving colleague expectations may present
competitive threats and/or opportunities
regarding staff attraction, retention and
engagement going forward.
Close Brothers Group plc Annual Report 2021 Risk
Mitigating Actions and Key Developments Outlook
67
Technological Change
and New Business
Models
Supply Chain Risk
The group is continuing to invest in strategic
data capabilities as part of our business and
technology strategies. Data governance
remains a key focus as part of this as we look
to further manage and exploit our data assets.
Our businesses, particularly within Retail, also
continue to prioritise digital channels and
messaging to enhance/improve the customer
journey and associated experience.
The group is also focused on upskilling current
staff and strategic provider partnerships to
support the digital transformation of our
businesses where appropriate.
Partnerships between existing financial
institutions and large technology houses
present an opportunity that the group can
further explore.
While Covid-19 has undoubtedly strained
supply chains globally, this has proved more
moderate in the Financial Services sector and
less so for the group given its relatively low
level of reliance on offshore service provision.
Notwithstanding, further evolution of the
group’s third party management framework is
required to keep pace with the evolving
regulatory landscape over the short to
medium term, noting this remains an area of
heightened regulatory focus, particularly with
respect to material suppliers.
In addition, the group is currently responding
to other related new/pending regulatory
requirements including, but not limited to,
operational resilience.
Technological change and new business
models have the potential to impact the
group’s market position and future profitability.
While regulation remains a barrier to entry for
many potential new competitors, consumer
expectations continue to evolve, challenging
existing capabilities and traditional
approaches. Competitors are adapting in
response, while new financial technology
companies continue to develop alternative
business models.
Notwithstanding this, the group prides itself
on its deep knowledge of its customers and
clients and the industries/sectors in which
they operate. Market developments are
closely monitored to identify and understand
emerging dynamics as well as the evolving
preferences of our customers.
The group’s third party management
framework ensures a risk-based approach is
adopted with regard to the identification,
classification and management of the many
potential business impacts that can result
from failures in the supply chain.
Through the identification of inherent risks at
the outset of all third party engagements,
appropriate due diligence is completed prior
to onboarding, suitably robust contracts are
put in place and effective lifecycle
management is implemented.
Ongoing reporting of key risk and
performance indicators coupled with periodic
supplier reviews from our third party
monitoring team help to manage supply chain
risk. Oversight of all material suppliers is
retained via the Group Risk and Compliance
Committee while continuity of service is a key
focus for all critical relationships through
resilience and substitutability planning.
The group is also continuing to build out its
understanding of supply chain concentration
risk across material third and fourth parties.
This Strategic Report was approved by the board and signed on its behalf by:
Adrian Sainsbury
Chief Executive
28 September 2021
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
68
Board of Directors
Mike Biggs
Chairman
N
R
Adrian Sainsbury
Chief Executive
Mike Morgan
Group Finance Director
Board Appointment
Mike Biggs was appointed as an
independent non-executive director in March
2017 and became chairman of the board
and of the Nomination and Governance
Committee from 1 May 2017.
Background and Experience
Mike 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.
Board Appointment
Adrian Sainsbury was appointed to the
board as chief executive on 21 September
2020.
Background and Experience
From 2016 until 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 is a board member of UK
Finance, the banking and finance industry
body, and also served as chairman of the Asset
Based Finance Association, the UK and Ireland
industry body.
Board Appointment
Mike Morgan was appointed as group finance
director in November 2018.
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
from June 2019 to June 2021 was chair of the
ICAEW Financial Services Faculty Board and
an 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.
Lesley Jones
A
Independent Non-executive Director
R N
RI
Bridget Macaskill
Independent Non-executive Director
RI N
R
Tesula Mohindra
Independent Non-executive Director
A RI
Board Appointment
Lesley Jones joined the board as an
independent non-executive director in
December 2013.
Board Appointment
Bridget Macaskill joined the board as an
independent non-executive director in
November 2013.
Board Appointment
Tesula Mohindra joined the board as an
independent non-executive director on
15 July 2021.
Background and Experience
Lesley is chair of Sainsbury’s Bank and a
non-executive director of Moody’s Investors
Service Limited and Moneysupermarket.com
Group PLC. 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 was
previously a non-executive director of N Brown
Group plc, ReAssure Group plc (where she also
chaired the Risk Committee) and Northern
Bank Limited.
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.
Background and Experience
Tesula is an independent non-executive director
of NHBC (National House Building Council) and
a trustee of Variety, the Children’s Charity. She
qualified as a chartered accountant with
PricewaterhouseCoopers, and held managing
director roles at JP Morgan and at UBS,
specialising in corporate finance for financial
institutions and pension fund risk management.
She was also a founding member of the
management team of Paternoster, the specialist
bulk annuity insurer, where she was a member
of the Executive Committee. Since then she has
worked as an independent financial consultant
on business plans and capital raising.
Close Brothers Group plc Annual Report 2021 69
Mark Pain
Senior Independent Director
RI R N
Patricia Halliday
Independent Non-executive Director
A RI
Board Appointment
Mark Pain joined the board as an independent
non-executive director and senior independent
director on 1 January 2021.
Board Appointment
Patricia Halliday joined the board as an
independent non-executive director on
1 August 2021.
Background and Experience
Mark is currently a non-executive director of AXA
UK plc, where he serves on the Audit, Investment,
Remuneration & Nomination, and Risk
Committees. He is chairman of London Square
Limited and Empiric Student Property plc (where
he is also chair of the Nominations Committee and
a member of the Remuneration Committee). He
has extensive finance, risk management and
commercial experience, having held board
positions at Barratt Developments plc and Abbey
National Group. Mark has previously been a
non-executive director of Yorkshire Building Society
(where he served as senior independent director),
Ladbrokes Coral Group plc, Punch Taverns plc,
Spirit Pub Company plc, Johnston Press plc, and
Aviva Insurance Limited, among others.
Background and Experience
Patricia has over 30 years’ experience in risk
management across the investment, corporate
and retail banking sectors. Patricia was chief risk
officer (“CRO”) of Santander UK with
responsibility for risk management and oversight
across retail and commercial banking. Prior to
Santander, Patricia was CRO of GE Capital
International Holdings Limited. She began her
career at NatWest, followed by senior credit risk
roles at Barclays Capital and then Deutsche
Bank, including as Head of Leveraged and
Structured Finance and Commercial Real Estate,
and Chair of the Underwriting Committee,
covering the UK, European and US markets.
Oliver Corbett
Independent Non-executive Director
RI N
A
Board Appointment
Oliver Corbett joined the board as an independent
non-executive director in June 2014.
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.
Sally Williams
A RI
Independent Non-executive Director
Peter Duffy
Independent Non-executive Director
RI R
Board Appointment
Sally Williams joined the board as an independent
non-executive director in January 2020.
Board Appointment
Peter Duffy joined the board as an independent
non-executive director on 1 January 2019.
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 and 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.
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.
A
RI
R
N
Audit Committee member
Risk Committee member
Remuneration Committee member
Nomination and Governance Committee
member
Committee chair
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
70
Executive Committee
Adrian Sainsbury
Chief Executive
Rebekah Etherington
Group Head of Human Resources
Mike Morgan
Group Finance Director
Philip Yarrow
Winterflood Chief Executive
Angela Yotov
Group General Counsel
Martin Andrew
Asset Management Chief Executive
Robert Sack
Group Chief Risk Officer
Martyn Atkinson
Group Chief Operating Officer
Rebecca McNeil
Chief Executive Officer Retail
Frank Pennal
Chief Executive Officer Property
Neil Davies
Chief Executive Officer Commercial
Close Brothers Group plc Annual Report 2021 71
Directors’ Report
The directors of Close Brothers Group plc (the “company”) present
their report for the year ended 31 July 2021.
The Strategic Report set out on pages 1 to 67 of this Annual Report,
and the Corporate Governance Report, the committee reports and
the Directors’ Remuneration Report set out on pages 97 to 125 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 195 of this Annual Report.
Results and Dividends
The consolidated results for the year are shown on page 134 of the
financial statements. The directors recommend a final dividend for
the year of 42p (2020: 40p) on each ordinary share which, together
with the interim dividend of 18p (2020: nil) paid in April 2021, makes
an ordinary distribution for the year of 60p (2020: 40p) per share. The
final dividend, if approved by shareholders at the 2021 Annual General
Meeting (“AGM”), will be paid on 23 November 2021 to shareholders
on the register at 15 October 2021. Further information on the final
dividend recommended by the directors can be found on page 43 of
this Annual Report.
subsidiary, Close Brothers Limited. More information on the recruitment
processes that resulted in the appointments of Mark, Tesula and
Patricia can be found in the Report of the Nomination and Governance
Committee on page 94 and 95 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 97 to 125 of this Annual Report.
Directors’ interests
The directors’ interests in the share capital of the company at 31 July
and 20 September 2021 are set out on pages 123 and 125 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 84 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 68 and 69 of this
Annual Report. All the directors listed on those pages were directors of
the company throughout the year, apart from Adrian Sainsbury, Mark
Pain, Tesula Mohindra and Patricia Halliday, who were appointed as
directors on 21 September 2020, 1 January 2021, 15 July 2021 and
1 August 2021, respectively. In addition, each of Preben Prebensen
and Geoffrey Howe served as directors for part of the year, stepping
down from the board on 21 September 2020 and 19 November 2020,
respectively.
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.
In accordance with the UK Corporate Governance Code, each of the
current directors will retire at the 2021 AGM and offer themselves for
reappointment at that meeting.
Company Secretary
The company secretary of Close Brothers Group plc is Alex Dunn. He
can be contacted at the company’s registered office.
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 company’s 2020 Annual Report.
Following the announcement of Preben Prebensen’s planned
departure on 24 September 2019, 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.
As announced by the company on 22 September 2020, Geoffrey
Howe did not submit himself for reappointment at the company’s 2020
AGM, having informed the board of his decision to step down following
nine years’ service on the board.
During the year, the company announced the following appointments
to the board, after formal and rigorous search processes overseen by
the Nomination and Governance Committee:
• On 31 December 2020, the company announced that the board
had decided to appoint Mark Pain as an independent non-executive
director with effect from 1 January 2021. Mark is a member of
the board’s Nomination and Governance, Remuneration and Risk
Committees and is also the company’s senior independent director.
• On 9 July 2021, the company announced that Tesula Mohindra
would join the board as an independent non-executive director with
effect from 15 July 2021. Tesula is a member of the Audit and Risk
Committees.
• On 23 July 2021, the company announced the appointment of
Patricia Halliday as an independent non-executive director with
effect from 1 August 2021. Patricia is a member of the Audit and
Risk Committees.
Like each of the company’s other independent non-executive directors,
Mark, Tesula and Patricia are also directors of the group’s Banking
Share Capital
The company’s share capital comprises one class of ordinary share
with a nominal value of 25p per share. At 31 July 2021, 152,060,290
ordinary shares were in issue, of which 1,260,614 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 2020 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 £12,610,667;
• allot shares up to an aggregate nominal amount of £25,221,334 for
the purposes of a rights issue;
• allot shares having a nominal amount not exceeding in aggregate
£1,891,600 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
£1,891,600, 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
£4,729,000 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
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 72
Directors’ Report continued
• make market purchases of up to 15,132,800 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 2020 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 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).
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.
During the year the company made market purchases of 735,545
Treasury Shares with an aggregate nominal value of £183,886.25,
representing 0.48% of its issued share capital, for an aggregate
consideration of £8.34 million. It transferred 208,756 shares out of treasury,
to satisfy share option awards, for a total consideration of £2.5 million.
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 pages
173 and 174 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 18 November
2021 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”).
At 31 July 2021, the company held 1,260,614 Treasury Shares with a
nominal value of £0.32 million. The maximum number of Treasury
Shares held at any time during the year was 1,466,518 with a nominal
value of £0.37 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 173 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
345,941 ordinary shares.
Substantial Shareholdings
Details of substantial shareholdings in the company are set out in the
Corporate Governance Report on page 87 of this Annual Report.
Articles of Association
The company’s articles of association may only be amended by a
special resolution of the company’s shareholders. They were last
amended in November 2020, following shareholder approval at the 2020
AGM. The articles of association can be viewed at www.closebrothers.
com/investor-relations/investor-information/corporate-governance.
Further details of the changes made to the articles of association in
2020 can be found in the 2020 Notice of AGM.
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 71 to 125 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 67 of this
Annual Report.
Business activities
The group’s business activities, together with a description of future
developments (including the factors likely to affect future development
and performance) and its summarised financial position, are set out in
the Strategic Report.
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.
Employment practices
Information on the company’s employment practices, including with
respect to disabled employees and its approach to investing in and
Close Brothers Group plc Annual Report 2021 73
rewarding its workforce, is set out in the Sustainability Report on pages
24 to 34 of the Strategic Report.
Greenhouse gas emissions
Information on the group’s greenhouse gas emissions, energy
consumption and energy efficiency action, as well as the approach the
company is taking to ensuring it manages this risk through its
governance processes and internal control arrangements is set out in
the Sustainability Report on pages 24 to 34 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. Information about actions taken by
the company to introduce, maintain or develop arrangements aimed at
providing employees systematically with information on matters of
concern to them as employees, regularly consult employees or their
representatives to take account of their views in decision-making,
encourage employee involvement in the company’s performance and
achieve awareness among employees of factors affecting the
performance of the company can also be found in the Corporate
Governance Report. Further details can be found on pages 36 to 41 of
the Strategic Report and also on pages 87 and 88 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. Further details can be
found on pages 36 to 41 of the Strategic Report and also on page 87
of the Corporate Governance 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 26 to 27 of the Strategic Report. More information on
diversity at board level and the board’s oversight of diversity and
inclusion initiatives can be found on pages 79 and 80 of the Corporate
Governance Report and in the Report of the Nomination and
Governance Committee on page 95 of this Annual Report.
Significant Agreements Affected by a Change of Control
A change of control of the company, following a takeover bid, may
cause a number of agreements to which the company is a party to
take effect, alter or terminate. These include certain insurance policies,
bank facility agreements and employee share plans.
The group had committed facilities totalling £1.6 billion at 31 July 2021
which contain clauses requiring lender consent for any change of
control. Should consent not be given, a change of control would trigger
mandatory repayment of those facilities.
All of the company’s employee share plans contain provisions relating
to a change of control. Outstanding awards and options may vest and
become exercisable on a change of control, subject, where applicable,
to the satisfaction of any performance conditions at that time and
pro-rating of awards.
Financial Instruments
Details of the group’s financial instruments can be found in notes 10 to
14, 17 to 20 and 28 to the financial statements. The notes begin on
page 141.
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 56 to 67 and the risks associated
with the group’s financial instruments are analysed in note 28 on pages
176 to 189 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 (2020: £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 72
There are no other matters which the Company is required to report
under Listing Rule 9.8.4R.
Research and Development Activities
During the normal course of business, the group continues to invest in
new technology and systems and to develop new products and services
to improve operating efficiency and strengthen its customer proposition.
Resolutions at the 2021 AGM
The company’s AGM will be held on 18 November 2021. Resolutions to
be proposed at the AGM include the reappointment of directors, the
approval of changes to 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,
and authority for the company to purchase its own shares.
The full text of each of the resolutions to be proposed at the 2021
AGM will be set out in the Notice of AGM sent to the company’s
shareholders. A letter from the chairman and explanatory notes will
accompany the Notice of AGM.
Auditor
PricewaterhouseCoopers LLP (“PwC”) has expressed its willingness to
continue in office as the company’s external auditor. Resolutions to
reappoint PwC and to give the directors the authority to determine the
auditor’s 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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 74
Directors’ Report continued
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, aiding
profitability to return to pre-Covid-19 levels in the year. The group
remains well positioned in each of its core businesses, and is strongly
capitalised, soundly funded and has high levels of liquidity.
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 included a central scenario, an upside scenario and a plausible
downside scenario.
The board considers three years to be an appropriate period for the
assessment to be made. A period of three years has been chosen
given the group’s proven and resilient business model, prudent
maturity profile and because it is the period covered by the group’s well
embedded strategic planning cycle. 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 assesses capital
requirements; and (iii) the Internal Liquidity Adequacy Assessment
Process (“ILAAP”), which identifies liquidity requirements.
In making its assessment, the board has identified and assessed
the principal and emerging risks facing the group and these are
highlighted on pages 60 to 67. The group’s approach to monitoring
and managing principal risks faced by the group’s business, including
financial, business, market and operational risks, have remained
consistent given the group’s activities, business model and strategy are
unchanged.
The scenarios modelled are based on a range of economic
assumptions, with consideration given to the ongoing 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.
Further details of these scenarios are set out in the Viability Statement.
Under all 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 liquidity comfortably in excess of regulatory
requirements.
For each of the divisions, the directors have also considered the
impact of the central, upside and downside scenarios on financial
performance. For Banking these include expected customer demand
that underpins loan book growth, material reduction in 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 all the divisions, the impact of the selected downside scenario
demonstrated the resilience of our business model.
The group acknowledges that the risk landscape is constantly
evolving and as such continually reviews its principal and emerging
risks. As part of this review, risks are assessed with robust oversight
exercised at both a local business unit and group level through risk
and compliance committees and the board. The group’s strong risk
assessment framework provides a solid foundation to assess going
concern throughout the organisation on a regular and consistent basis.
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 they have a reasonable
expectation that the company and the group, as a whole, have adequate
resources to continue as a going concern for a period of at least 12
months from the date of approval of the financial statements.
Accordingly, they continue to adopt the going concern basis in
preparing the Annual Report.
The group utilises an established risk management framework to
monitor its portfolio of emerging risks incorporating the group’s
“bottom up” and “top down” approach. These are monitored by the
local and group risk and compliance committees with agreed actions
regularly tracked. Key emerging risks include:
• economic uncertainty arising from the Covid-19 pandemic, with
ongoing uncertainty regarding the future economic trajectory;
• financial loss resulting from climate change, ensuring the group
is able to address the financial risks arising from the physical and
transitional impacts of climate change;
• evolving working practices, ensuring extensive risk assessments
over hybrid working patterns; and
• legal and regulatory changes as a result of the continued
implementation of existing EU legislation into UK law, in addition to
governmental and regulatory changes in response to Covid-19.
The group will continue to monitor and assess these risks, 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 and monitored risk appetites. The
group’s business model, supported by a solid track record and
sustained profitability, has worked well through a range of economic,
social and environmental conditions over multiple economic cycles
and this is projected to continue over the medium to long term.
Given the diversified portfolio of the businesses across the group, the
board considers longer-term economic, social, environmental and
technological trends at the individual business unit level as part of
the strategic planning cycle. This includes focusing on the long-term
strategic approach to protect, grow and sustain our business model,
with key priorities outlined on page 20.
The board has also assessed the group’s viability by considering
regular forecasting and stress testing undertaken to reflect
uncertainties in the economic environment. A range of forward-looking
scenarios has been considered, with distinct social and economic
assumptions encompassing both the severity of a downturn and
the timing of any assumed recovery from the impact of Covid-19.
Differing macroeconomic assumptions have been assessed across
the scenarios including GDP growth, unemployment, residential
house prices and equity prices. 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.
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 their liabilities, as they fall due,
for the three-year period up to 31 July 2024.
These scenarios have been built using the same principles as those in
the going concern assessment, extended out over the three-year period:
• the central scenario presents our base case assuming a strong
recovery, with lockdown restrictions lifted and normal working
conditions allowed to resume, supporting GDP growth and falling
unemployment rates;
Close Brothers Group plc Annual Report 2021 75
• the downside scenario assumes weaker than expected economic
recovery with continued Covid-19 local lockdowns, impairment
losses front-loaded due to rising unemployment rates coupled with
lower income in market-facing businesses as equity prices and
market levels decline; and
• the upside scenario illustrates a very strong UK rebound designed
to test the group’s capital and liquidity resources with strong GDP
growth, declining unemployment rates and recovery in market levels.
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). Additionally, the Financial Conduct Authority’s
Disclosure Guidance and Transparency Rules require the directors to
prepare the group financial statements in accordance with international
financial reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union.
The group maintains capital ratios significantly above regulatory
minima, which are currently set at a minimum common equity tier 1
ratio of 7.6% and a minimum total capital ratio of 11.5%, excluding
any applicable Prudential Regulation Authority (“PRA”) buffer. In all
scenarios, the company and group continue to operate with sufficient
levels of capital, with the group’s capital ratios comfortably in excess of
regulatory requirements and funding and liquidity positions well within
appetite.
Across the divisions, the financial impact of each scenario
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 a 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 board’s risk appetite and robust assessment of the principal and
emerging risks, which could impact the performance of the group,
and how these are managed – please see the Risk Report on pages
56 to 67;
• the group’s current financial position and prospects – please see the
Financial Overview on pages 42 to 45; and
• the group’s business model and strategy – please see Business
Model on pages 12 to 13, and Strategy and Key Performance
Indicators on pages 20 to 21.
The directors have also considered the results from the most recent
version of the following reviews, which were conducted during the
Covid-19 pandemic:
• the annual review of the Recovery Plan which included employing a
number of scenarios to test our recovery plan, our wide range of risk
indicators and the various recovery options available to the group;
• the 2020 ICAAP, which included both stress testing and scenario
analysis. At a group level, one severe stress test scenario was
assessed representing a protracted downside scenario. This 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. As part of the
ICAAP, reverse stress testing was also employed to support the
identification of potential adverse circumstances and events; and
• the 2020 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.
This forward-looking viability statement made by the board is based
on information and knowledge of the group at 28 September 2021.
Unexpected risks and uncertainties may arise from future events or
conditions, such as economic changes and business conditions,
which are beyond the group’s control and could cause the group’s
actual performance and results to differ from those anticipated.
Directors’ Responsibility Statement
The directors, whose names and functions are listed on pages 68 and
69, 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 accounting
standards in conformity with the requirements of the Companies
Act 2006 and the company financial statements in accordance with
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 company and of the profit
or loss of the group and company for that period. In preparing the
financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• state whether applicable international accounting standards in
conformity with the requirements of the Companies Act 2006 and
international financial reporting standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in 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 company
financial statements (together the ‘relevant financial reporting
frameworks’), subject to any material departures disclosed and
explained in the group and company financial statements;
• make judgements and accounting estimates that are reasonable
and prudent; and
• prepare the group and company financial statements on the going
concern basis unless it is inappropriate to presume that the group
and the company will continue in business.
The directors are responsible for safeguarding the assets of the group
and company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The directors are also responsible for keeping adequate accounting
records that are sufficient to show and explain the group’s and
company’s transactions and disclose with reasonable accuracy at
any time the financial position of the group and company and enable
them to ensure that the financial statements and the Directors’
Remuneration Report comply with the Companies Act 2006.
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 company financial statements, which have been
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 company respectively;
• the Strategic Report, together with the Directors’ Report and
the Corporate Governance Report, includes a fair review of the
development and performance of the business and the position of
the group and 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’s and company’s
position and performance, business model and strategy.
By order of the board
Alex Dunn
Company Secretary
28 September 2021
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
76
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 2021. The following
pages explain 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
Commitment to high standards of corporate governance
At Close Brothers we firmly believe in the important role that high
standards of corporate governance and effective board oversight play
in supporting the group’s performance, the delivery of its strategy and
achieving long-term sustainable success for the company’s
shareholders and other stakeholders. The board is committed to
maintaining a robust and effective governance, control and risk
management framework and I have been pleased once again this year
to see the benefits of that framework.
This has been another year impacted by the pandemic and whilst
opportunities to meet in person have been limited, our focus on robust
corporate governance practices has enabled the board to continue to
ensure effective oversight of the group’s activities, together with challenge
and support for senior management. Throughout the last year, stakeholder
considerations relating to the pandemic have been central to the board’s
agenda with significant time spent monitoring the impact on the group’s
customers, clients, partners and employees. Further information on the
operation of the board during the pandemic is set out later in this report.
Strategy, purpose and culture
The board plays an important role in setting the group’s strategy,
purpose, business model and culture, and the board spends time on
each of these areas throughout the year. Among other things this year,
the board considered and approved the evolution of the group’s
strategic objectives following the appointment of Adrian Sainsbury as
chief executive. In these discussions, the board was keen to ensure
consistency with the existing model and strategy whilst reflecting the
need for evolution as the group matures and the external environment
changes. Each of the directors recognises the role we have to play in
setting the tone from the top and in monitoring how the group’s culture
and values are communicated and embedded. We also acknowledge
the crucial link between culture, governance and leadership, and the
role that decision-making plays as a key driver of culture. Once again
this year, in my own engagement with employees, I have been pleased
to see the group’s strong and distinctive culture in action, as shown by
the continuing commitment on the part of our employees to support
customers, clients and partners during the pandemic.
Changes to the board
Since the start of the financial year under review, the board has been
refreshed with the appointment of Adrian Sainsbury, who succeeded
Preben Prebensen as chief executive on 21 September 2020, and the
appointments of Mark Pain, Tesula Mohindra and Patricia Halliday, who
became independent non-executive directors on 1 January 2021,
15 July 2021 and 1 August 2021, respectively. Information on Adrian’s
appointment was set out in last year’s Annual Report. More detail on the
robust and formal search processes led by the Nomination and
Governance Committee that culminated in the appointments of Mark,
Tesula and Patricia can be found on pages 94 and 95. The appointment
of three new non-executive directors has further strengthened the range
of skills, backgrounds and experience on the board and forms part of
our orderly and proactive approach to succession planning. The board
continues to be diverse, with directors from a range of backgrounds, and
I am pleased that we comply with the recommendations of the
Hampton-Alexander and Parker Reviews in terms of the composition of
the board.
On 21 September 2020, Preben Prebensen stepped down after 10
years as chief executive and a member of the board. Geoffrey Howe
did not submit himself for reappointment at the company’s 2020 AGM,
having informed the board of his decision to step down after more than
nine years’ service. Once again, I would like to thank Preben and
Geoffrey for their contribution to the group over many years.
Board effectiveness
This year, in line with the UK Corporate Governance Code, the board
appointed an external evaluator to review its effectiveness and
performance. The review concluded that the board remains strong and
Close Brothers Group plc Annual Report 2021 77
effective, and that it has responded well to the challenges arising from
the pandemic. The evaluation also acknowledged that the board has
addressed each of the recommendations made in the previous external
evaluation in 2018. The board welcomes the findings and we will work to
consider opportunities for incremental improvements during the year
ahead. Further detail on the evaluation can be found on page 86.
Stakeholder engagement
Stakeholder engagement remains 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. These discussions included consideration of
stakeholders and their interests, as well as risks arising from the wider
regulatory, economic and political environment. As part of the board’s
regular meetings and in sessions specifically focusing on strategy, the
directors have spent considerable time assessing and having regard to
the impact of individual decisions and the group’s operations on different
stakeholder groups. This has included extensive discussion of points
arising from engagement with shareholders, customers, employees,
regulators and other groups. 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 36 to 41.
Sustainability and ESG
In the 2021 financial year, the board and its committees spent time on
a broad range of sustainability considerations, including as part of
strategy discussions and regular environmental, social and governance
(“ESG”) updates. I have been pleased to discuss the board’s approach
in this area as part of my regular meetings with shareholders. The
board and the Nomination and Governance Committee have
continued to monitor diversity and inclusion, both as part of ongoing
board succession planning and in relation to activities aimed at
developing a diverse and inclusive talent pipeline below board level.
Further information on the board’s approach to diversity and inclusion
can be found on page 79. As part of wider sustainability discussions,
the board has continued to focus on external and internal
developments in relation to climate change. This has included
discussion of the group’s climate strategy and goals, together with
oversight of progress towards disclosure requirements relating to the
Task Force on Climate-related Financial Disclosures (“TCFD”).
Executive remuneration
Executive remuneration remains an important topic, and I was pleased
that our Directors’ Remuneration Policy received the strong support of
shareholders at last year’s AGM. As a result of the implementation of
the new CRD V directive, the Remuneration Committee has spent a
large portion of its time reviewing our current policy and engaging with
shareholders on proposed changes to reflect new regulatory
requirements. The revised policy will be submitted to shareholders for
approval at the forthcoming AGM. More detail on the proposed
changes to the policy can be found as part of the Directors’
Remuneration Report on pages 97 to 125.
Engagement with shareholders
Engagement and dialogue with shareholders continue to be a key
focus for the board and I have been pleased to meet virtually 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. Unfortunately, last year we were required to hold a “closed
AGM” due to Covid regulations. We provided alternative means for
shareholders to engage with the board, including via written questions
and a video presentation by our chief executive, Adrian Sainsbury, and
I hope these were useful. This year, the board hopes to be able to
return to a more typical AGM and, following the approval of new
articles of association by shareholders at last year’s AGM, it currently
intends to hold a “hybrid” meeting that enables shareholders to attend
and participate in the business of the meeting either in person or
online. Further details will be set out in the Notice of AGM sent to
shareholders in due course but we hope that this new form of meeting
will allow more shareholders to participate and discuss the
performance of the group with the board.
On behalf of the board, I would like to thank shareholders for their
continued engagement and support. My fellow directors and I look
forward to continued engagement with you in the year ahead, including
at the AGM.
Michael N. Biggs
Chairman
28 September 2021
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 applied
the principles and complied with the provisions set out in the Code,
with the exception of the two items noted below.
As explained in the 2020 Annual Report, the pension contribution rate
of the former chief executive, Preben Prebensen, was higher than 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. Preben served as chief executive for a
small part of the 2021 financial year before stepping down on
21 September 2020. For this portion of the year in relation to Preben’s
pension, the company was not therefore compliant with provision 38 of
the Code, which requires the pension contribution rates of executive
directors to be aligned with those available to the workforce. The
pension contribution rate of the group’s current chief executive, Adrian
Sainsbury, is (like that of the group finance director, Mike Morgan)
aligned with the general employee population, and the group is
therefore now fully compliant with provision 38 and has been since
21 September 2020.
During the 2021 financial year, an administrative error resulted in the
inadvertent exercise of a vested 2017 LTIP award held by Preben
Prebensen prior to the expiry of the applicable post-vesting holding
period. This inadvertent exercise was not compliant with provision 36
of the Code, which requires a total vesting and holding period for such
awards of five years or more. Further information can be found on
page 124 of the Directors’ Remuneration Report, including steps taken
by the company and Preben following identification of the error to put
alternative arrangements in place to largely replicate the overall vesting
and holding schedule applicable to the LTIP award in question.
More information on the executive directors’ remuneration can be
found in the Directors’ Remuneration Report that follows later in this
Annual Report. Further detail and examples as to how the company
has applied and complied with the Code are set out in the remainder of
this Corporate Governance Report and in other sections of the Annual
Report noted in the table overleaf.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
78
Corporate Governance Report continued
Section 1: Board Leadership and Company Purpose
Principle A:
A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable
success of the company, generating value for shareholders and wider society
Principle B:
The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned.
All directors must act with integrity, lead by example and promote the desired culture
Principle C:
The board should ensure that the necessary resources are in place for the company to meet its objectives and measure
performance against them. The board should also establish a framework of prudent and effective controls
Principle D:
In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective
engagement with, and encourage participation from, these parties
Principle E:
The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-
term sustainable success. The workforce should be able to raise any matters of concern
Pages 23, 24 to
34, 38, 68, 69,
79, 81 and 82
Pages 5, 14,
16, 76
and 85
Pages 20, 21,
56 to 59 and 87
Pages 37,
40, 87
and 88
Pages 38, 85
and 86
Section 2: Division of Responsibilities
Principle F:
The chair leads the board and is responsible for its overall effectiveness in directing the company. The chair should demonstrate
objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates
constructive board relations and the effective contribution of all non-executive directors and that directors receive accurate, timely
and clear information
Principle G:
The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive)
directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a
clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business
Principle H:
Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive
challenge, strategic guidance, offer specialist advice and hold management to account
Principle I:
The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and
resources it needs in order to function effectively and efficiently
Pages 82 and
83
Pages 5, 7, 68,
69, 79, 83
and 84
Pages 83
to 84
Page 85
Section 3: Composition, Succession and Evaluation
Principle J:
Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan
should be maintained for board and senior management. Both appointments and succession plans should be based on merit
and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and
personal strengths
Pages 26, 27,
79, 80, 94
and 95
Principle K:
The board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to
the length of service of the board as a whole and membership regularly refreshed
Principle L:
Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve
objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively
Pages 86,
94, 95
and 96
Page 86
Section 4: Audit, Risk and Internal Control
Principle M:
The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of
internal and external audit functions and satisfy itself on the integrity of financial and narrative statements
Principle N:
The board should present a fair, balanced and understandable assessment of the company’s position and prospects
Principle O:
The board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and
extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives
Pages 56 to
59, 92
and 93
Pages 74, 75
and 92
Pages 56 to
59, 89
and 90
Section 5: Remuneration
Principle P:
Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success.
Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the
company’s long-term strategy
Principle Q:
A formal and transparent procedure for developing policy on executive remuneration and determining director and senior
management remuneration should be established. No director should be involved in deciding their own remuneration outcome
Principle R:
Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of
company and individual performance, and wider circumstances
Pages 97
to 125
Pages 97
to 125
Pages 97
to 125
Close Brothers Group plc Annual Report 2021 79
The Board
Leadership of the board
The board’s primary role is to provide effective leadership and
direction for the group as a whole, and to ensure that the company
is appropriately managed, delivers long-term shareholder value and
contributes to wider society. It establishes the group’s purpose and
strategic objectives, and on an ongoing basis monitors management’s
performance against those objectives. 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 67 of this Annual Report.
Another key function 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 section 172 of the Companies Act 2006. The company’s
formal section 172 statement can be found on page 40 of this Annual
Report.
Board size and composition
The board has 11 members: the chairman, two executive directors
and eight 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 Nomination and Governance Committee monitors the
overall size of the board and the balance between its executive and
non-executive membership.
During the 2021 financial year, the board appointed three new non-
executive directors as part of its proactive and orderly approach
to succession planning. One of these was the appointment of a
successor to the long-standing senior independent director who
retired from the board during the year, whilst the remaining two were
incremental appointments which resulted in an increase in the overall
size of the board compared with the prior financial year. The overall size
of the board has grown slightly in recent years as new directors have
been appointed to bring additional and complementary knowledge,
skills and experience, and to ensure continuity of membership and
knowledge as other directors near the end of their terms in the years
ahead. The board considers that the size and structure of the board
remains appropriate given the company’s operations, and the need to
ensure an orderly succession and transition between directors.
The board considers that recent appointments have resulted in a
valuable refreshing of the board, providing new perspectives and
challenge which have further strengthened the board’s effectiveness
and the quality of its deliberations. As the membership of the board
has evolved, it has also taken the opportunity to review and refresh
the membership of its committees. During the year, new members
were added to each of the board’s committees and, following a review
by the Nomination and Governance Committee, other changes were
made to the membership of the Audit and Remuneration Committees.
Further detail can be found on pages 94 and 95.
Details of the individual directors and their biographies are set out on
pages 68 and 69.
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. Following review by the
Nomination and Governance Committee and the board during the
year, a small number of incremental changes were made to the policy.
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, five of the
board’s 11 members are women. At 45%, this means that female
representation currently exceeds the recommendation of the
Hampton-Alexander Review. Five of the company’s nine non-executive
directors are women.
2. Having at least one director of colour
The board acknowledges the importance of cultural and ethnic
diversity and the benefits this can bring. At the date of this report,
the composition of the board is in line with the recommendation of
the Parker Review that a FTSE 250 board should have at least one
director of colour. 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 Heidrick & Struggles and Russell Reynolds, both of which are
signatories to the Voluntary Code.
The board remains committed to seeking to improve further its position
on gender, cultural and ethnic 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 the role.
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 following rigorous
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
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 80
Corporate Governance Report continued
throughout the year. During the year, the Nomination and Governance
Committee received updates in this area, including in relation to the
activities of employee networks 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 26 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 95. 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.
• approval of communications to shareholders;
• changes to the structure, size and composition of the board,
following recommendations from the Nomination and Governance
Committee;
• approval of corporate governance matters, including the evaluation
of the performance of the board and its committees;
• undertaking appropriate engagement to understand the views
of other stakeholders and reviewing stakeholder engagement
mechanisms;
• leading the development, adoption, assessment and monitoring of
the group’s culture framework; and
• approval and oversight of the group’s policy framework and ensuring
that the group’s policies, practices and behaviour are consistent with
the company’s values and support long-term, sustainable success.
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;
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 2020/2021
During the year the board held seven regular scheduled meetings.
In addition, all members of the board at the relevant dates attended
strategy sessions with senior management in December 2020 and
May 2021.
The attendance of directors at scheduled meetings of the board and
the committees of which they were members during the 2021 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. Patricia
Halliday did not join the board until the start of the 2022 financial year.
She was not therefore eligible to attend any meetings in the 2021
financial year and, as such, is not listed in the table.
The board held 19 additional ad hoc meetings in the year to consider
a number of matters, including the group’s response to Covid-19
and proposed board appointments. The Audit Committee held two
Board
Audit Committee
Remuneration Committee
Risk Committee
Nomination and
Governance Committee
Attended
Total
Attended
Total
Attended
Total
Attended
Total
Attended
Total
Executive directors
Adrian Sainsbury1
Mike Morgan
Preben Prebensen2
Non-executive directors
Mike Biggs3
Oliver Corbett4
Peter Duffy5
Lesley Jones
Bridget Macaskill6
Tesula Mohindra7
Mark Pain8
Sally Williams
Geoffrey Howe9
6
7
1
7
7
6
7
7
1
5
7
2
6
7
1
7
7
7
7
7
1
5
7
2
5
5
3
5
2
5
5
3
5
2
3
2
3
5
5
3
1
3
2
3
5
5
3
1
6
6
6
6
4
6
2
6
6
6
6
4
6
2
5
5
5
5
3
2
5
5
5
5
3
2
1 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 all board meetings during the
2021 financial year as a director. However, before becoming a director, he attended all board meetings in the year in his previous role as Banking division managing director.
2 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.
3 Mike Biggs became a member of the Remuneration Committee with effect from 1 March 2021.
4 Oliver Corbett stepped down as a member of the Remuneration Committee with effect from 1 March 2021.
5 Peter Duffy was unable to attend one meeting of the board due to a pre-existing commitment prior to the finalisation of the board’s schedule for 2021. Peter became a member of the
Remuneration Committee on 1 March 2021.
6 Bridget Macaskill stepped down as a member of the Audit Committee with effect from 1 March 2021.
7 Tesula Mohindra was appointed as an independent non-executive director and a member of the Risk and Audit Committees with effect from 15 July 2021.
8 Mark Pain was appointed as an independent non-executive director and a member of the Nomination and Governance, and Risk Committees with effect from 1 January 2021 and a
member of the Remuneration Committee with effect from 1 March 2021.
9 Geoffrey Howe stepped down as a director at the conclusion of the company’s AGM on 19 November 2020, as announced by the company on 22 September 2020.
Close Brothers Group plc Annual Report 2021 81
additional ad hoc meetings during the year to discuss progress on
the 2020 Annual Report and review the group’s Recovery Plan.
The Nomination and Governance Committee held five additional ad
hoc meetings during the year to discuss, among other things, the
non-executive director recruitment processes, and to consider and
recommend to the board the appointments of Mark Pain, Tesula
Mohindra and Patricia Halliday. The Remuneration Committee held
four additional ad hoc meetings during the year to discuss, among
other things, matters relating to compensation planning and changes
to the Directors’ Remuneration Policy. The Risk Committee held two
additional ad hoc meetings during the year to review, among other
things, the 2020 ICAAP and key changes to the Internal Liquidity
Adequacy Assessment Process. These additional meetings are not
reflected in the table on the previous page. 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. This year, many of these opportunities have
taken place remotely, and include 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.
Operation of the board during the Covid-19 pandemic
The board met regularly via video conference during the Covid-19
pandemic specifically to monitor the development of the pandemic
and its impact on the group and key stakeholders, and to oversee
the group’s response. In addition to scheduled board meetings in
the period (included in the table on page 80), the board held 10 ad
hoc meetings during the financial year to oversee the operation and
performance of the group during the pandemic or to consider other
specific issues relating to Covid-19. During earlier phases of the
pandemic in the previous financial year, the board met weekly at times
but this moderated during the 2021 year.
The board’s focus and agenda evolved during these meetings as
the pandemic and its impact on the group moved into different
phases. Throughout, a key priority for the board 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 meetings were also used to
provide information on senior management’s regular engagement with
regulators and other external stakeholders.
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;
• close monitoring of the group’s liquidity, funding and capital
positions;
• the impact of the pandemic on the group’s model and strategy;
• oversight and discussion of the group’s operational and technology
response to lockdown and, subsequently, planning for 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 and a “hybrid” working model as employees began to
return to the workplace;
• evolving government guidance and regulations relating to
the pandemic, including the impact on field and office-based
employees;
• updates on guidance published by, and on management’s
engagement with, regulators;
• the need to adapt the format of the 2020 AGM in response to
rapidly changing government guidance; 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
chair of the Audit Committee and each of the group finance director
and the group head of internal audit, and the chair of the Risk
Committee and the group chief risk officer.
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, information on the
Banking division’s participation in HM Government’s coronavirus loan
schemes 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 external board and committee
evaluation. The evaluation concluded that the board continued to
perform effectively throughout the pandemic and that it responded well
to the external business challenges arising from Covid-19 as well as to
its effect on employees. Further detail on the evaluation can be found
on page 86.
Further information on the group’s broader response to Covid-19 can
be found in the Strategic Report at the beginning of this Annual Report.
Role of the board in relation to strategy and purpose
The board recognises its responsibility for establishing and monitoring
the strategy and purpose of the group. During the year, a range of
activities enabled the board to focus on these areas. These included
two strategy sessions: the usual session held in May 2021, but also an
additional session in December 2020 which presented a first
opportunity for the board to discuss strategic issues in detail at a
discrete session with the new chief executive, Adrian Sainsbury. These
sessions covered a broad range of strategic issues, including the
group’s three-year strategic plan, matters connected with the
pandemic, shareholder feedback during the year, opportunities for
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 82
Corporate Governance Report continued
individual businesses and people-related issues, including the results of
the recent employee opinion survey and plans in relation to future ways
of working.
In addition, the board considers strategic issues and the group’s model
as part of regular meetings throughout the year. At each scheduled
meeting, group and divisional executives provide updates on
performance against strategic goals and relevant developments in the
wider market, including from a competitor or regulatory perspective.
During the year, the board has held a number of “deep-dive” strategy
sessions, each focused on an individual business. The board aims to
cover each of the group’s businesses at such a session on a rolling
two-year basis.
In the 2021 financial year, the board spent time with management
discussing the introduction of Our Responsibility as a core component of
the group’s model. As part of this, the board considered the group’s
broader responsibility to help address the social, economic and
environmental challenges facing its business, colleagues and customers.
Throughout the year, the board and its committees have discussed the
connection between the group’s responsibility, wider stakeholder
considerations and its long-term positioning, including the link to
attracting and retaining talent at all levels of the group’s operations,
supporting customers, clients and partners, and the group’s continuing
efforts towards reducing its impact on the environment.
In addition, during the year, the board discussed with management
actions to build on the core strengths of the group’s successful and
differentiated business model through the next stage of its
development. Among other things, this resulted in the decision that the
group’s strategic approach would focus on three objectives: to protect,
grow and sustain the group’s business model. Further information on
this and the board’s discussions can be found on page 41.
The Nomination and Governance Committee also discussed the chief
executive’s plans, which took effect in late 2020, to make changes to
the group executive team. These included bringing the leadership of
the Motor Finance and Premium Finance businesses together under
the Retail CEO, Rebecca McNeil, as well as appointing Neil Davies as
Commercial CEO, with responsibility for Asset Finance and Invoice and
Speciality Finance. Rebecca and Neil, along with Frank Pennal,
Property CEO, joined the Executive Committee, with all of the group’s
businesses now represented at this level.
Governance Framework
Board governance structure
The board has delegated responsibility for certain matters to its
committees. The committee structure is shown in the diagram below.
Each committee has written terms of reference which are reviewed
annually. These terms of reference outline each committee’s role and
responsibilities and the extent of the authority delegated by the board.
They are available on the company’s website at www.closebrothers.
com/investor-relations/investor-information/corporate-governance. This
year, each committee’s terms of reference were updated to reflect,
among other things, recent industry guidance, best practice and
changes in applicable legislation. The chair of each committee reports
regularly to the board on matters discussed at committee meetings.
Board Committee Structure
All members of the board have access to the papers of all committees,
and have a standing invitation to attend any committee meeting.
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.
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 schedule of agenda items includes regular “deep-dives” into
particular areas of importance to the board. These include quarterly
updates in relation to customers, IT and culture, and half-yearly
updates on whistleblowing and the portfolio of major investment
programmes across the group. A key feature of these ‘deep-dives’ is
an assessment and consideration of relevant issues relating to key
stakeholder groups, including the outputs from engagement by the
board and senior management.
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 the performance of businesses across the
Banking division, 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;
• approval of the company’s Tier 2 debt issuance;
The Board
Audit
Committee
Remuneration
Committee
Risk
Committee
Nomination
and Governance
Committee
Close Brothers Group plc Annual Report 2021 83
• review and approval of the group’s budget and three-year strategic
plan;
• strategic projects affecting the group and individual businesses,
including the Motor Finance and Asset Finance transformation
programmes, 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;
• review and approval of the submission of the group’s application
to the PRA 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;
• consideration and approval of interim and final dividend proposals;
• oversight of developments relating to the company’s subsidiary,
Novitas including management’s strategic review of the business;
• review and approval of the group’s half-year and full-year results,
together with quarterly trading updates to the market;
• IT and cyber matters, and associated projects;
• the group’s culture and values framework and a quarterly review of the
group’s culture dashboard which sets out information and key metrics
in relation to culture across the group and each of its divisions;
• discussing the results of the group’s biennial employee opinion
survey and follow-up actions proposed by management;
• reviewing the competitive landscape;
• engagement with regulators and regulatory developments during the
year, including 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 external board and committee effectiveness evaluation.
Chairman and chief executive
In line with the UK 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 68. 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 68. 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 70.
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 Oliver
Corbett, Peter Duffy, Patricia Halliday, Lesley Jones, Bridget Macaskill,
Tesula Mohindra, Mark Pain and Sally Williams. Mark, Tesula and
Patricia joined the board on 1 January 2021, 15 July 2021 and
1 August 2021, respectively.
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 Mark Pain. 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 and senior management,
without the chairman present, to appraise the chairman’s performance
and then communicates the results of that appraisal to the chairman.
A description of the responsibilities of the senior independent director,
as approved by the board, can be found on the company’s website at
www.closebrothers.com/investor-relations/investor-information/
corporate-governance.
Non-executive directors’ independence 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.
As part of its consideration of non-executive independence, the board
has given particularly rigorous consideration to the overlapping
directorships held by Lesley Jones and Peter Duffy on the boards of the
company and Moneysupermarket.com Group PLC. It has considered
the nature of those directorships, and the character, behaviour,
contribution and judgement of Lesley and Peter during the year. It has
concluded that both Lesley and Peter continue to demonstrate
independence as evidenced by, among other things, their contribution to
board meetings and their continuing challenge of senior management.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 84
Corporate Governance Report continued
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
board approval before they take on additional commitments.
Lesley Jones was appointed to the board of Sainsbury’s Bank as chair
on 29 January 2021, and joined the board of Moneysupermarket.com
Group PLC on 1 September 2021 as an independent non-executive
director. As required by the Code and in advance of Lesley taking on
each directorship, the board reviewed the proposed role, including the
time commitment and whether it presented any potential conflict of
interest for the group. In each case following that review, the board
was satisfied that neither of the proposed appointments would restrict
Lesley from carrying out her duties and responsibilities as a director of
the company (including as chair of the Risk Committee), and
accordingly it approved the appointments.
During the year, the board also considered the proposed appointment
of Adrian Sainsbury as a director of the financial services trade body,
UK Finance. Among other things, the board considered the nature of
the role and the anticipated time commitment. It was satisfied that the
appointment would not adversely impact Adrian’s role as chief
executive and considered that there were benefits to the group from
Adrian taking up the position. Accordingly, it approved the proposed
appointment, which took effect on 1 February 2021. Adrian’s role with
UK Finance is not remunerated.
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 2020 AGM. Further detail
regarding these authorisations is set out on pages 71 and 72.
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 2021 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 be reappointed by
shareholders at the 2021 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, market, risk and governance 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’ responsibilities and the Senior Managers Regime,
together with a range of relevant current and historical information about
the group and its business. A key aim of the induction is to ensure that
new board members are equipped to contribute to the group and the
work of the board as quickly as possible.
Directors provide input on how their individual inductions should be
tailored both in terms of content and structure. The company secretary
engages regularly with individual directors as their inductions progress,
and, once they have served on the board for a period, seeks their input
on any further induction or development requirements they may have.
The chairman also discusses induction plans, and training and
development more broadly, with new joiners as part of regular
one-to-one meetings.
Tailored induction programmes have been completed or commenced
for the three new non-executive directors who joined the board in the
last year. Relevant activities are continuing for Tesula Mohindra and
Patricia Halliday who only joined the board in July and August 2021,
respectively. These programmes have included, or will include, detailed
meetings and briefings with members of the board and the Executive
Committee, the head of operational risk and compliance, the head of
group internal audit, the chief credit risk officer, the director of investor
relations and corporate development, and the group’s external auditor.
The new directors have also met other senior managers from across
the central and control functions (including risk, finance and IT).
Specific topics covered in these sessions include 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,
they each 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.
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 climate change, regulatory
developments and horizon-scanning, corporate governance changes,
accounting updates, the regulatory Senior Managers Regime, cyber,
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.
Close Brothers Group plc Annual Report 2021 85
Training and development records are maintained by the company
secretary and reviewed annually by the chairman and each individual
director.
Company secretary
The company secretary is responsible for ensuring that board
procedures and applicable rules and regulations are observed. All
directors have direct access to the services and advice of the company
secretary, who also acts as secretary to each of the board committees.
The company secretary provides advice and support to the board,
through the chairman, on all governance matters and on the discharge
of their duties. Directors are able to take independent external
professional advice to assist with the performance of their duties at the
company’s expense.
Conflicts of Interest
The articles of association include provisions giving the directors
authority to approve conflicts of interest and potential conflicts of
interest as permitted under the Companies Act 2006.
Directors are responsible for notifying the chairman and the company
secretary of any actual or potential conflicts as soon as they become
aware of them. A procedure has been established, whereby actual and
potential conflicts of interest are regularly reviewed and appropriate
authorisation sought. This procedure includes mechanisms for the
identification of conflicts prior to the appointment of any new director
or if a new conflict arises during the year. The decision to authorise a
conflict of interest can only be made by non-conflicted directors and in
making such a decision the directors must act in a way they consider,
in good faith, will be most likely to promote the success of the
company. The company secretary maintains a register of conflicts
authorised by the board. The board believes this procedure operated
effectively throughout the year.
Culture and Values
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 establishing, 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.
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;
• 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
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 networks 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 and deliver great customer
outcomes;
• 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 (whether in
person or virtual) and participation in employee meetings;
• 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 monitor
effectively the group’s culture during the year and to ensure that culture
continues to be aligned with the group’s purpose, values and strategy.
In the year, the board and its committees considered the role and
impact of culture as part of individual decisions and its oversight of the
group’s operations. This included discussions in the context of
investment planning, the response of the group and its employees to
ongoing challenges presented by the pandemic and preparations for
the gradual return of employees to the workplace in line with
government guidance. Considerations relating to culture and values
have also formed an important part of the board’s discussions on the
group’s strategy, model and purpose, including in the context of M&A
opportunities considered by the group.
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.
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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 86
Corporate Governance Report continued
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. During the year, in accordance
with the Code, the board appointed an external evaluator to carry out
an independent review of its effectiveness and that of its committees.
The Nomination and Governance Committee considered a short list of
potential external evaluators drawn up by the company secretary and
appointed Margaret Exley CBE of SCT Consultants to undertake the
evaluation. Ms Exley also carried out the previous external evaluation in
2018, and the Committee agreed that, given her existing knowledge of
the board and the group, it would be advantageous for her to carry out
a further review in order to assess the development of the board in the
intervening three years and to review progress against the
recommendations she made in 2018. Ms Exley has a small
shareholding in the company which she acquired prior to her
engagement to carry out the 2021 evaluation, but otherwise neither
Ms Exley nor SCT Consultants has any connections with the company.
The scope and timing of the evaluation were discussed by the Nomination
and Governance Committee, and the chairman and company secretary
then discussed the process to be followed with Ms Exley.
Each of the directors and the company secretary completed a
confidential questionnaire and then held one-to-one interviews with
Ms Exley. In advance of these sessions, Ms Exley was provided with a
wide range of documents and other information in response to a
request list and observed a meeting of the board.
The evaluation focused on a range of different areas relevant to board
effectiveness and corporate governance, including:
• the role and composition of the board;
• strategy;
• oversight of business performance;
• culture, purpose and values;
• management of the work of the board;
• board behaviours;
• the operation of the board during the Covid-19 pandemic;
• the work and contribution of committees;
• stakeholder engagement and wider societal impact; and
• risk management.
Ms Exley presented her report to the board for discussion at its
meeting in July 2021.
The overall conclusion of the evaluation was that the board and its
committees remain strong and effective, with clarity on their role and
purpose. Ms Exley noted the evolution of the board since her previous
evaluation in 2018, and that its membership had been further
strengthened. The evaluation noted that each of the recommendations
raised in 2018 had been addressed and that, as a result, the board’s
practices had improved in a number of areas. Ms Exley observed that
the board has responded well to the pandemic, with strong oversight
of the resulting external business challenges and the impact of Covid
on employees and other stakeholder groups.
In terms of the operation of the board, the evaluation found that the
board is chaired well, demonstrating rigour and focus in its work, whilst
creating an atmosphere of inclusivity and openness, combined with
constructive challenge, which allows for diversity of opinion. Ms Exley
found that board processes, including agenda management and
follow-up actions, are very effective.
As regards the activity of the board, the evaluation concluded that the
board has sustained high levels of performance in terms of its oversight
of the business, strategy development and stakeholder engagement.
Among other things, Ms Exley highlighted the board’s strong focus in
relation to culture and risk management.
The evaluation concluded that the board’s committees are chaired very
effectively and demonstrate deep professionalism in the way their work is
managed. The report noted, in particular, actions taken since 2018 to
streamline the membership of certain committees, which has enabled
more focus and a better division of workload between directors.
The board welcomes the positive conclusions of the evaluation and will
focus during the next financial year on the recommendations made by
Ms Exley in a small number of areas, with the aim of further improving
the effectiveness of the board and its committees in the years ahead.
The recommendations made in this year’s evaluation include: further
enhancing the richness of customer-related data presented to the
board about individual businesses; in addition to the existing strong
work of the Nomination and Governance, and Remuneration
Committees, including an annual review of the group’s talent
management strategy as part of the full board’s agenda; continuing to
inform and educate directors in relation to cyber risk, digitisation and
the changing economic and financial context within which the group
operates, as part of its ongoing training and development programme;
and following changes to board committee membership, continuing to
ensure that where committees do not have all non-executive directors
sitting on them, a full report is provided to the full board on relevant
discussion points and decisions.
The board also considers that improvements have been made in the
areas identified for improvement in the internal evaluations undertaken
in the previous two years, including in relation to the further streamlining
of board and committee papers, the provision of additional training and
development sessions in particular areas and in continuing to capture
positive learnings from the operation of the board during the pandemic.
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, 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, group finance director and other members of
senior management. The senior independent director subsequently
provides feedback to the chairman.
Directors’ fitness and propriety
In line with its regulatory obligations, the group undertakes annual
reviews of the fitness and propriety of all those in senior manager
functions, including all of the company’s directors and a number of
other senior executives. This process comprises assessments of
individuals’ honesty, integrity and reputation; financial soundness;
competence and capability; and continuing professional development.
This year’s reviews have confirmed the fitness and propriety of all of the
company’s directors and other senior executives who perform senior
manager functions. Consideration of matters relating to fitness and
propriety also form an important part of the board’s recruitment
process for non-executive directors.
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 56 to 67 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 89.
Close Brothers Group plc Annual Report 2021 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
91 to 93 of this Annual Report. Further information on financial control
matters can also be found in the Risk Report on page 58.
Substantial Shareholdings
The table below sets out details of the interests in voting rights notified
to the company under the provisions of the FCA’s Disclosure Guidance
and Transparency Rules. Information provided by the company
pursuant to the Disclosure Guidance and Transparency Rules is
publicly available via the regulatory information services and on the
company’s website.
Standard Life Aberdeen plc
M&G plc
Aviva plc and its subsidiaries
Royal London Asset Management
20 September 2021
Voting rights
31 July 2021
Voting rights
13.64% 13.64%
5.73%
4.99%
4.99%
5.73%
4.99%
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, partners, 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
section 172 statement, can be found in the Strategic Report on pages
36 to 41.
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 36 to 41.
During the year, as part of the group’s responsibility to wider society,
the board discussed the group’s charitable efforts and community
activities, including donations of £100,000 each to two charities facing
challenges in the wake of Covid-19: the children’s literacy charity,
Bookmark; and the foodbank charity, The Trussell Trust. Both charities
make a material difference to children’s and families’ lives throughout
the UK, and these donations were made in support of the vital role
they play in helping some of the most vulnerable in our communities.
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
87
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 lockdowns during the Covid-19 pandemic and planning for
the return of employees to the workplace following the lifting of
restrictions in line with government guidance. In addition, engagement
with, and consideration of the interests of, employees continues to
form a significant part of the board’s oversight of major transformation
programmes across the group.
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 2021
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 fully 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.
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. Throughout the year, both as part of its
oversight of business performance and developments, and in the
context of strategic discussions, individual board members have
provided insight from their own engagement with employees across
the group. This insight makes a meaningful contribution to the board’s
discussions and decision-making. By way of example, the
Remuneration Committee has considered points arising from the
employee opinion survey undertaken in the year in its discussions in
relation to compensation, and members of the Nomination and
Governance Committee have discussed their own observations from
employee engagement activity as part of the committee’s oversight of
diversity and inclusion initiatives around the group.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 88
Corporate Governance Report continued
In addition, the board spent time in the year considering employee-related
actions and proposals in response to the pandemic. These discussions
were informed by the results of different employee engagement activities
and included extensive consideration of the group’s plans for future ways
of working in light of the pandemic and other trends.
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. During the year, the Remuneration Committee has considered
data showing the participation of employees in the schemes and
discussed steps to further improve participation levels.
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 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 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 meets with major institutional
shareholders to discuss matters such as strategy, corporate
governance and succession planning. Feedback on these meetings is
provided to the board during the course of the year. Separately, the
senior independent director is available to meet with shareholders.
The 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 shareholders to engage directly with the board. Unfortunately, in 2020
government restrictions during the pandemic meant that it was not
possible for shareholders to attend the AGM other than those forming
the minimum quorum which was facilitated by the company. At all times
in relation to the 2020 AGM, the board’s priority was to protect the
wellbeing of employees, shareholders and the wider community. The
board was mindful of the value that shareholders place on hearing
presentations from the board on the group’s performance and strategy.
Accordingly, a video presentation from the chief executive was made
available ahead of the meeting and shareholders were encouraged to
submit questions about the business of the meeting to the company
secretary. Each of the questions submitted received an individual
response. In normal circumstances, all members of the board would
typically attend the AGM; however in 2020 only the chairman attended,
in line with government guidance. Shareholders were strongly
encouraged to cast their votes on the AGM resolutions by proxy and it
was pleasing to note that shareholders representing nearly 80% of the
share register voted in this way.
The board hopes that the company will be able to return to a more
typical AGM this year. The AGM is scheduled to take place on
18 November 2021. Following shareholder approval to amend the
company’s articles of association at the 2020 AGM, the company
currently intends to hold a “hybrid” meeting that enables shareholders to
attend and participate in the business of the meeting either in person or
online. Further details will be set out in the Notice of AGM sent to
shareholders in due course but the company believes that this new form
of meeting will allow more shareholders to join the meeting and discuss
the performance of the group with the board. The board acknowledges
the importance of shareholders receiving presentations from the board at
the meeting and being able to ask questions on the business of the
AGM and the performance of the group. The company will provide a
means for them to ask questions of the directors.
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 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.
By order of the board
Alex Dunn
Company Secretary
28 September 2021
Periodically, the group runs seminars covering different aspects of its
business to provide additional detail to investors and analysts. In June
2021, the group hosted a group-wide online event for investors and
analysts, in which the chief executive provided further details on the
group’s strategy and other members of the executive team presented
on their businesses and how they are delivering the group’s strategy.
The session involved extensive Q&A with attendees, covering a wide
range of areas. 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).
Close Brothers Group plc Annual Report 2021 Risk Committee Report
89
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.
Chair’s Overview
Looking back over the last 12 months, I am pleased with the way in
which the group has been able to manage risk effectively as we continue
to operate in this Covid environment. Notwithstanding all of the
challenges associated with the pandemic, including home working and a
heightened regulatory focus on customer outcomes which we have
delivered upon, we have continued to progress against the broader
regulatory agenda, in particular with regard to climate risk, conduct risk,
operational resilience, cyber risk and outsourcing/third party risk.
During the year, we have leveraged our pre-prepared and business-
tailored playbooks to good effect to support both risk management and
business delivery in line with strategy. These playbooks continue to be
refined and remain a key component of our risk management framework.
In common with other firms, we have matured in our approach to
remote working as a steady state and have updated our control
frameworks in response to the associated change in risk profile that
this presents. The investment made over recent years to enhance our
risk management systems and risk reporting infrastructure has
continued to serve us well in this environment.
The Committee and the group board have continued to receive regular
and timely updates on our operations, liquidity and balance sheet,
supporting the ability of the directors to address the challenges
presented by the pandemic. These include issues associated with
elevated levels of forbearance, most notably ensuring positive
customer outcomes and adhering to our conduct risk responsibilities.
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 and compliance function on the
processes that support the management and mitigation of those risks.
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 60 to 67.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 90
Risk Committee Report continued
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, eight meetings were held during the year (six
scheduled and two ad hoc). Full details of attendance by the non-
executive directors at scheduled meetings are set out on page 80.
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.
We have also continued to review the risks presented by climate
change and have received various updates throughout the year on the
group’s progress in developing a regulatorily-compliant climate risk
framework. This remains an area of heightened focus, both within the
group and across the industry more broadly, and we continue to track
emerging best practice ahead of our planned alignment with TCFD
recommendations in 2022.
Ensuring that we are fully compliant with the numerous and ever-
changing regulatory requirements for financial services firms remains
challenging. We engage actively with regulators and industry bodies to
ensure that our compliance framework remains appropriate and
relevant for all of our businesses.
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.
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
have increased their reach. Over the course of the last year we have
continued to evolve our conduct risk reporting framework with regular
updates provided to the Committee.
Committee Effectiveness
As described in more detail on page 86, 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 results
confirm that the Committee is operating effectively. 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 2021 Financial 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 areas of conduct and
compliance, operational resilience, data governance and cyber risk.
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.
Given the ongoing pandemic, the Committee has focused strongly on
those areas most current to circumstance, in particular operational risk
status, cyber protection, credit impairment/model performance and
governance of third party risk.
The group’s use of finance and risk models continues to evolve at pace
with the ongoing development of credit and impairment models. This is
in line with our IRB application which was submitted as planned during
the financial year. We have also seen the continued embedding and use
of the model risk framework and governance structure with particular
focus at the Committee on the performance of our model suite at this
point in the cycle. 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 and model hosting platform.
Focus on cyber crime has increased as we remain alert to the risk, with
the Committee receiving regular updates over the course of the year with
the support of external parties where appropriate. We continue to upgrade
our detection and monitoring capabilities and our overall posture.
The Committee has also received an update on the status of the
Senior Managers and Certification Regime (“SMCR”) framework in
place across the group, with work currently ongoing to further embed
and enhance our practices in this area.
Over the course of 2021, the Committee has also exercised oversight
of Novitas. This has included review of the effectiveness of local and
group-level risk and control governance, together with challenge and
discussion on both the financial and non-financial risks in the business.
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 2022
The year ahead promises to be another challenging one for the
Committee. The longer-term outcomes of the pandemic, including
associated economic impacts, remain uncertain and will require close
attention. Notwithstanding, we will not lose sight of the longer-term
plans that we have for continuous improvement, namely:
• Continuing the development of an effective and regulatorily-
compliant climate risk framework, including alignment with TCFD
recommendations.
• As part of the IRB programme, continued review and assessment of
the group’s modelling capabilities, including the further development
of the models strategy.
• Close monitoring of operational risk impacts alongside refinement
and advancement of the group’s operational resilience framework.
• A focus on third party risk, including alignment with new and
evolving regulation.
• Further evolution of the conduct risk framework and broader
emphasis on ensuring positive customer outcomes.
Lesley Jones
Chair of the Risk Committee
28 September 2021
Close Brothers Group plc Annual Report 2021 Audit Committee Report
91
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 ensuring
oversight of financial reporting and the control environment.
Chair’s Overview
The work undertaken by the Committee to discharge its responsibilities
is set out below.
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 has again had a full agenda and continued to focus
on the key matters across its principle roles and responsibilities,
including overseeing the additional and ongoing impacts of the
Covid-19 pandemic. Focus has been given to challenging the key
accounting judgements across the group, assessing the integrity
and fair presentation of the group’s external financial reporting and
reviewing the maintenance and effectiveness of the group’s internal
control framework. The Committee has also monitored the activities
and performance of internal and external audit, along with oversight of
non-audit services.
Further details on this work and other key areas are set out in the
sections below.
Membership and Meetings
The Committee comprises solely of independent non-executive
directors, being Lesley Jones who chairs the Risk Committee, Sally
Williams, Tesula Mohindra who joined the Committee in July 2021,
Patricia Halliday who joined the Committee in August 2021 and me
as chair. During the year, at the Annual General Meeting in November
2020 Geoffrey Howe did not seek reappointment having served as a
director for more than nine years, and in March 2021 Bridget Macaskill
stepped down from the Committee as part of wider committee
membership changes. More details on this change can be found on
page 95. I would like to extend my thanks to Geoffrey and Bridget for
their extensive contribution.
The qualifications of each of the members are outlined in the
biographies on pages 68 and 69. 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
The Committee held five scheduled meetings during the year with dates
fixed around the group’s financial reporting schedule. In addition, it held
two ad hoc meetings to consider an interim update on the 2020 Annual
Report & Accounts and to review the group’s 2020 recovery plan.
Additional informal meetings and discussions were held as appropriate.
Details of members’ attendance are set out on page 80. I provide the
board with a formal update on the key matters discussed at each
meeting of the Committee.
In addition to the Committee members, standing invitations are
extended to the chairman of the board and all other directors. The
group head of internal audit, the group head of compliance, the group
chief risk officer and the group financial controller also attend meetings
by invitation. I meet with this group as well as the group finance
director ahead of each meeting to agree the agenda and to receive a
full briefing on all relevant issues.
Invitations to attend are extended to other members of management
to brief the Committee on specific issues as necessary. The external
auditor attends each meeting and I had regular contact with the lead
audit partner during the year. The Committee held private sessions with
internal and external audit following each meeting of the Committee,
without members of management.
Committee Effectiveness
As described in more detail on page 86, an external evaluation of the
board and its Committees was undertaken during the year in line with
the requirements of the UK Corporate Governance Code. The results
confirm that the Committee is operating effectively. The Committee
considers that it continued to have access to sufficient resources to
enable it to carry out its duties during the year.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
92
Audit Committee Report continued
Activity in the 2021 Financial Year
Key accounting judgements
The Committee spent considerable time reviewing the interim report
and 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. This also
included consideration of the internal controls over financial reporting.
The Committee noted that there were no new material standards, or
amendments to standards, relevant to the group that had become
effective for the reporting period.
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. Covid-19 has required the
Committee to discuss at length with management the continued
appropriateness of the conclusions reached during the 2020 financial
year, and the implications on reporting in 2021.
The main areas of focus are outlined below. Each of these matters
were discussed with the external auditor and, where appropriate, have
been addressed in the external auditor’s report.
IFRS 9
Given the materiality of the group’s loan book, ensuring the group’s
expected credit loss (“ECL”) models and the related IFRS 9
judgements and disclosures are appropriate remains a key priority for
the Committee, particularly given the ongoing impacts of the Covid-19
pandemic. Regular updates were provided to the Committee.
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 significant increase in provisions against the Novitas loan book
reflecting updated assumptions for case failure and recovery rates in
this business;
• the impact of lockdown restrictions, the reopening of the UK
economy, government support measures and the planned end
of such measures to the specific circumstances of the group’s
businesses and customers, including the distinction between retail
and commercial portfolios;
• the ongoing use and approval of heightened levels of model
adjustments, and the evolution of these adjustments during the
course of the financial year;
• the high level of estimation uncertainty in setting forward-looking
macroeconomic assumptions; and
• management’s model enhancement plan which this year focused on
the Asset Finance and Invoice Finance businesses.
Credit risk and provision disclosures were discussed to ensure they
were clear and gave a transparent articulation of the group’s credit risk
profile, key drivers of the expected credit loss charge and the approach
taken in light of Covid-19. In the next financial year, the Committee will
continue to monitor IFRS 9 provisions and 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.
Other Financial Reporting and Control Matters
Going concern and viability statement
The Committee assisted the board in determining the appropriateness
of adopting the going concern basis of accounting and in performing
the assessment of the viability of the group. The Committee reviewed
a paper from management in support of the going concern basis and
the longer-term viability of the group.
The Committee assessed the proven stability of the group’s business
model which is supported by a diverse portfolio of businesses,
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 as well as
the Covid-19 pandemic which may affect the future development,
performance and financial position of the group. The Committee
considered whether a period of three years remained appropriate for
the viability statement, particularly when taking into account changes in
the economic, technological and regulatory environment.
Overall the Committee concluded that it remained appropriate to
prepare the accounts on a going concern basis, advised the board
that three years was a suitable period of review for the viability
statement, and recommended the viability statement to the board for
approval, set out on pages 74 and 75.
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, the strategic review of Novitas and resulting impairment, the
significant increase in credit provisions in Novitas due to the latest case
failure and recovery rate assumptions, the classification and disclosure
relating to the VAT refund and climate risk.
The Committee considered the 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.
Impairment of goodwill and intangible assets acquired on
acquisition
The Committee was presented with the annual goodwill impairment
review and, except for Novitas, was satisfied that there were no
impairment indicators. A detailed presentation on the impairment
indicators, methodology and underlying assumptions used to
determine the full impairment of goodwill and intangible assets
acquired on acquisition in respect of Novitas was also reviewed.
The Committee challenged the appropriateness of the assessment,
including discussing the outcome with the group’s auditor, and
concluded the approach was reasonable.
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. Further information on the board’s activities in this area
can be found on page 85 of the Corporate Governance Report.
Restoring trust in audit and corporate governance
The Committee has, and will continue to, evaluate the impact of
the Department for Business, Energy and Industry Strategy (“BEIS”)
consultation and resulting proposals for restoring trust in audit and
corporate governance on the group.
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, as well as noting the group’s tax policy.
Close Brothers Group plc Annual Report 2021
93
Internal Audit
The Committee reviewed, challenged and approved the annual internal
audit plan, and amendments made during the course of the year. It
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. 26 audits
were distributed to the Committee during the financial year. All audits
were summarised at meetings of the Committee together with an
update on the status of issues identified by internal audit.
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.
The Committee completed its annual review of 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.
In addition to reviewing the internal audit function’s effectiveness,
the Committee assessed the level of internal audit resource and the
appropriateness of the skills and experience of the internal audit
function. The internal audit function appointed a head of technology
and change auditor and recruited more auditors to reduce its reliance
on the co-source provider for all but highly specialist knowledge and
experience.
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.
Following a tender process in 2017, PwC has been auditor to the
group since 1 August 2017. Mark Hannam has been the group’s lead
audit partner from this same date and attends all meetings of the
Committee.
Statutory Audit Services Compliance
The company confirms compliance 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 2021.
Subject to shareholder approval, PwC will undertake the audit of the
company and the group for the year ended 31 July 2022. There are
no plans as at the date of this report to conduct a tender exercise for
external audit services.
Non-Audit Services
The Committee oversees the group’s policy on the provision of non-
audit services by the external auditor, which incorporates the Financial
Reporting Council’s Revised Ethical Standard from March 2020.
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 the
service complies with the group policy and where:
• the 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.
This year the regulatory cap on the annual value of non-audit services
being 70% of the average of three years’ audit fee has become
mandatory, being the fourth financial year following the change of
auditor.
During the year, total audit fees amounted to £2.6 million (2020:
£2.0 million) while total non-audit fees including those relating to
services required by legislation amounted to £0.7 million (2020: £0.5
million), representing 27% (2020: 26%) of the current year audit fee.
This included non-audit services not required by law of £0.3 million
(2020: £0.2 million), 12% (2020: 10%) of the audit fee, predominantly
relating to the review of the group’s interim financial statements and
third party assurance over certain Asset Management division internal
controls. 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.
During the year the Committee reviewed the external audit plan as well
as the resulting findings. Principal matters discussed with PwC are set
out in their report on pages 126 to 133.
Oliver Corbett
Chair of the Audit Committee
28 September 2021
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;
• the senior leadership of the audit team;
• the quality of service including consistency of approach and
responsiveness; and
• the response to Covid-19.
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
reappointment of the auditor at the company’s AGM.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
94
Nomination and Governance Committee Report
Chair’s Overview
On behalf of the board, I am pleased to present the report of the
Nomination and Governance Committee for 2021. The report sets out
an overview of the Committee’s roles and responsibilities, and its key
activities during the year.
In the 2021 financial year, non-executive succession and recruitment
has been an important focus for the Committee. The Committee
adopts a proactive and structured approach to succession planning. In
the appointments made in the year it has remained mindful of board
changes that will naturally occur in the years ahead as directors reach
the end of their terms and the need to ensure continuity of knowledge
and experience among the board as a whole.
During the year, the Committee oversaw the processes for the
appointment of three new independent non-executive directors: Mark
Pain, who joined the board on 1 January 2021; Tesula Mohindra, who
joined the board on 15 July 2021; and Patricia Halliday, who joined the
board on 1 August 2021. Mark joined the board as the company’s
senior independent director (“SID”), taking over from Geoffrey Howe
who stepped down from the board at the AGM in November 2020
following more than nine years as a director. A description of the
processes that resulted in the appointments of Mark, Tesula and
Patricia can be found below. 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.
Following Mark’s appointment as a director, the Committee reviewed
the membership of the board’s committees and recommended a
number of changes. The board has moved away from its previous
model which saw all non-executive directors serve on all of the board’s
committees. We consider this new approach to be more effective and
the change is in line with a recommendation from the previous external
evaluation of the board’s effectiveness in 2018.
The Committee spent time considering succession planning and talent
management for roles below board level. 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. In light of this and other activities in the year,
it recommended to the board that all serving directors be reappointed
at the 2021 AGM.
The Committee has closely monitored sustainability and environmental,
social and governance (“ESG”) developments relevant to the group,
including consideration of points arising from engagement with
shareholders and other stakeholders in these areas. These will
continue to be key areas for the Committee and the board as a whole
in the coming years.
Committee Roles and Responsibilities
The Committee’s key roles and responsibilities are:
• regularly reviewing the structure, size and composition of the board
and its committees, and making recommendations to the board with
regard to any changes;
• considering the leadership needs of the group and considering
succession planning for directors and senior executives;
• considering the appointment or retirement of directors;
• reviewing the continued independence of the non-executive
directors;
• assessing the board’s balance of skills, knowledge and experience;
• evaluating the skills, knowledge and experience required for a
particular appointment, normally with the assistance of external
advisers to facilitate the search for suitable candidates; and
• assessing the contribution 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 2021 Financial Year
During the year the Committee’s activities included:
• considering board composition and succession, including searches
for a new SID and other non-executive roles;
• assessing the composition of each of the board’s committees;
• 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;
• oversight of the external board and committee evaluation
undertaken during the year;
• monitoring sustainability and ESG developments and considering
the implications for the group;
• 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 and
independence.
Membership and Meetings
The Committee’s membership changed during the year following the
retirement of Geoffrey Howe from the board and the appointment of
Mark Pain. It now comprises Mark Pain, 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 80. In
addition, five ad hoc meetings were held to consider matters relating to
specific board appointments during the year, including meetings to
consider the nomination of Mark Pain, Tesula Mohindra and Patricia
Halliday as members of the board, and to finalise the recommendation
to the board regarding changes to the membership of its committees.
Overview of Main Activities During the Year
NED succession
During the year, the Committee oversaw the formal and robust search
processes that culminated in the decisions by the board to appoint
Mark Pain, Tesula Mohindra and Patricia Halliday as independent
non-executive directors. The searches were part of the Committee’s
ongoing and orderly approach to succession planning. The resulting
appointments will ensure that the board continues to be of an
appropriate size and composition as other directors reach nine years’
service in the years ahead.
In each case, the Committee reviewed and approved a detailed
description for the role, having considered the particular skills,
experience and background required for each role. As part of all board
recruitment searches, the Committee assesses the balance of
knowledge and expertise needed to ensure the continued effective
leadership of the group, and the development and oversight of its
strategy, purpose and culture. In identifying and recommending
candidates for appointment to the board, the Committee considers
candidates from a wide range of backgrounds, assessing them on
merit against objective criteria and with due regard for the benefits of
diversity on the board.
Close Brothers Group plc Annual Report 2021 95
Each of the three searches was conducted in conjunction with an
external search firm: Heidrick & Struggles, in the case of the search
that resulted in Mark Pain’s appointment; and Russell Reynolds, in the
case of the searches that culminated in the appointments of Tesula
Mohindra and Patricia Halliday. Both firms were instructed to consider
candidates from a diversity of backgrounds and experiences. Neither
firm is connected to the company in any way and each is a signatory
to the Voluntary Code of Conduct for Executive Search Firms.
For all three searches, following the preparation of a long-list of
candidates, a shortlist was selected by the Committee and interviews
were held with the involvement of both non-executive and executive
members of the board and members of senior management. As part
of the process, the Committee considered the other commitments of
candidates to ensure that they would have sufficient time to devote to
their duties to the group. Following completion of the processes to the
Committee’s satisfaction (including, in Mark’s case, receipt of all
necessary regulatory approvals for his appointment as SID), it
recommended the appointment of Mark, Tesula and Patricia to the
board. The Committee also considered and recommended to the
board their appointment to the various committees referred to in their
biographies on pages 68 and 69.
Further details on Mark, Tesula and Patricia’s experience can be found
in their biographies. Each of them brings significant experience of
financial services, and is a strong addition to the existing range of skills
and expertise on the board.
Committee memberships
Following the appointment of Mark Pain to the Board in January 2021,
the Committee reviewed the membership of the board’s committees. It
agreed that Mark’s appointment, and the increase in the size of the
board in recent years, presented an opportunity to refresh the
membership of certain committees. Following its review, the
Committee recommended a number of changes to the Audit and
Remuneration Committees, which have seen the board move away
from its previous model whereby all non-executive directors served as
members of all committees. The new approach is considered to be
more efficient and effective, and enables the work of committee
members to be shared among the directors. The board approved the
Committee’s recommendation and the following changes took effect
on 1 March 2021: Bridget Macaskill stepped down as a member of the
Audit Committee; Oliver Corbett stepped down as a member of the
Remuneration Committee; and Peter Duffy, Mark Pain and I joined the
Remuneration Committee. The Committee will continue to monitor the
composition of each of the board’s committees.
Senior management talent development and succession planning
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 across the group. 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 year, the Committee was updated on the various initiatives
in place across the group to support talent development at different
levels of the group’s operations. Among other things, it discussed a
recently launched pilot rotational programme to improve the long-term
leadership pipeline in the Banking division. Further information in
relation to the group’s activities in this area can be found on page 27 of
the Sustainability Report.
Sustainability
The Committee recognises and welcomes the continuing 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 broad range
of different areas, including diversity and inclusion, and ESG. Further
details on each of these areas are set out below.
Diversity and inclusion
Diversity and inclusion remain 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 discussed 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
pages 79 and 80 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. The Committee is
pleased with the progress made in recent years to ensure that the
board comprises individuals from a diversity of backgrounds. The
board now comprises 45% women, and five of its nine non-executive
directors are women. This continues to exceed the recommendation of
the Hampton-Alexander Review. The board supports the
recommendations set out in the Parker Review, and aims at all times to
have at least one director of colour. Due to the relatively small size of
the board, the Committee also recognises the impact that the
retirement of an individual director can have on the overall composition
of the board from a diversity perspective. As a result, diversity and
inclusion at board level will continue to be an area of focus for the
Committee, particularly as directors reach the end of their nine-year
terms in the years ahead.
The Committee takes seriously 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 across the group. Among
other things, the Committee discussed the group’s approach to
recruitment, training and development programmes for employees,
management’s work with diversity and inclusion campaign groups, and
activities of discrete employee networks including in the areas of
gender, ethnic diversity, disability, LGBTQ+, working parents and
carers, mental wellbeing and social mobility. During the year it also
discussed a “deep-dive” update in relation to people-related
sustainability issues, including a wide-ranging overview of the broad
range of activities and initiatives across the group to ensure that it
continues to meet its obligations to employees. 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 2021 was 33% (2020:
35%) female and 67% (2020: 65%) male. More detail on the group’s
approach to diversity and inclusion can be found in the Sustainability
Report on pages 26 to 27.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 96
Nomination and Governance Committee Report continued
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 significant contribution that each of
these 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.
Committee Effectiveness
As described in more detail on page 86, an external evaluation of the
effectiveness of the board and its committees was undertaken during
the year in line with the requirements of the UK Corporate Governance
Code. The Committee was involved in determining the format, scope
and timing of the evaluation, and in selecting the evaluator.
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. During the year, the Committee
reviewed its terms of reference to ensure that they remain appropriate.
Michael N. Biggs
Chair of the Nomination and Governance Committee
28 September 2021
Environmental, social and governance
Throughout the year, the Committee received and considered
dedicated updates on ESG issues relevant to the group. The group’s
head of sustainability attends relevant parts of the Committee’s
meetings to present. The Committee’s discussion of ESG issues
covered a wide range of areas and was informed by, among other
things, engagement with shareholders and other stakeholders,
legislative and regulatory initiatives and wider market developments.
Areas of focus this year included the group’s sustainability strategy and
targets (including progress in the year and future plans), the impact of
Covid-19 on the broader sustainability agenda, wider market themes
and trends including issues connected with the forthcoming UN
Climate Change Conference of the Parties (COP26) later in 2021, and
the group’s progress towards disclosure requirements relating to the
Task Force on Climate-related Financial Disclosures (“TCFD”). 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 or listed
companies. Further information on the background and experience of
each of the non-executive directors can be found in their biographies
on pages 68 and 69.
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 2021 AGM, the
Committee has recommended to the board that all serving directors be
reappointed at the AGM.
Close Brothers Group plc Annual Report 2021 Directors’ Remuneration Report
97
Bridget Macaskill Chair of the Remuneration Committee
This report sets out our approach to remuneration for the group’s
employees and directors for the 2021 financial year, and our new
remuneration policy for the next three years.
The Directors’ Remuneration Report is divided into three sections:
Annual Statement from the Remuneration Committee Chair,
pages 97 to 99;
Directors’ Remuneration Policy, pages 100 to 110; and
Annual Report on Remuneration, pages 110 to 125.
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 2021
financial year. This year we are presenting both our decisions for the
2021 financial year and a revised Remuneration Policy (“Policy”) that
will operate over the next three years. As a consequence of Capital
Requirements Directive V (“CRD V”) being fully adopted by the UK, a
maximum 2:1 variable to fixed pay cap will apply to all the group’s
Material Risk Takers (“MRTs”) that are in scope, including the executive
directors, from 1 August 2021. We are therefore required to make
changes to our Policy to ensure that we comply with CRD V and will
be seeking shareholder approval for a new Policy at the 2021 Annual
General Meeting (“AGM”). At the AGM, we will also be seeking formal
shareholder approval to adopt a 2:1 variable to fixed pay cap,
extending the mandated 1:1 ratio.
How the group performed during the 2021 financial year
The group performed strongly in the 2021 financial year, highlighting
the benefits of its proven and resilient business model. Overall, the
group reported an 88% increase in adjusted operating profit to
£270.7 million (2020: £144.0 million), returning to pre-crisis levels and
achieving a return on opening equity, our key financial measure, of
14.5%.The group’s performance benefited from higher income levels
across all divisions and significantly lower impairment charges in the
lending business.
While Covid-19 continued to present challenges and dominate
the external environment, the disciplined adherence to its resilient
business model meant that the group was able to continue to support
customers and colleagues while making the most of the growth
opportunities in its core markets. The Banking division saw high new
business volumes, with an increase in the loan book of 10.9% over
the year while maintaining a strong net interest margin of 7.7% (2020:
7.5%). Impairment charges decreased significantly, reflecting strong
underlying credit performance across Commercial, Retail and Property
as well as a reduction in Covid-19 provisions. The bad debt ratio of
1.1% (2020: 2.3%) reflected an increase in provisions against the
Novitas loan book, which accounted for a significant portion of the
impairment charge for the year. Asset Management continued to grow
assets under management and achieved a good net inflow rate of 7%,
despite the impact of reduced face-to-face interaction with clients due
to Covid-19 restrictions. Winterflood delivered a very strong trading
performance as it benefited from exceptionally high levels of trading
volumes for most of the year and the expertise of our traders, with only
one loss day in a volatile market environment.
Following the appointment of the group’s new chief executive, Adrian
Sainsbury, in September 2020, the group introduced the evolution of
its strategic priorities to “protect”, “grow” and “sustain” the business
model. A new “Model Fit Assessment Framework” was also introduced
and included a set of criteria used to assess the group’s initiatives. This
framework was used as a key tool in the strategic review of Novitas,
which concluded that the overall risk profile of the business is no longer
compatible with the group’s long-term strategy and risk appetite. As a
result, in July 2021, the group decided to cease permanently the approval
of lending to new customers across all of the products offered by Novitas,
and to withdraw from the legal services financing market.
The group maintained a strong capital, funding and liquidity position.
The CET1 capital ratio increased to 15.8% (31 July 2020: 14.1%)
and remained well ahead of the applicable minimum regulatory
requirements. This mainly reflected the group’s strong capital
generation through higher profit and the benefit from regulatory
changes to the treatment of software assets as well as the significant
amount of lending under the British Business Bank’s CBILS Scheme,
which attract a lower risk weighting. Our strong financial resources
position us well to continue delivering on our strategy.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 98
Following the group’s strong performance in the year and to reflect the
continued confidence in our business model and financial position, the
board is proposing a final dividend of 42p per share, resulting in a full-
year dividend per share of 60p, an increase of 50%.
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
CET1 capital ratio
Adjusted operating profit (£ million)
Adjusted earnings per share growth over
three years1
Distribution to shareholders (£ million)2
2021
14.5%
12.7%
15.8%
270.7
2020
8.0%
13.6%
14.1%
144.0
0.1%
89.5
(43.4)%
59.8
1 For the three-year periods ended 31 July 2021 and 31 July 2020.
2 For the 2021 financial year, interim dividend paid and proposed final dividend.
Executive director remuneration outcomes for the 2021 financial
year
As in previous years, the Remuneration Committee assessed the
following factors when determining remuneration outcomes for the
executive directors: how to maintain a fair balance between the
interests of different stakeholders, including shareholders, employees
and management; how to encourage and reward the behaviours that
reflect our purpose and culture; and how to judge performance against
objectives, including considering where the Remuneration Committee
should apply discretion to adjust any formulaic outcomes.
Given the robust performance of the Group, the financial element of
the executive directors’ bonuses, which is linked to return on equity
and the CET1 capital ratio, paid out at 82.5% of maximum. The year-
end review of performance against the strategic scorecard (as detailed
on pages 114 to 117) demonstrated that the management team has
continued to progress key strategic priorities in spite of the continued
uncertainties in the wider environment. The Remuneration Committee
therefore determined to approve an annual bonus outcome of 73% for
the strategic scorecard (see page 113 for further details).
The 2018 LTIP vested at 39.6% of maximum. Adjusted EPS growth
over the three year period was 0.1% below the threshold and
therefore this element did not vest. Average return on equity over the
performance period was 12.7% and this element therefore vested
at 11.1%. The continued prudent approach to capital management
combined with a good performance in risk, compliance and controls
mean that the risk management objectives element scored 95% and
therefore vested at 28.5%. The overall level of the vesting of the LTIP
has decreased from the previous year’s award.
After consideration, the Remuneration Committee decided that
these outcomes were appropriate and therefore did not require the
application of discretion or further adjustment.
Recognising the continued progression in role of the
group finance director
As disclosed at the time of his appointment in 2018, the group finance
director’s annual maximum bonus and LTIP opportunity were both set
at 175% of salary initially, well within the 300% and 350% maximums
respectively permitted within our approved Policy, and below the levels
which had applied for the previous incumbent. This package reflected
Mike Morgan’s first-time appointment to group finance director. In
recognition of Mike’s significant progression in role since appointment,
and in order to tilt the balance of his package towards long-term
equity-based reward, the Remuneration Committee’s intention had
been to make a relatively modest increase in his LTIP opportunity from
175% of salary to 200% of salary for the 2022 financial year. As outlined
above, the Remuneration Committee is required to make changes to
the Remuneration Policy to reflect requirements under CRD V, and in
particular the variable to fixed pay cap. In translating the group finance
director’s package into a CRD V compliant structure, the Remuneration
Committee has therefore used an LTIP opportunity of 200% of salary to
reflect the increase he would otherwise have received had we been able
to continue with the current Policy.
Directors’ Remuneration Policy and proposed implementation for
the 2022 financial year
Our current Directors’ Remuneration Policy was approved by
shareholders at the 2020 AGM, with over 97% of the shareholders’
votes cast in favour. Our intention was that this Policy would apply for
a three-year period until the 2023 AGM unless material amendments
to our executive remuneration structure were required to address
regulatory changes. As noted above, it is necessary to amend the
Policy that was approved by shareholders at the 2020 AGM in order
to comply with requirements under CRD V, which will apply to the
Company from the 2022 financial year onwards.
Given the strong support of our Remuneration Policy in 2020, our
overarching principle in designing the new Policy has been to retain
as many of the key features of the current Policy as possible whilst
addressing the requirements of CRD V. We are therefore proposing the
following decisions for our new Policy:
• No change will be made to the structure of the executive directors’
pay elements, which includes salary, pension, annual bonus and LTIP.
Changes will, however, need to be made to the quantum of fixed and
variable pay elements to align with the variable to fixed pay cap.
• Pension contributions for executive directors will continue to be in
line with the rate paid to all employees (currently equates to a 10%
contribution).
• The current balance of the short to long-term variable pay
opportunity will be retained to maintain alignment with shareholders.
• There will be no changes to deferral or retention periods for the
annual bonus or LTIP. This reflects our Level 3 proportionality status.
• Malus and clawback provisions will continue to apply, allowing
the Remuneration Committee to reduce awards in appropriate
scenarios, and the period over which clawback provisions will apply
will be extended in line with CRD V requirements.
• In-employment and post-employment shareholding requirements will
remain at 200% of salary. This will require an increase in the absolute
value of shareholdings due to the proposed increases in salary levels.
• The expected level of pay will be maintained for both executives at
levels as close as possible to the current expected levels (though note
the decisions made in relation to the group finance director’s LTIP, as
explained earlier). “Expected level of pay” is based on the average of
the actual outcomes over the past five years.
In formulating these proposals the Remuneration Committee consulted
extensively with shareholders, who welcomed this consistency in
our approach. Shareholder feedback generally indicated that, in
transitioning to a CRD V compliant structure, the proposed Policy
was fair to executives, while continuing to be simple and effective in
rewarding and incentivising outperformance.
Shareholders were supportive of the following changes we are
making in order to ensure our Policy complies with CRD V, which are
summarised below.
• From the 2022 financial year, the maximum annual bonus
opportunity will be capped at 95% of salary and the maximum LTIP
opportunity will be capped at 125% of salary, well below the current
maximums of 300% and 350%.
• Increases to fixed pay will be applied to broadly maintain current
expected pay levels within a CRD V compliant structure. The
following salaries are proposed with effect from 1 August 2021:
– Chief executive – Current: £550,000, proposed: £930,000.
– Group finance director – Current: £400,000, proposed: £560,000.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 99
• In order to compensate the executive directors fairly under CRD V,
the rebalanced package should be targeted to match “expected
level of pay”, based on the average of the actual outcomes over
the past five years. There will therefore be a reduction in the
overall maximum value of the total compensation package while
maintaining the “expected value” of the package for executive
directors. In adopting this approach, the Remuneration Committee
is comfortable that the last five years is sufficiently representative of
our business cycle, and the experience of the executive directors in
terms of pay outcomes, to be a reasonable point of reference.
• Whilst we will be maintaining the existing policy on executive directors’
shareholding guidelines, as these are expressed as a percentage of
base salary, in real terms the value of the shareholding requirement will
in practice increase in line with the adjustments to salaries.
• Clawback period will be increased to seven years, extendable to
10 years, from award, in line with CRD V requirements.
We made enhancements to the draft policy based on helpful feedback
from our shareholders and greatly appreciate the level of engagement
and support that we received for these Policy changes, full details of
which can be found on pages 100 to 110. We continue to believe
these proposals are fair to both shareholders and the executive
directors and reflect Close Brothers’ responsible approach to executive
pay and the fact that our remuneration framework has consistently
delivered incentive payouts that have been well aligned with group and
individual performance, and with the experience of our shareholders.
Changes to the board of directors during the year
As announced in last year’s Annual Report, Adrian Sainsbury was
appointed chief executive from 21 September 2020.
Preben Prebensen, our former chief executive, stepped down from his
role on 21 September 2020. In recognition of his contribution during the
period before he left, Preben has been awarded a time pro-rated bonus
for the period of the 2021 financial year for which he was chief executive.
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
Remuneration Committee continues to spend time in 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 111.
The average salary increase awarded across the group was a modest
1%, with an emphasis on supporting pay levels for junior employees.
The group continues to pay all staff at or above the national living wage,
which is in excess of the national minimum wage. However, following a
c.30% decrease in bonus awards in the 2020 financial year, the average
bonus for the 2021 financial year has increased by 21%.
CRD V also means that the pay arrangements of any staff member
identified as a group and banking MRT will have to comply with
the new regulations. As such, adjustments have been made to the
compensation mix of impacted individuals in line with the same
principles as those used for the executive directors.
Gender-pay disclosures
This year the Remuneration Committee has overseen the publication of
our fourth gender pay gap report, which is published on our website.
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. At the end of the
financial year we 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, our
broader focus on inclusion ensures we prioritise fairness and equality
for all colleagues. We are signatories of the Women in Finance and
Race at Work Charters and the Social Mobility Pledge. This year we
have broadened our inclusion remit to focus on disability inclusion
through joining the Valuable 500 initiative.
Our 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 colleagues continue to feel that we
are an inclusive organisation, as demonstrated by responses in the
latest employee opinion survey, and we continue to push forward and
implement activities and initiatives in this sphere to ensure we support
an inclusive environment where all our colleagues feel a sense of
belonging and are proud to work for us.
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
28 September 2021
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 100
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 2021 and, if approved, will apply from the
date of the AGM.
As a consequence of the CRD V being implemented in the UK, a number of amendments are required to be made to the Policy. The
Remuneration Committee discussed the detail of these amendments 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.
This Policy remains largely unchanged from the policy approved by shareholders in 2020 other than the following updates which are required to
comply with CRD V:
• From 1 August 2021, executive directors (“EDs”) will be subject to a 2:1 cap on the ratio of variable to fixed remuneration; accordingly, EDs
maximum annual bonus opportunity will be capped at 95% of base salary and the maximum LTIP opportunity will be capped at 125% of base
salary provided that, taken together, an EDs variable remuneration does not exceed the 2:1 cap on fixed remuneration.
• Increase EDs base salary, from 1st August 2021, to broadly maintain current expected pay levels in compliance with the cap on variable
remuneration required under CRD V.
• Clawback periods on awards increased to seven years, extendable to 10 years, from award.
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.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 101
Performance framework, recovery and withholding
Not applicable.
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.
Changes from previous policy
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:
• a change in the regulatory environment;
• 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.
Base salaries for the EDs will be increased, to £930,000 for the chief executive and £560,000 for the group financial director, to account for a
reduction in the ratio of variable to fixed remuneration payable under CRD V.
Any benefit 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).
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.
Benefits
Enables the EDs to perform
their roles effectively by
contributing to their wellbeing
and security.
Provides competitive benefits
consistent with the role.
Changes from previous policy
None.
Pension
Provides an appropriate and
competitive level of personal
and dependant retirement
benefits.
Changes from previous policy
None.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
102
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.
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 95% of base salary.
At the Remuneration Committee’s discretion, dividend equivalents
will usually be paid in cash or additional shares when the deferred
awards vest.
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 Remuneration
Committee’s discretion, an element of the
bonus may also be based on personal
performance.
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 Remuneration 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 105 and 106.
Changes from previous policy
The cap on the annual bonus has been reduced from 300% to 95% of base salary.
The clawback period for the deferred element of the annual bonus will be increased to seven years from the date of award, extendable to 10 years
at the discretion of the Remuneration Committee where there is an ongoing investigation.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued
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.
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 Remuneration 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 125% of base salary, excluding dividend equivalents.
103
Performance framework, recovery and withholding
Measures and weightings
Individual awards vest based on
performance against both financial and
non-financial performance measures.
At least 70% of the award will be based on
performance against financial measures.
The remainder will be based on non-financial
performance.
The Remuneration 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 Remuneration 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
105 and 106.
Changes from previous policy
The cap on LTIP awards has been reduced from 350% to 125% of base salary.
The clawback period for LTIP awards has been increased to seven years from the date of award, extendable to 10 years by the Remuneration
Committee where there is an ongoing investigation.
Save As You Earn (“SAYE”)
Aligns the interests of
executives with those of
shareholders through building
a shareholding.
Changes from previous policy
None.
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 Remuneration Committee reserves the discretion to increase
the maximum contributions in line with any HMRC rule changes
during the period of the Policy.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 104
Element and how it supports the
group’s short-term and long-term
strategic objectives
Share Incentive Plan (“SIP”)
Aligns the interests of
executives with those of
shareholders through building
a shareholding.
Changes from previous policy
None.
Shareholding requirement
Aligns the interests of
executives with those of
shareholders.
Changes from previous policy
None.
Other
Changes from previous policy
None.
Operation and maximum payable
EDs are able to contribute up to a maximum of £1,800 per annum
from pre-tax income and national insurance earnings to buy
Partnership Shares.
Performance framework, recovery and withholding
Not applicable, as this is a voluntary scheme
where EDs have invested their own
earnings.
At present the Remuneration Committee has determined that EDs
have the ability to buy Partnership Shares. Currently there is no
match, but the Remuneration 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 Remuneration Committee exercise this
discretion.
Dividends paid on shares held in the SIP are reinvested to acquire
further Dividend Shares.
The Remuneration Committee reserves the discretion to increase
the maximum contributions in line with any HMRC rule changes
during the period of the Policy.
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 first two years after stepping down as
an ED.
The Remuneration Committee retains discretion to waive this
guideline if it is not considered appropriate in the specific
circumstances.
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.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 105
Additional details on the Directors’ Remuneration Policy
The Remuneration 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 Remuneration 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 Remuneration
Committee will make full and clear disclosure of any such adjustments within the Annual Report on Remuneration for the relevant financial year.
The Remuneration 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 Remuneration Committee will make full and clear disclosure of any such adjustments within the Annual Report on Remuneration for the
relevant financial year.
The Remuneration 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 Remuneration Committee may adjust an award as appropriate.
Rationale for choice of performance conditions
The Remuneration Committee selects financial and non-financial performance measures that strengthen the alignment of the remuneration
arrangements with the business model and the interests of our shareholders.
At maximum performance, the ratio of financial to non-financial measures for the chief executive and group finance director across the annual
bonus and LTIP is approximately two-thirds. The Remuneration 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 our 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 company has extended the circumstances in which malus and clawback can be applied, to align the terms between the LTIP and annual
bonus (cash and deferred elements). The company has applied the extended malus and clawback conditions for LTIP awards granted in 2020
onwards and intends to apply the extended malus and clawback conditions 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 typically include (where relevant) an assessment of 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 seven years from the date of grant, extendable to 10 years by the
Remuneration Committee where there is an ongoing investigation. LTIP awards are subject to malus for the three-year period to the point of
vesting, and are subject to clawback for seven years from the date of grant (four years after vesting), extendable to 10 years by the Remuneration
Committee where there is an ongoing investigation.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 106
Malus triggers
The Remuneration Committee may apply malus to unvested LTIP awards granted on or after 21 September 2020 and to annual bonus awards
granted on or after 23 September 2021 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 and to annual bonus awards granted
on or after 23 September 2021 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 Remuneration Committee does not formally consult with employees when setting the Policy, although the employee opinion
survey conducted every year includes remuneration as one of the topics surveyed. The Remuneration Committee also receives feedback from
engagement with, and communication to, employees on matters relating to remuneration issues, which it uses to inform its broader approach to
remuneration, including with respect to the alignment between executive remuneration and the approach to compensation for employees across
the group. At each scheduled meeting, the Remuneration Committee reviews a ‘Remuneration Dashboard’ containing metrics, analysis and other
information, which the Committee uses as part of its decision-making, including as part of the annual compensation process. It covers a wide-
range of areas throughout the year, such as workforce demographics, pay and reward at different levels across the group, gender pay and SAYE
participation.
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 and group and bank MRTs. 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.
Members of the group Executive Committee who are not EDs are required to build and maintain shareholdings of at least one times base salary.
Employees receive the same level of pension contributions (in the form of a cash allowance or contribution to a pension arrangement) as EDs.
All UK employees are eligible to participate in the SAYE and SIP plans.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 107
Illustrations of application of Remuneration Policy for EDs
The scenario charts below provide illustrations of potential remuneration outcomes for our EDs in 2022, based on the 2021 Remuneration Policy
set out on pages 100 to 106, based on the assumptions provided in the table below.
Chief executive: Adrian Sainsbury
£’000
4,000
3,000
2,000
1,000
0
£1,055
100%
£2,078
28%
21%
51%
£3,101
38%
28%
34%
Minimum
On target
Maximum
Group finance director: Mike Morgan
£’000
3,000
2,000
1,000
0
£618
100%
£1,234
28%
22%
50%
£1,850
38%
29%
33%
Minimum
On target
Maximum
£3,682
16%
31%
24%
29%
Maximum +
share price
growth
£2,200
16%
32%
24%
28%
Maximum +
share price
growth
Fixed remuneration
Annual bonus
Performance awards
Share price growth
Element
Fixed remuneration
Minimum
On target
Maximum
Assumptions used
Consists of 2022 base salary (chief executive £930,000; group finance director £560,000), 2022 benefits
and 2022 pension allowance (10% of salary)
No variable elements are awarded
Annual bonus: Awarded at 47.5% of base salary for the chief executive and the group finance director
(50% of maximum potential for 2022)
LITP: Awards with face value of 125% of salary for the chief executive and the group finance director and
assumed 50% vesting
Annual bonus: Awarded at 95% of base salary for the chief executive and the group finance director
(100% of maximum potential for 2022)
Maximum (with share price growth)
Other
LTIP: Awards with face value of 125% of salary for the chief executive and the group finance director and
assumed 100% vesting
Maximum scenario with assumed 50% share price growth over the LTIP performance period
No adjustment for dividend equivalents
Approach to recruitment remuneration
The remuneration package for new EDs will comply with the Policy for EDs outlined on pages 100 to 107 and the following paragraphs. The
Remuneration Committee will seek to pay no more than is necessary to secure the right candidate.
The Remuneration Committee may, to the extent permitted by the Listing Rules and any other regulatory requirements to which the group is
subject, 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 Remuneration 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 Remuneration Committee may continue with existing remuneration provisions for any such individual where appropriate.
If considered appropriate, the Remuneration Committee may apply different performance measures and/or targets to an ED’s first incentive
awards in their year of appointment.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 108
In the event of an interim appointment being made to fill an ED role on a short term basis or if exceptional circumstances require that the Chairman
or a non-executive director takes on an executive function on a short term basis, the Remuneration Committee retains discretion to make
appropriate remuneration decisions outside the standard Policy to meet the individual circumstances of recruitment.
Legacy awards
The Remuneration 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 Remuneration Committee, the payment was not in consideration for the individual becoming a director of the company. For these
purposes “payments” includes the Remuneration 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 office
Standard provision
Notice period
Policy
12 months’ notice from the company.
12 months’ notice from the ED.
Compensation for loss of office
in service contracts
No more than 12 months’ salary, pension
allowance and benefits.
Treatment of annual bonus on
termination
No bonus is paid unless the ED is employed
on date of payment (unless the Remuneration
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
Remuneration 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 Remuneration
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 Remuneration 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 Remuneration Committee may award a pro-rated bonus
to EDs who work for part of the year or are “good leavers” (as
determined by the Remuneration 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 Remuneration 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 Remuneration 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
Remuneration Committee.
• The bonus may, at the Remuneration Committee’s discretion,
be paid entirely in cash.
• An ED’s deferred shares will lapse (unless the Remuneration
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 Remuneration 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
Remuneration Committee elects to assess performance over
an alternative period).
• Unless the Remuneration 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 Remuneration
Committee determines). However, the Remuneration
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.
Outside appointments
EDs may accept external appointments.
• Board approval must be sought before accepting the
appointment.
• The fees may be retained by the director.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 109
Standard provision
Chairman and non-executive
directors
Policy
Engaged under letters of appointment for
terms not exceeding three years.
Details
• All non-executive directors are subject to annual re-election.
• No compensation is payable if required to stand down.
Other
Other notable provisions in
service contracts
Renewable by mutual agreement and can be
terminated on one month’s notice.
The Remuneration 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
Adrian Sainsbury
Mike Morgan
Preben Prebensen1
Date of service contract
1 May 2020
15 November 2018
9 February 2009
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 and/or time commitments.
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 £1.25 million authorised by our articles of association.
There is no performance framework, recovery or withholding.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 110
Non-executive directors’ appointment letters
Name
Mike Biggs
Lesley Jones
Geoffrey Howe1
Bridget Macaskill
Oliver Corbett
Peter Duffy
Sally Williams
Mark Pain
Tesula Mohindra
Patricia Halliday2
Date of appointment
14 March 2017
23 December 2013
4 January 2011
21 November 2013
3 June 2014
1 January 2019
1 January 2020
1 January 2021
15 July 2021
1 August 2021
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
1 January 2021
15 July 2021
1 August 2021
1 Geoffrey Howe stood down as a non-executive director on 19 November 2020.
2 Although Patricia Halliday is a non-executive director of the company at the date of this report, she did not join the board until the start of the 2022 financial year.
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 2021 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;
• 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; and
• 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 with the group’s risk appetite.
Membership
The Remuneration Committee comprises Bridget Macaskill as chair, together with Mike Biggs, Peter Duffy, Lesley Jones and Mark Pain. Geoffrey
Howe and Oliver Corbett stepped down as Committee members on 19 November 2020 and 28 February 2021 respectively. Mike Biggs, Peter
Duffy and Mark Pain joined the Committee effective 1 March 2021. A record of the Committee members’ attendance at the five meetings held
during the year is set out on page 80. There were two additional ad hoc meetings, firstly to finalise 2020 compensation awards in August 2020
and secondly to discuss changes to the Directors’ Remuneration Policy required by CRD V in March 2021.
The chief executive, group head of human resources and the head of reward and HR operations also attend meetings by invitation.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 111
Membership activity in the 2021 financial 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:
August
2020
September
2020
January
2021
March
2021
April
2021
June
2021
July
2021
•
•
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•
•
•
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Remuneration policy and disclosures
Review and approval of Remuneration Policy Statement for 2020
Review and approval of Directors’ Remuneration Report for 2020
Review and approval of the remuneration section of the Pillar 3
disclosure for 2020
Review of Directors’ Remuneration Policy for 2022
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 2021 awards
Final review and approval of EDs’ annual bonus targets and
objectives
Review of performance testing results for vesting 2017 or 2018
LTIP awards
Review EDs’ performance against their annual bonus targets and
objectives
Review EDs’ compensation packages based on the CRD V
Review and approval approach to year-end compensation
Year-end all-employee group-wide salary and bonus analysis/
proposals for 2020 or 2021
Governance review of the sales incentive schemes
Review and approval of the risk management objectives for the
2017 or 2018 LTIP vesting
Review proposed 2020 or 2021 compensation for Material Risk
Takers
Initial review of EDs’ annual bonus targets and objectives for
2021 or 2022
Review of sales incentive schemes and approval of schemes for
2022
Regulatory and external developments
Review of revised Capital Requirements Directive rules
Material Risk Takers identification for 2021
Review and approve Material Risk Takers identification for 2022
based on the CRD V changes
Gender pay gap review
Special business
Review and approval of CEO exit arrangements
Approve Omnibus Scheme Rules changes
Committee remit and effectiveness
Review terms of reference
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UK Corporate Governance Code
As detailed in the Directors’ Remuneration Report last year, we continue to be 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.
• 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 107 provide estimates of the potential total reward opportunity for the executive
directors under our Policy.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 112
• 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.
Advice
During the year under review and up to the date of this report, the Remuneration Committee consulted and received input from the chairman of
the board, the chief executive, the group head of HR, the head of reward and HR operations, the group chief risk officer and the company
secretary. Where the Remuneration Committee seeks advice from employees, this never relates to their own remuneration.
The Remuneration Committee’s remuneration advisers are Deloitte LLP (a member of the Remuneration Consultants Group) and were appointed
by the Remuneration Committee following a competitive tendering process. During the year, separate teams within Deloitte provided advice to the
group on risk, cyber, IT, internal audit and related projects. The Remuneration Committee assesses the performance of Deloitte, the associated
fees and the quality of remuneration advice provided, to ensure that it remains objective and independent of the provision of these other services.
Total fees paid to Deloitte were £154,250 during the 2021 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 £112,800, calculated on a
time and material basis.
Statement of voting on the Directors’ Remuneration Policy at the 2020 AGM
Directors’ Remuneration Policy
Statement of voting on the Directors’ Remuneration Report at the 2020 AGM
Annual Report on Remuneration
Implementation of the policy in 2021
Single total figure of remuneration for executive directors 2021 (Audited)
For
97.1%
Against
2.9%
For
96.4%
Against
3.6%
Number of
abstentions
461,438
Number of
abstentions
462,443
Salary
Benefits
Pension
Total fixed
remuneration
Annual Bonus1
Performance
awards2,3
Total variable
remuneration
Total
remuneration
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
Name
Adrian Sainsbury4,5
Mike Morgan
Preben Prebensen6
£’000
475
400
78
£’000
–
400
550
£’000
22
9
3
£’000
–
2
19
£’000
48
35
17
£’000
–
35
124
£’000
545
444
98
£’000
–
437
693
£’000
843
551
180
£’000
–
218
660
£’000
325
263
582
£’000
£’000
£’000
– 1,713
£’000
– 1,168
814
£’000
–
379
597 1,258 1,034
690 762 1350 860 2,043
1 60% of Adrian Sainsbury’s, Mike Morgan’s and Preben Prebensen’s annual bonus is deferred into shares
2 The figures for the performance awards for 2020 have been recalculated using the actual share price on the date of vesting for the LTIP of £10.55. The three-month average to 31 July
2020 was used for the 2020 report given that the awards were vesting after publication of the report.
3 The figures for the performance award for 2021 have been calculated using the three-month average to 31 July 2021. As this share price is lower than the grant date share price, none of
this value relates to share price appreciation.
4 Adrian Sainsbury was appointed chief executive on the 21 September 2020. His salary, benefits, bonus and pension in the table relate to the period he was an executive director.
5 Adrian Sainsbury’s performance awards were granted before he was appointed to the board. The full award relates to a vested LTIP that was subject to the performance criteria outlined on
page 117.
6 Preben Prebensen stepped down as chief executive on the 21 September 2020 and his remuneration has been time pro-rated accordingly.
Link between reward and performance
The group delivered strong results in the 2021 financial year, maximising the opportunities as the economy recovers from the Covid-19 crisis. The
board is now proposing payment of a 60p per share dividend in respect of the 2021 financial year, reflecting our confidence in the group’s
business model and strong financial position.
Overall, the group reported an increase in adjusted operating profit to £270.7 million (2020: £144.0 million), resulting in a solid return on opening
equity of 14.5% (2020: 8.0%), which has been reflected in the EDs’ bonuses, with this element vesting at 65% of the potential maximum. The
CET1 measure, introduced this financial year, has increased to 15.8% (2020: 14.1%) and is vesting at 100%. The resulting combined overall
vesting of the two financial measures is 82.5% of the potential maximum. The executive directors continued to demonstrate a high level of
progress against specified objectives, and this resulted in strong performance scores against the strategic scorecard (see pages 114 to 117 for
further details).
For the 2018 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 adjusted earnings per share growth of 0.1% over the last three years was below the threshold
performance target of 10% growth and consequently the adjusted earnings per share element of the LTIP has not vested. The average annual
return on equity of 12.7% per annum has exceeded the threshold target of 12.0% per annum, meaning the return on opening equity element
contributed 11.1% 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 95%, contributing 28.5% to the overall vesting. As a result,
the LTIP vested at 39.6% overall this year (see page 117 for further details).
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 113
Additional disclosures on the single total remuneration figure for executive directors table (Audited)
Salary
The per annum salaries paid during the year are as shown in the single total remuneration figure table above. When reviewing salary levels, the
Remuneration 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 during the 2021 financial year, whilst the average
increase for the general employee population is 1%.
Benefits
Adrian Sainsbury and Preben Prebensen received an £18,000 allowance in lieu of a company car (time pro-rated for period in executive director
role). 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
Adrian Sainsbury and Mike Morgan received a pension allowance equivalent to 10% of base salary, the same percentage as the general employee
population. Preben Prebensen received a monthly cash pension allowance equivalent to 22.5% of base salary.
Annual bonus
Maximum bonus potential for the 2021 financial year was 225% of salary for Adrian Sainsbury (time pro-rated for period in executive director role),
175% of salary for Mike Morgan and 300% of salary for Preben Prebensen (time pro-rated for period as executive director). The bonuses for
executive directors were determined with reference to RoE and CET1 targets and a group-wide strategic scorecard. Details of the achievements
and targets are outlined below.
Summary of annual bonus achievement
Financial target (RoE)
Potential
maximum
£’000s
Actual
per cent
of
maximum
Weighting
Adrian Sainsbury1
Mike Morgan
Preben Prebensen2
30%
30%
30%
321
210
68
65%
65%
65%
Actual
amount
awarded
£’000s Weighting
209
137
45
30%
30%
30%
Financial target (CET1)
Potential
maximum
£’000s
Actual
per cent
of
maximum
321
210
68
100%
100%
100%
Group-wide strategic scorecard
Actual
amount
awarded
£’000s Weighting
321
210
68
40%
40%
40%
Potential
maximum
£’000s
Actual
per cent
awarded
Actual
amount
awarded
£’000s
Total
bonus
awarded
£’000s
428
280
91
73%
73%
73%
313
204
67
843
551
180
1 Adrian Sainsbury’s potential maximum for all elements of the annual bonus award are time pro-rated based on his appointment as chief executive on the 21 September 2020.
2 Preben Prebensen’s potential maximum for all elements of the annual bonus award are time pro-rated based on him stepping down as chief executive on the 21 September 2020.
The RoE for the 2021 financial year was 14.5% against a target range of 10% to 18%, warranting an award of 65% of the potential maximum
bonus for this element.
The CET1 capital ratio for the 2021 financial year was 15.8% against a target range of 12.6% to 15.6%, warranting an award of 100% of the
potential maximum bonus for this element.
Financial measures
Financial measure
RoE
CET1 capital ratio
Threshold
33.3% of maximum
potential
10.0%
12.6%
Target
50% of maximum
potential
13.0%
14.1%
Maximum
100% of maximum
potential
18.0%
15.6%
Actual financial
element achieved
14.5%
15.8%
Percentage of
financial element paid
65%
100%
For Adrian Sainsbury, Mike Morgan and Preben Prebensen, 60% of any annual bonus is deferred into group shares vesting in equal tranches over
three years in line with the 2020 Remuneration Policy.
Group-wide performance and executive directors’ objectives for the 2021 financial year (Audited)
Covid-19 continued to present challenges this year and management’s priority has been to ensure the group remained in a strong position to
support customers and colleagues while making the most of the opportunities as the economy recovers.
The group continued to support employees with a constant focus on their wellbeing. The recent employee opinion survey achieved strong scores
and showed high levels of employee engagement, demonstrating the strength of Close Brothers’ culture. The group offered a range of
forbearance measures to assist customers during the crisis with most of them now resuming payments or no longer in forbearance. The
continued focus on customers and clients is demonstrated by the strong customer satisfaction scores achieved. The playbooks and simulations
run in prior years benefited the group’s agile response to this changing environment.
The disciplined application of the group’s business model was highlighted by this year’s strong financial performance. The Banking division saw
high new business levels and made the most of the cyclical growth opportunities, while maintaining its underwriting and pricing discipline, with a
consistent strong net interest margin, which remains well ahead of the peer group average. Strong new business volumes were supported by
demand for loans issued under the UK government support schemes. The group made a strategic decision to focus on CBILS over the Bounce
Back Loan Scheme (“BBLS”), as it enabled it to apply normal underwriting and pricing discipline. Impairment charges reduced significantly as the
group experienced strong underlying credit performance across the Commercial, Retail and Property businesses, as well as a reduction in
Covid-19 provisions. The bad debt ratio of 1.1% (2020: 2.3%) included the impact of a significant increase in credit provisions against the Novitas
loan book within the Commercial business.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 114
Asset Management achieved good net inflows and Winterflood delivered a strong trading performance, highlighting the benefits of the group’s
diverse portfolio of businesses and variety of profit streams.
The group maintained a strong balance sheet, with a prudent funding and liquidity position. The capital levels remain significantly above the
applicable minimum requirements. In addition, two successful debt issuances took place in the year, reflecting the group’s prudent approach to
managing funding and liquidity.
The multi-year investment programmes, which included the submission of our initial IRB application to the PRA in December, progressed well in
the year and continued to deliver tangible benefits and to protect the business.
The group progressed well on the delivery of its sustainability objectives over the past year and announced its support for the Paris Agreement on
net zero goals and its commitment to become operationally net zero through its Scope 1 and Scope 2 carbon emissions by 2030.
The group remains well positioned to continue to make the most of the opportunities arising in the current environment and to continue supporting
employees and customers as the economy recovers.
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 objectives.
The table on pages 114 to 117 sets out examples of the strategic scorecard objectives which were in place in 2021, performance metrics against
these objectives where appropriate, and an overview of the factors that the Remuneration Committee has taken into account when assessing the
performance of the executives.
The Remuneration Committee determines the overall outcome of the balanced scorecard and adjusts the final individual rating to take into
account the individual contributions to successful outcomes of the scorecard objectives.
For reasons of commercial sensitivity, not all performance criteria and factors taken into consideration by the Committee have been disclosed.
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
Delivering in the Covid
environment
Effective management of Covid-19
related concessions, bad debt
and collections
Performance metrics
• Net interest margin at 7.7% (2020: 7.5%)
• Bad debt ratio of 1.1% (10-year range: 0.6%-2.3%)
• Strong loan book growth of 10.9% (10-year range: 0%-20%)
• Return on net loan book of 2.6% (10-year range: 1.3%-3.7%)
• Return on opening equity of 14.5% (2020: 8.0%)
• Over 90% of the loan book is secured or has some form of structural protection
• Average loan book maturity of 17 months (31 July 2020: 15 months)
• Average maturity of funding allocated to loan book of 24 months (31 July 2020: 18 months)
• £1.8 billion of treasury assets (31 July 2020: £1.7 billion), predominantly held on deposit with the Bank
of England
• CET1 capital ratio of 15.8% (31 July 2020: 14.1%)
• Leverage ratio of 11.8% (31 July 2020: 11.2%)
• Group’s strong credit ratings have been upgraded by Moody’s Investors Services (“Moody’s”) and
affirmed by Fitch Ratings (“Fitch”) in the 2021 financial year
Assessment
• The performance of the forborne book remains encouraging. At 31 July 2021, the total balance of
loans classified as forborne and subject to Covid-19 concessions reduced to £0.46 billion
(31 July 2020: £1.4 billion)
• As the pandemic progressed, the impact on customers and their ongoing performance and
requirements have been monitored, including the uptake of concessions, payment performance, the
resumption of normal payment terms and the requirement for further concessions
• Conservative and appropriate cure periods associated with these concessions have been determined
based on in-depth knowledge of portfolios and sub-portfolios
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued
115
Objective
Assessment of performance against objectives including performance metrics
Maintain the group’s pricing and
underwriting discipline, in line
with the overall credit risk
appetite set by the group board
Assessment
• Firm adherence to lending model with continued underwriting and pricing discipline
• Strong new business volumes, particularly in Asset Finance and Motor Finance
• Loan book growth has been supported by strong demand for loans issued under CBILS
• Strategic decision to focus on CBILS over BBLS, as it enabled the group to apply normal underwriting
and pricing discipline
• Strategic decision to withdraw from the legal services financing market. This follows a strategic review
of Novitas, which concluded that the overall risk profile of the business is no longer compatible with the
group’s long-term strategy and risk appetite
• Core financial metrics remain consistent with the group’s lending model
• Credit risk metrics including security cover, tenor, pricing, credit quality and concentration risk remain
within risk appetite
Creating and implementing a return to
the workplace approach
Assessment
• Covid-secure working environment established in over 95% of the group’s locations prior to the
Developing and implementing the
group’s strategic narrative and priorities
national lockdown in January 2021
• In Banking, most field-based employees have now resumed face-to-face interaction with customers
• Additional Winterflood trading floor established, providing enhanced contingency
• Extensive work has been completed to risk assess hybrid working patterns, enabling the identification
and mitigation of any risks arising
• The group is in the process of adapting to and implementing future ways of working, taking into
account the different needs of customers and each of the group’s businesses, to suit its diverse nature
Assessment
• Following a review with the objective of evolving the group’s strategy, the framework for articulating the
group’s future strategic priorities evolved from “protect, improve, extend” to “protect, grow, sustain” to
reflect our commitment to the delivery of disciplined growth and the sustainability of the group’s
business model over the long term
• To support the articulation of how the group plans to deliver disciplined growth, the “Model Fit
Assessment Framework” was introduced
• The evolved objectives were further articulated and presented at the group’s recent Investor Event, with
positive feedback received from shareholders and analysts
• The group’s strategic narrative was is also well understood internally following several Town Hall
meetings attended by over 1,700 colleagues
Delivering for the future
Recognising and responding to
changes in customer behaviour
Assessment
• High level review across all businesses of Covid-related changes in customer behaviours and
macroeconomic environment conducted
• Continued investment in technology, as a way of supporting the group’s human-fronted approach, making
its experts even more valuable
• Investments in Motor and Asset enabled front ends to be implemented in an agile way which facilitated
record volumes and allowed those businesses to respond and adapt to recent challenges of Covid-19
• In the Savings business, the online savings portal now has c.39,000 customers, representing 40% of retail
customer base, registered for online banking. This has also been particularly valuable in a Covid-19
environment, as it has mitigated the challenges of offering a postal channel whilst working remotely
• Motor Finance completed the initial phase of their external market review, setting out how the business is
adapting to customers moving on line and looking to partner with disrupters
Investing to maintain the value of
the model
Progressing multi-year investment
programmes
Assessment
• Good progress on all multi-year investment programmes, with minor Covid-19 related delays
• Preparations for a transition to the IRB approach remain on track, with the initial application to the PRA
submitted in December 2020
• The group is progressing through the first phase of the PRA’s IRB review process and continues to
work with the regulator to support their review
• Motor Finance transformation programme nearing completion, with the programme delivering
improvements in the service proposition, enhancing operational efficiency, improving credit acceptance
process and increasing sales effectiveness
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 116
Objective
Assessment of performance against objectives including performance metrics
Delivering disciplined growth
Assessment
• Strong year of growth in the Banking division following the initial Covid-19 impact
• Loan book up 10.9%, reflecting high levels of activity and supported by strong demand for CBILS
loans
• At 31 July 2021, over £1.14 billion had been lent across more than 5,700 loans under the government
support schemes in the Commercial and Property businesses
• Strategic decision to focus on CBILS over BBLS, as it enabled the group to apply normal underwriting
and pricing discipline
• Approved to lend under the Recovery Loan Scheme, but anticipate volumes to be substantially lower
than lending via CBILS
• Continued growth in Asset Management with net inflows of 7% despite reduced face-to-face
interaction with clients due to Covid restrictions
• Completed the acquisition of PMN Financial Management, an IFA business with c.£300 million assets
under administration, in line with the group’s plans to maximise long-term growth potential in the Asset
Management business
• Winterflood delivered an exceptionally strong trading performance and capitalised on increased trading
volumes for most of the year
• Winterflood Business Services has continued to grow its assets under administration, now at £6.2
billion (31 July 2020: £4.1 billion), capitalising on the trend for outsourcing
People
Succession planning for key senior
management team
Assessment
• Smooth transition of chief executive
• Implemented and embedded new group Executive Committee structure leading to simplification of
management structure and reallocation of SMR responsibilities
• Recruitment and smooth transition of group treasurer
Maintain strong employee engagement
and reinforce position as employer of
choice
Performance metrics
• 91% employee engagement, above external benchmark of 82%
• 96% of colleagues believe their immediate team work well together
• 93% say colleagues go the extra mile to meet the needs of customers and clients
Assessment
• Employee opinion survey confirms continued strong employee engagement
• Employee engagement score above external benchmark
Customers
Maintain focus on the end customer
Performance metrics
• All businesses scored above average net promoter score (“NPS”) in financial services (+50) with scores
ranging from +60 to +87 in the 2021 financial year
Assessment
• Continued support for our customers as the economy recovered from the Covid-19 crisis
• 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
• New complaints dashboard introduced and successfully being used to track performance and focus
effort on improvement areas
Support customers through
forbearance and enhance strong
long-term relationships
Performance metrics
• Over 130,000 customer payment deferrals and other Covid-19 related concessions offered since the
beginning of the pandemic
Assessment
• Wide range of forbearance measures offered across all businesses and in-line with regulatory guidance
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 117
Objective
Assessment of performance against objectives including performance metrics
Risk conduct and compliance
Operate within risk appetite, preserve
compliance with legal and regulatory
obligations, maintain strong control
framework and overall operational
resilience
Assessment
• Continued development of operational risk framework, which was significantly tested and shown to be
effective during the Covid-19 crisis
• Cyber security strategy enhanced and agreed with Board Risk Committee, with investments delivering
significant improvements, particularly in technology
• Internal audit reviews confirm businesses continue to operate within established and embedded credit
and operational risk appetite, reflecting mature and transparent risk management practices
• Maintained key regulatory and compliance controls
• Short-term risks from the current working environment continue to be coordinated and monitored on
an ongoing basis. Longer-term risks and opportunities being considered through a working group
Long-term performance awards (Audited)
The performance awards in the single total figure of remuneration include the 2018 LTIP grant. This will vest on 2 October 2021, 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
0.1%
12.7%
n/a
n/a
95.0%
Overall vesting
0.0%
11.1%
28.5%
39.6%
In addition to the overall vesting of the performance measures, both share price and dividend equivalents affect the payout from the LTIP.
The share price during the relevant performance period for the LTIP decreased by 2.9% 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 2021 was 1,570p from 1 May 2021 to
31 July 2021, which was the performance measurement period. The 2018 LTIP award was originally granted at 1,589.0p.
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 2019 and 2020 Directors’ Remuneration Reports respectively. The year three performance
assessment is detailed on the following page.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 118
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 14.1% to 15.8%, providing a significant headroom above
the above the applicable minimum regulatory requirement of 7.6% excluding any PRA
buffers.
Dividend
• Interim dividend, 2021 of 18p declared and paid, reflecting the group’s strong performance
in the first half of the financial year and confidence in our business model and financial
position.
• The board is proposing a final dividend of 42p, resulting in a full-year dividend per share of
60p, reflecting the group’s strong performance in the year and continued confidence in our
business model and financial position.
Funding
• Average maturity of funding allocated to loan book is 24 months, well in excess of the loan
book at 17 months.
Liquidity
• Continue to comfortably meet the liquidity coverage ratio requirement with a 12-month
average to 31 July 2021 LCR of 1,003% (2020: 823%).
Risk, compliance and
controls
Internal Ratings Based
approach
• Achieved all key objectives and milestones with the initial formal application submitted to the
PRA, as planned, in December 2020.
• Concluded phase/module one of PRA application process with initial interviews conducted
in May 2021.
• The various workstreams under the project to transition to IRB led to a continued positive
relationship with the regulator.
Conduct and Culture
• Approach to enhancing the Conduct Risk Framework and dashboard developed, approved
Sustainability
and currently being piloted in certain businesses prior to group-wide roll out in the next
financial year.
• Overall cultural assessment for the group remains positive with strong scores on culture
achieved in the latest employee opinion survey completed.
• Positive employees feedback received around how Close Brothers supported colleagues
through the pandemic.
• Broadened our inclusion remit to focus on disability inclusion through joining the Valuable
500 initiative and signing up to the Mental Health at Work commitment.
• At 31 July 2021, 32% of our senior managers were female. This reflects a slight drop from
33% in June but we remain confident in our overall progress to achieve our 2025 target of
36%.
• Increased our ethnicity data disclosure to 75%, exceeding our target of 60%.
• Sustainability targets met, exceeded or on track. These include the achievement of a 23%
reduction in group-wide overall Scope 1 and 2 emissions, maintenance of strong customer
satisfaction scores across all our businesses, and a 25% improvement in fleet vehicle
emissions.
• Significant progress was made during the year in advancing and externally articulating the
group’s strategy on sustainability and the group’s identified focus areas, objectives and
associated measures of performance.
• The group has announced that it is supportive of the goals of the Paris Agreement towards
achieving net zero by 2050, reinforced by a new target of becoming operationally net zero
through our Scope 1 and 2 emissions by 2030.
• A qualitative review of climate risks was completed and a process to embed climate risk
identification and risk methodology within the group’s risk framework is being undertaken.
• Assessment of our indirect Scope 3 emissions over the coming year in order to set out our
own transition pathway to lower emissions.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued
119
Element
Measure
Extent to which the Committee determined the target has been met
Operational resilience
• The group’s operational resilience framework, standards and roadmap have been agreed
with the Board Risk Committee.
• A roadmap of investment in operational resilience has been confirmed with key resources
and capabilities identified, including a group-wide resilience investment prioritisation in line
with regulatory compliance timelines.
• Repeatable methodology for defining important business services and defining impact
tolerances agreed with the Board Risk Committee. Initial stress testing and monitoring of
results under way.
• Continued delivery of cyber improvement programme/framework with an independent
assessment confirming the appropriateness of the group’s approach to cyber security.
The table below summarises the Remuneration 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 2022
Base salary
Chief executive – Adrian Sainsbury
Group finance director – Mike Morgan
1 Subject to shareholder approval at the November 2021 AGM.
Year one assessment
100%
90%
Year two assessment Year three assessment
100%
90%
95%
95%
Salary effective from 1 August 20211
£930,000
£560,000
Overall vesting
98.3%
91.7%
95.0%
Increase
–
–
No merit base or cost of living increase has been given to the executive directors although base salaries will increase from £550,000 to £930,000
for the group chief executive and £400,000 to £560,000 for the group finance director as part of a compensation mix adjustment required by the
implementation of the bonus cap introduced as part of CRD V. The salary increases are subject to shareholder approval at the 2021 AGM and will
be backdated to the 1 August 2021, if approved. The average salary increase across the wider employee population was 2%, effective from
1 August 2021.
Adrian Sainsbury and Mike Morgan’s allowance in lieu of pension will be 10% of base salary, which is in line with the level of benefit offered to the
general employee population.
The executive directors will receive benefits in line with those outlined in the remuneration policy table on page 101.
There will be no other increases to allowances or benefits other than any potential increase in the cost of providing them.
2022 annual bonus (i.e. bonus awarded in respect of the 2022 performance year)
RoE continues to be a long-standing metric for the financial element of the executive directors’ remuneration framework. The Remuneration
Committee considers it to be a significant key performance indicator, as it provides strong evidence of adherence to the group’s business model.
At the start of the 2021 financial year, CET1 capital ratio was included as a complementary financial measure as the Remuneration Committee
viewed this metric as particularly important given the uncertain environment as a result of Covid-19. As the economic outlook improved and
uncertainty in the external environment has reduced, the Remuneration Committee has determined that the weighting within the financial
measures should be reviewed, with a higher emphasis on returns, to reflect the group’s commitment to delivering disciplined growth.
Nature of measures
Financial
Non-financial
Choice of measures
RoE
CET1 capital ratio
Strategic scorecard:
Strategic, People, Customers and
risk, Conduct and compliance
objectives
Targets
10% to 18%
12.6% to 15.6%
Discretionary
assessment1
Percentage of bonus opportunity
40%
20%
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 2022 Annual Report on Remuneration.
2 Performance below threshold in the financial measures would result in zero vesting of the financial measure.
Adrian Sainsbury and Mike Morgan have a proposed maximum bonus potential of 95% of salary that is subject to the new Remuneration Policy
being approved at the 2021 AGM.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 120
2021 LTIP (i.e. LTIP awarded in respect of the 2022 to 2024 cycle)
The 2021 LTIP awards due to be granted in November 2021 are shown in the table below.
2021 LTIP award
Percentage change in LTIP award from 2020
2021 LTIP award as a percentage of proposed 2022 salary
Chief executive
Adrian Sainsbury
£1,162,000
(23)%
125%
Group finance director
Mike Morgan
£700,000
0%
125%
As the performance period for the 2021 LTIP awards commences from the 2022 financial year, the Remuneration Committee has proposed
awards for the executive directors at the revised maximum level of 125% of their 2022 base salary under the new Remuneration Policy. These
awards are subject to shareholder approval at the 2021 AGM.
The 2021 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 Remuneration Committee believes these targets are appropriately stretching and effectively align the executive directors’ interests with those
of shareholders.
For the 2022 financial year, an additional measure relating to operational risk has been added to the four risk management objectives in 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 conduct and culture framework and extend the diversity and inclusion strategy
Develop our sustainability strategic position and manage the financial risks and opportunities associated with climate change
Continue to build out our operational resilience strategy and framework
Continue to enhance effectiveness of our operational risk control environment
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 spend on pay
The following table shows the total remuneration paid compared to the total distributions to shareholders.
Remuneration paid
Distributions to shareholders1
1 Interim dividend paid and final dividend proposed for the financial year.
2021
£ million
363.2
89.5
2020
£ million
322.7
59.8
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 2021 financial
year. The year-on-year movement in salary and fees for the directors and employees reflects the annual review implemented in August 2020 and
changes throughout the financial year ending 31 July 2021. Non-executive directors fees have not changed during the 2021 financial year
however, there were a number of changes to the board and committees which are reflected in the salary figures below. The reduction in Preben
Prebensen’s figures reflect he was only in the position of chief executive for part of the year. Mike Morgan’s bonus increased as a result of the
significant improvement in the performance of the financial elements within the executive directors’ annual bonus. The average increase in bonus
for the general population is supported by the improved business performance. Adrian Sainsbury, Mark Pain and Tesula Mohindra were appointed
directors during the 2021 financial year and have been omitted from the table below as there are no year on year remuneration comparisons.
Executive directors2
Chairman and non-executive directors3
Average
Employee1
Preben
Prebensen
Mike
Morgan4
Mike
Biggs
Lesley
Jones
Bridget
Macaskill
Oliver
Corbett
Geoffrey
Howe5
Peter
Duffy
Sally
Williams
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
Salary
Benefits
Bonus
0% 1.8% (85.9)%
0%
0%
0%
0%
0%
0% 5.6% (1.8)% 5.6% (0.1)% 5.6% (69.9)% 2.9% 2.8%
0%
0%
0% 1.8% (86.0)%
0% 479.8%
0% 119.5% (25.7)% (0.4)% (57.0)% 33.5% (50.5)%
21.2% 13.1% (72.8)% (51.3)% 152.2% (54.7)%
–
–
–
–
–
–
0%
–
0% (36.0)% 32.6%
0%
0% (85.3)%
–
–
–
–
–
–
–
–
–
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.
3 Calculated using the fees and taxable benefits from the single figure table for non-executive directors on page 124.
4 Mike Morgan’s 2021 benefits have increased by £7,000 as it includes the gain for the SAYE scheme joined during the year.
5 Geoffrey Howe stepped down as a non-executive director on 19 November 2020 and this is reflected in his 2021 figures.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 121
Pay ratios
The table below compares the chief executive’s single total remuneration figure to the remuneration of the group’s UK employees over the last two
financial years. The Remuneration Committee is satisfied that the median ratio is consistent with the pay, reward and progression policies for our
employee population.
The chief executive’s single total remuneration figure is Adrian Sainsbury’s and Preben Prebensen’s combined 2021 single figures. The combine
figure over states the performance awards as it includes both individuals’ awards that vest in the 2021 financial year.
Year
2021
2020
Method
Option A
Option A
25th Percentile
79 : 1
64 : 1
Median
47 : 1
38 : 1
75th Percentile
29 : 1
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;
• pensions and benefits paid during the financial years;
• annual bonus awarded for the financial years;
• actual and projected gains realised from exercising awards from taxable employee share plans;
• sales incentives paid during the financial years; and
• projection of vested performance awards.
The 2021 total remuneration value for the employee at the 25th percentile, median and 75th percentile was £32,437, £54,729 and £89,927
respectively, of which the salary component made up £28,820, £38,500 and £70,000 respectively.
Chief executive: Historical information
Preben Prebensen
Single figure of total remuneration (’000)3
Annual bonus against maximum opportunity
LTIP, SMP and Matching Share Award vesting4
2012
2013
2014
2015
2016
2017
2018
2019
20201
20212
£2,496
£5,748
90% 100% 100%
95%
79%
25%
£7,411 £5,962 £3,995 £3,337 £2,541 £2,770 £2,043
40%
91%
42%
51%
82%
30%
86%
19%
95%
68%
98%
97%
£860
78%
40%
1 The figures for the performance awards for 2020 have been recalculated using the actual share price on the dates of vesting for the LTIP of £10.55. In the 2020 report, the three-month
average to 31 July 2020 was used, given that the awards were vesting after publication of the report.
2 Preben Prebensen’s remuneration for the 2021 financial year has been time pro-rated to 21 September 2021, the day he stepped down as chief executive.
3 The figures for 2012 to 2014 include the Matching Share Awards that were granted in 2009 at the time of Preben Prebensen’s appointment as chief executive.
4 SMP and Matching Share Awards were last granted in the 2016 financial year.
Adrian Sainsbury
Single figure of total remuneration ('000)
Annual bonus against maximum opportunity
LTIP vesting
1 Adrian Sainsbury was appointed chief executive on 21 September 2021 and his remuneration included in the single figure has been time pro-rated accordingly.
LTIP vesting for the last eight years
Year awarded
20111
20122
20132
20142
20152
20162
20173
20183
Year vested
2014
2015
2016
2017
2018
2019
2020
2021
Adjusted EPS
100%
100%
100%
56%
0%
0%
0%
0%
TSR
100%
100%
25%
26%
0%
28%
–
–
Vesting percentage
RoE
–
–
–
–
–
–
38%
32%
RMO
85%
87%
89%
92%
93%
94%
94%
95%
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 and 2018 awards.
20211
£1,713
78%
40%
Total
95%
97%
68%
51%
19%
30%
42%
40%
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 122
Performance graph
The graph below shows a comparison of TSR for the company’s shares for the 10 years ended 31 July 2021 against the TSR for the companies
comprising the FTSE 250 Index.
350
300
250
200
150
100
50
0
July 2011
July 2012
July 2013
July 2014
July 2015
July 2016
July 2017
July 2018 July 2019
July 2020
July 2021
Source: Thomson Reuters Datastream
Close Brothers
FTSE 250 Index
Note:
This graph shows the value, by 31 July 2021, of £100 invested in Close Brothers Group plc on 31 July 2011 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 30 July 2021 was 1.543p and the range during the year was
946p to 1,685p.
Scheme interests awarded during the year (Audited)
The face value and key details of the share awards granted in the 2021 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 £9.88, the average mid-market closing price for the five days prior to grant (28 September 2020).
Name
Adrian Sainsbury
Mike Morgan
Preben Prebensen
Award type1
DSA2
LTIP3,4
DSA2
LTIP3,4
DSA2
Vesting period
1-3 years
3 years
1-3 years
3 years
1-3 years
Performance
conditions
No
Yes
No
Yes
No
Face value
‘000
£70
£1,500
£131
£700
£396
Percentage vesting
at threshold Number of shares
7,086
151,838
n/a
25%
Vesting/
performance
period end date
29-Sept-23
29-Sept-23
n/a
25%
n/a
13,265
70,858
29-Sept-23
29-Sept-23
40,086
29-Sept-23
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 120.
4 LTIPs vested from 2020 have an additional two-year holding period.
External appointments
Preben Prebensen received £ 9,904.47 in non-executive director fees (2020: £71,687) from The British Land Company plc for the period he was
chief executive.
Payments to departing directors (Audited)
The treatment of Preben Prebensen’s compensation arrangements was determined last year and set out in full on pages 112 and 113 in the 2020
Directors’ remuneration report. In accordance with these arrangements, Preben Prebensen has been awarded a time pro-rated bonus for the
period of the 2021 financial year he was chief executive in recognition of his performance until date of leaving and for his role in the smooth
transition of the new chief executive. Preben Prebensen did not receive a termination payment upon departure.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued
123
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 2021 are set out below:
Name
Adrian Sainsbury
Mike Morgan
Preben Prebensen6
Shareholding
requirement
at 31 July
20211
71,290
51,848
114,286
Number of
shares
owned
outright2
2021
77,180
69,955
103,303
Outstanding share awards not
subject to performance
conditions3
Outstanding share awards subject
to performance conditions4
Outstanding options5
2021
22,784
23,573
97,652
2020
–
15,620
116,625
2021
275,596
172,632
122,113
2020
–
135,699
386,819
2021
2,146
3,778
–
2020
–
2,505
1,458
1 Based on the closing mid-market share price of 1,543p on 31 July 2021.
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.
6 Preben Prebensen’s shareholding is as at 21 September 2020, the day he stepped down as chief executive.
No executive directors held shares that were vested but unexercised at 31 July 2021. There were no changes in notifiable interests between
1 August 2021 and 20 September 2021, other than the purchase of shares by Adrian Sainsbury within the SIP which increased his shareholding
to 77,199 shares.
Executive directors’ shareholding
The chart below compares the current executive directors’ shareholding versus shareholding policy, as a percentage of salary.
Adrian Sainsbury
Mike Morgan
200%
217%
200%
0
100
200
Policy
Actual
270%
300
Details of executive directors’ share exercises during the year (Audited)
Name
Adrian Sainsbury
Mike Morgan
Preben Prebensen
Award type
2017 DSA
2018 DSA
2019 DSA
2015 LTIP Special2
2018 DSA
2019 DSA
2015 LTIP Special2
2015 LTIP Special2
2017 DSA
2018 DSA
2019 DSA
2017 LTIP
Held at
1 August
2020
5,712
4,721
5,489
22,148
315
4,997
10,374
6,697
Called1
5,712
4,721
5,489
22,148
315
4,997
10,374
6,697
Lapsed
–
–
–
–
–
–
–
–
21,343
17,863
19,853
129,541
21,343
17,863
19,853
53,889
–
–
–
75,652
Market price
on award
p
1,459.0
1,588.8
1,366.4
1,446.0
Market price
on calling
p
1,014.0
1,014.0
1,014.0
1,014.0
1,588.8
1,366.4
1,446.0
1,493.4
1,459.0
1,588.8
1,366.4
1,459.0
1,022.0
1,022.0
1,022.0
1,022.0
1,401.6
1,401.6
1,401.6
1,401.6
Total value
on calling1
£
57,920
47,871
55,658
224,581
3,219
51,069
106,022
68,443
299,143
250,368
278,260
755,308
Dividends
paid on
vested shares
£
11,938
6,987
4,611
72,079
340
2,199
29,612
19,116
44,607
26,437
16,677
112,628
1 These are the actual number of shares and values realised on calling. Any variances in totals are due to rounding.
2 The 2015 LTIP Special Awards are performance awards granted to the individuals before they were appointed to the board. The awards were conditional on continued employment and
positive EPS growth between grant and vesting.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 124
Notes to the details of executive directors’ share exercises during the year
The DSA is a mandatory deferral of a portion of the annual bonus.
The DSA and LTIP give executive directors the right to call for shares in the company from the employee benefit trust or treasury shares, at nil cost,
together with a cash amount representing accrued notional dividends thereon. They may be called for at any time up to 12 months from the date
of vesting. The DSA and LTIP awards may be forfeited in certain circumstances if the executive director leaves employment before the vesting
date. The value of the awards is charged to the group’s income statement in the year to which the award relates for the DSA and spread over the
vesting period for the LTIP award.
As previously disclosed, the former chief executive, Preben Prebensen, was granted nil cost awards in 2017 under the Company’s Long-Term
Incentive Plan. Those awards vested in respect of 53,889 company shares at the end of the three-year performance period (ending on 3 October
2020), with the remainder lapsing. After vesting, the award was subject to a further two-year holding period, during which time the Award should
not have been capable of exercise until 3 October 2022. Due to an administrative error on the part of the company, Preben’s nil cost awards were
exercised in December 2020, with the underlying shares being sold in the market, the proceeds of sale used to account for deductible taxes, and
the net proceeds being remitted to Preben. On discovery of the administrative error, Preben cooperated fully with the company and has agreed
to defer the vesting of awards over 51,076 shares in the company, held under the company’s Deferred Annual Bonus Plan, that are due to vest
in October 2021. These awards will instead be released on 3 October 2022 (being the date on which Preben’s 2017 LTIP awards would have
been released). Preben has also purchased an additional 2,813 shares in the company, and has agreed not to sell or transfer those shares until
3 October 2022. These steps have been taken with the intention of largely replicating the overall vesting and holding schedule applicable to the
2017 LTIP awards referred to above.
Details of executive directors’ option exercises during the year (Audited)
Name
Adrian Sainsbury
Award type
2017 SAYE (Spring)
2017 SAYE (Autumn)
Held at
1 August
2020
729
774
Exercised
729
774
Lapsed
–
–
Exercise price
1,234.0
1,162.0
Market price
on exercise Gain on calling
579
1,172
1,313.4
1,313.4
Mike Morgan
–
–
–
Preben Prebensen
2017 SAYE (Spring)
1,458
1,458
–
–
–
–
–
1,234.0
1,313.4
1,158
Single total figure of remuneration for non-executive directors (Audited)
Name
Mike Biggs
Lesley Jones
Geoffrey Howe3
Bridget Macaskill
Oliver Corbett4
Peter Duffy
Sally Williams
Mark Pain
Tesula Mohindra5
2021
2020
Basic fee1
£’000
300
70
21
70
70
70
70
41
–
Committee
chairman
£’000
–
33
–
33
33
–
–
–
–
Committee
member
£’000
–
10
5
8
8
7
10
5
–
Senior
independent
director
£’000
–
–
6
–
2
–
–
19
–
Benefits2
£’000
8
1
–
7
–
–
–
–
–
Total
£’000
308
114
32
118
113
77
80
65
–
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
–
–
–
–
–
–
Benefits2
£’000
4
1
–
5
–
–
1
–
–
Total
£’000
304
114
105
118
113
75
48
–
–
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 Geoffrey Howe stepped down as a non-executive director on 19 November 2020.
4 Oliver Corbett was appointed interim senior independent director for the period 19 November 2020 to 31 December 2020.
5 Tesula Mohindra was appointed a non-executive director on 15 July 2021 and not paid during the 2021 financial year.
Close Brothers Group plc Annual Report 2021Directors’ Remuneration Report continued 125
Notes to the single total figure of remuneration for non-executive directors
The fees payable to non-executive directors for the 2021 and 2022 financial years are as follows. All fees with the exception of the chairmans’ fee
are increasing with effect from 1 August 2021. The committee membership fee is increasing for the first time since 2010.
Role
Chairman1
Non-executive director
Supplements
Senior independent director2
Chair of Audit Committee
Chair of Remuneration Committee
Chair of Risk Committee
Committee membership3
1 The chairman receives no other fees for chairmanship or membership of board committees.
2 The senior independent director fee increased from £24,000 to £33,000 effective 1 January 2021.
3 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 Howe1
Bridget Macaskill
Oliver Corbett
Peter Duffy
Sally Williams
Mark Pain
Tesula Mohindra
1 Geoffrey Howe’s shareholding is at 19 November 2020, the day he left the company.
There were no changes in notifiable interests between 1 August 2021 and 20 September 2021.
This report was approved by the board of directors on 28 September 2021 and signed on its behalf by:
Bridget Macaskill
Chair of the Remuneration Committee
2022
£300,000
£71,000
2021
£300,000
£70,000
£34,000
£34,000
£34,000
£34,000
£6,000
£33,000
£33,000
£33,000
£33,000
£5,000
Shares held
beneficially at
31 July 2021
500
–
5,000
2,500
–
848
–
–
–
Shares held
beneficially at
31 July 2020
500
–
5,000
2,500
–
848
–
–
–
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 126
Report on the audit of the financial statements
Opinion
In our opinion:
• Close Brothers Group plc’s group financial statements and company financial statements (the “financial statements”) give a true and fair view
of the state of the group’s and of the company’s affairs as at 31 July 2021 and of the group’s profit and the group’s cash flows for the year then
ended;
• the group financial statements have been properly prepared in accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006;
• the 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.
We have audited the financial statements, included within the Annual Report, which comprise: the consolidated and company balance sheets
as at 31 July 2021; 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.
Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union
As explained in Note 1 to the financial statements, the group, in addition to applying international accounting standards in conformity with
the requirements of the Companies Act 2006, has also applied international financial reporting standards adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union.
In our opinion, the group financial statements have been properly prepared in accordance with international financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
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.
Other than those disclosed in Note 5, we have provided no non-audit services to the company or its controlled undertakings in the period under
audit.
Our audit approach
Overview
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 evaluating entity level controls, testing information technology general controls and analytical
review procedures to mitigate the risk of material misstatement in the residual components.
Key audit matters
• Impact of COVID-19 (group and company)
• Application of effective interest rate (“EIR”) accounting (group)
• Determination of expected credit losses on loans and advances to customers (group)
Materiality
• Overall group materiality: £13,200,000 (2020: £11,200,000) based on 5% of profit before tax (2020: 5% of the 3 year average profit
before tax).
• Overall company materiality: £11,100,000 (2020: £10,000,000) based on 1% of total assets.
• Performance materiality: £9,900,000 (group) and £8,325,000 (company).
Independent Auditors’ Report to the Members of Close Brothers Group plcClose Brothers Group plc Annual Report 2021 127
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.
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.
The key audit matters below are consistent with last year.
Key audit matter
How our audit addressed the key audit matter
Impact of COVID-19 (group and company)
The COVID-19 global pandemic resulted in unprecedented
economic conditions and government support programmes and
regulatory interventions to support businesses and people. It has
also changed the way that the group operates its business, with
one of the substantial impacts being transition to remote working.
Our audit team has also been working remotely for much of the
period during which we performed the audit.
Consistent with the prior year, 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 Directors considered the impact of the pandemic on the
group’s and company’s ability to continue as going concerns. 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
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 and control matters” section of the
Audit Committee Report on page 92.
• The “Going concern” section of the Directors Report on page 74.
Determination of expected credit losses on loans and
advances to customers (group)
Refer to the separate Key Audit Matter “Determination of expected
credit losses on loans and advances to customers”.
Application of effective interest rate (“EIR”) accounting
(group)
Interest income on loans and advances is recognised using the EIR
method whereby any fees or costs that are an integral part of the
financial instrument are included in the EIR as an EIR adjustment.
We consider that portfolios with material manually determined EIR
adjustments present a significant risk of material misstatement due
to fraud or error.
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, we:
• 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; and
• Substantiated the nature and existence of the group’s financial
resources and liquidity financing facilities.
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.
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.
We have understood management’s processes for revenue
recognition, identifying areas which present a heightened risk of
error, as described in the left column.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 128128
Independent Auditors’ Report to the Members of
Close Brothers Group plc continued
Key audit matter
How our audit addressed the key audit matter
Relevant references:
• Note 1, significant accounting policies that includes the group’s
revenue recognition policy on page 141.
Determination of expected credit losses on loans and
advances to customers (group)
The determination of expected credit loss (“ECL”) allowances is
subjective and judgmental, including the degree of judgement and
inherent uncertainty in the assumptions arising from the impact of
COVID-19.
During the year, developments in the Novitas business have
required management to significantly revise the assumptions made
in determining the ECL, leading to a material increase in the ECL for
that business.
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, litigation case
failure, 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.
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 how COVID-19 related concessions
cure, including new concessions granted in the year, 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
145;
• Note 11, Loans and advances to customers on page 155, and
• Note 28c, Financial risk management on page 179.
In those areas, we performed the following testing:
• Critically assessed which fees and costs were included in the
determination of EIR;
• Agreed a sample of inputs to underlying agreements and cash
receipts; and
• Reperformed the calculation of the EIR adjustment for a sample of
loans.
Based on the evidence obtained, we found that the calculations,
models and data used were appropriate.
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; 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.
We evaluated management’s model to derive the Novitas ECL, we
critically assessed the assumptions used by management and we
performed our own sensitivity analysis using plausible scenarios
derived from available experience.
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 used credit risk modelling specialists to support the audit team
in the performance of these audit procedures.
Close Brothers Group plc Annual Report 2021 Key audit matter
How our audit addressed the key audit matter
129
Individually assessed provisions
We performed the following procedures to test the completeness
of the identification of defaulted loans requiring individual
assessment:
• Critically assessed the criteria for determining whether a default
event had occurred; and
• Tested a haphazardly-selected 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 borrowers’
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, including those which were
used to account for the impact COVID-19 has had, focusing on the
larger adjustments and those which we considered to represent
the greatest level of audit risk.
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 post model adjustment 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 were appropriate.
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 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’).
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 130130 Close Brothers Group plc
Annual Report 2021
Independent Auditors’ Report to the Members of
Close Brothers Group plc continued
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. Our
scoping also 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.
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
How we determined it
Rationale for benchmark applied
Financial statements – group
Financial statements – company
£13,200,000 (2020: £11,200,000).
£11,100,000 (2020: £10,000,000).
1% of total assets rounded down to the
nearest £100,000 (2020: the same basis)
We have selected total assets as an
appropriate benchmark for company
materiality. Profit based benchmarks were
not considered appropriate for company
materiality as the company is an investment
holding company and is not a trading
company.
5% of profit before tax rounded down to
nearest £100,000 (2020: 5% of the 3 year
average profit before tax)
Profit before tax (PBT) 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.
The global pandemic resulted in volatility in
profits in prior years due to which we used a
three years average PBT in the prior year to
adjust for such volatility. However, in the
current year as the group had returned to its
normal earnings level, we therefore deemed it
appropriate to use the current year PBT as
the benchmark.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of
materiality allocated across components was between £2.9 million and £11.1 million. Certain components were audited to a local statutory audit
materiality that was also less than our overall group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and
extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance
materiality was 75% of overall materiality, amounting to £9,900,000 for the group financial statements and £8,325,000 for the company financial
statements.
In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment and aggregation
risk and the effectiveness of controls – and concluded that a haircut of 25% was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £500,000 (group audit) (2020:
£500,000) and £500,000 (company audit) (2020: £500,000) as well as misstatements below those amounts that, in our view, warranted reporting
for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the group’s and the company’s ability to continue to adopt the going concern basis of accounting
included:
• A detailed risk assessment to identify factors that could impact the going concern basis of accounting, including the effect of COVID 19;
• Evaluation of management’s going concern assessment as well as the ICAAP and ILAAP submissions to the PRA;
• Evaluation of stress testing performed by management and consideration of whether the stresses applied are appropriate for assessing going
concern;
Close Brothers Group plc Annual Report 2021 131
• Evaluation of the Group’s forecast financial performance, liquidity and capital positions over the going concern period including an evaluation of
the impact of COVID-19 on the financial outlook of the Group;
• Read the credit rating agency ratings and actions.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the group’s and the company’s ability to continue as a going concern for a period of at least twelve
months from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the
financial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group’s and the company’s
ability to continue as a going concern.
In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the
going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this 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 our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as
described below.
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 2021 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the group and 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.
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.
Corporate governance statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate
governance statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other
information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance
statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add
or draw attention to in relation to:
• The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;
• The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an
explanation of how these are being managed or mitigated;
• The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any material uncertainties to the group’s and company’s ability to continue to do so over
a period of at least twelve months from the date of approval of the financial statements;
• The directors’ explanation as to their assessment of the group’s and company’s prospects, the period this assessment covers and why the
period is appropriate; and
• The directors’ statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its
liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or
assumptions.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 132
Independent Auditors’ Report to the Members of
Close Brothers Group plc continued
Our review of the directors’ statement regarding the longer-term viability of the group was substantially less in scope than an audit and only
consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with
the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements
and our knowledge and understanding of the group and company and their environment obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate
governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:
• The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the
information necessary for the members to assess the group’s and company’s position, performance, business model and strategy;
• The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
• The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the 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.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors’ Responsibility Statement, 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 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 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.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities,
outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of
detecting irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related
to breaches of banking laws and regulations such as but not limited to consumer credit and unethical and prohibited business practices,
securities markets, trading and other financial products and services including conduct of business, principally those determined by the Prudential
Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”), 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 financial statements
such as the Companies Act 2006, UK tax legislation and the Listing Rules of the 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 manual journal entries to manipulate financial performance, management bias through judgements and assumptions in
significant accounting estimates and significant one-off or unusual transactions. 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:
• Discussions with management and those charged with governance including consideration of known or suspected instances of non-
compliance with laws and regulation and fraud.
• Assessment of matters reported on the Group’s whistleblowing helpline and the results of management’s investigation of such matters.
• Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to the
allowance for ECL.
• Identifying and testing journal entries, in particular any manual journal entries posted by unexpected or unusual users, manual journals posted
with descriptions indicating an increased risk of override of controls, and manual journals posted to unusual account combinations considering
those with a potentially favourable impact on financial performance.
• Performing testing over material period end adjustments.
• Incorporating unpredictability into the nature, timing and/or extent of our testing.
• Reviewing key correspondence with the FCA and PRA.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with
laws and regulations that are not closely related to events and transactions reflected in the financial statements. 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.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques.
However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target
particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
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.
Close Brothers Group plc Annual Report 2021 133
Use of this report
This report, including the opinions, has been prepared for and only for the 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 obtained all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the 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 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 4 years, covering the years ended
31 July 2018 to 31 July 2021.
Mark Hannam (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
28 September 2021
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 134 Close Brothers Group plc
Annual Report 2021
Consolidated Income Statement
for the year ended 31 July 2021
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 and impairment of intangible assets on acquisition,
goodwill impairment and exceptional item
Operating profit before amortisation and impairment of intangible assets on acquisition,
goodwill impairment and exceptional item
Amortisation and impairment of intangible assets on acquisition
Goodwill impairment
Exceptional item: HMRC VAT refund
Operating profit before tax
Tax
Profit after tax
Profit attributable to shareholders
Basic earnings per share
Diluted earnings per share
Interim dividend per share paid
Final dividend per share
Note
4
4
2021
£ million
656.8
(119.3)
2020
£ million
629.1
(135.1)
537.5
494.0
246.1
(16.1)
165.2
89.4
(69.5)
230.2
(17.6)
142.6
83.4
(66.5)
415.1
372.1
952.6
866.1
(592.1)
(89.8)
(538.4)
(183.7)
(681.9)
(722.1)
270.7
(14.2)
(12.1)
20.8
265.2
(63.1)
202.1
144.0
(3.1)
–
–
140.9
(31.4)
109.5
202.1
109.5
134.8p
133.6p
18.0p
42.0p
72.8p
72.5p
–
40.0p
4
4
4
16
4
11
15
15
6
7
8
8
9
9
Strategic Report
Close Brothers Group plc
Annual Report 2021
135
Consolidated Statement of Comprehensive Income
for the year ended 31 July 2021
Profit after tax
Other comprehensive income/(expense) that may be reclassified to income statement
Currency translation losses
Gains/(losses) on cash flow hedging
Gains/(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 (expense)/income that will not be reclassified to income statement
Defined benefit pension scheme gains
Tax relating to items that will not be reclassified
Other comprehensive income/(expense), net of tax
Total comprehensive income
Attributable to
Shareholders
2021
£ million
202.1
2020
£ million
109.5
(1.1)
7.4
0.9
(1.2)
6.0
0.5
(0.6)
(0.1)
5.9
(0.4)
(1.9)
(0.6)
1.0
(1.9)
0.9
(0.3)
0.6
(1.3)
208.0
108.2
208.0
108.2
Governance ReportFinancial Statements 136 Close Brothers Group plc
Annual Report 2021
Consolidated Balance Sheet
at 31 July 2021
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
2021
£ million
31 July
2020
£ million
Note
10
11
12
13
14
15
16
7
17
18
19
19
19
19
14
17
20
21
1,331.0
699.6
136.3
8,444.5
477.3
31.9
51.1
18.3
232.6
309.9
36.4
56.0
209.6
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
12,034.5
11,071.5
690.6
150.6
6,634.8
512.7
1,865.5
–
21.3
–
367.0
222.7
604.9
152.8
5,917.7
497.9
1,870.3
17.9
20.8
1.3
315.3
223.0
10,465.2
9,621.9
38.0
1,555.5
(23.2)
38.0
1,435.0
(22.4)
1,570.3
1,450.6
(1.0)
(1.0)
1,569.3
1,449.6
12,034.5
11,071.5
The consolidated financial statements were approved and authorised for issue by the board of directors on 28 September 2021 and signed on
its behalf by:
Michael N. Biggs Adrian J. Sainsbury
Chairman
Chief Executive
Registered number: 520241
Strategic Report
Close Brothers Group plc
Annual Report 2021
137
Consolidated Statement of Changes in Equity
for the year ended 31 July 2021
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 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
At 31 July 2020
38.0
1,435.0
Profit for the year
Other comprehensive (expense)/income
Total comprehensive income for the year
Dividends paid (note 9)
Shares purchased
Shares released
Other movements
Income tax
–
–
–
–
–
–
–
–
202.1
(0.1)
202.0
(86.6)
–
–
3.7
1.4
–
(0.5)
(0.5)
–
–
–
–
–
0.2
–
0.6
0.6
–
–
–
–
–
–
–
–
–
(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
(15.6)
(1.3)
(5.7)
1,450.6
(1.0)
1,449.6
–
–
–
–
(12.1)
10.0
(4.7)
–
–
–
–
–
–
–
–
–
–
5.4
5.4
–
–
–
–
–
202.1
5.9
208.0
(86.6)
(12.1)
10.0
(1.0)
1.4
–
–
–
–
–
–
–
–
202.1
5.9
208.0
(86.6)
(12.1)
10.0
(1.0)
1.4
At 31 July 2021
38.0 1,555.5
0.8
(22.4)
(1.3)
(0.3)
1,570.3
(1.0) 1,569.3
Governance ReportFinancial Statements 138 Close Brothers Group plc
Annual Report 2021
Consolidated Cash Flow Statement
for the year ended 31 July 2021
Net cash inflow from operating activities
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment
Intangible assets – software
Subsidiaries
Sale of:
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 issuance of subordinated loan capital
Net (decrease)/increase in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note
27(a)
2021
£ million
119.1
2020
£ million
429.4
27(b)
27(c)
(8.9)
(47.9)
(2.9)
(5.3)
(44.3)
(4.6)
2.3
0.5
(57.4)
(53.7)
61.7
375.7
(12.1)
(86.6)
(13.6)
(14.7)
40.6
(8.0)
(65.8)
(14.3)
(14.6)
–
(24.7)
1,461.3
273.0
1,188.3
27(d)
1,436.6
1,461.3
Strategic Report
Company Balance Sheet
at 31 July 2021
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
Subordinated loan capital
Provisions
Deferred tax liability
Other creditors
Accruals
Net current assets
Total assets less current liabilities
Creditors: Amounts falling due after more than one year
Debt securities in issue
Subordinated loan capital
Provisions
Net assets
Capital and reserves
Called up share capital
Profit and loss account
Other reserves
Shareholders’ funds
1 Restated – see note 1(c).
Close Brothers Group plc
Annual Report 2021
139
Note
15
16
30
2021
£ million
20201
£ million
–
11.5
287.0
0.1
5.4
287.0
298.5
292.5
7
19
17
7
19
17
21
434.8
363.4
4.6
–
8.9
1.2
416.8
312.6
3.2
0.1
10.9
0.9
812.9
744.5
1.8
0.6
1.2
0.8
0.8
9.5
1.8
–
1.1
–
1.5
7.7
14.7
12.1
798.2
732.4
1,096.7
1,024.9
249.3
221.5
1.8
248.9
174.6
2.2
624.1
599.2
38.0
608.5
(22.4)
38.0
576.8
(15.6)
624.1
599.2
The company reported a profit for the financial year ended 31 July 2021 of £116.0 million (2020: £81.1 million).
The company financial statements were approved and authorised for issue by the board of directors on 28 September 2021 and
signed on its behalf by:
Michael N. Biggs Adrian J. Sainsbury
Chairman
Chief Executive
Governance ReportFinancial Statements 140 Close Brothers Group plc
Annual Report 2021
Company Statement of Changes in Equity
for the year ended 31 July 2021
At 1 August 2019
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Dividends paid (note 9)
Shares purchased
Shares released
Other movements
At 31 July 2020
Profit for the year
Other comprehensive expense
Total comprehensive income for the year
Dividends paid (note 9)
Shares purchased
Shares released
Other movements
At 31 July 2021
Other reserves
Share-
based
payments
reserve
£ million
Profit
and loss
account
£ million
Shareholders’
funds
£ million
Share capital
£ million
38.0
563.0
(18.2)
582.8
–
–
–
–
–
–
–
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)
38.0
576.8
(15.6)
599.2
–
–
–
–
–
–
–
116.0
(0.1)
115.9
(86.6)
–
–
2.4
–
–
–
–
(12.1)
10.0
(4.7)
116.0
(0.1)
115.9
(86.6)
(12.1)
10.0
(2.3)
38.0
608.5
(22.4)
624.1
141
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 (2020: 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.
The accounting policies of the company are the same as those of the
group set out in this note except for (l) Leases. For the company,
rental costs under operating leases are charged to the income
statement in equal instalments over the period of the lease.
(b) Compliance with International Financial Reporting Standards
The consolidated financial statements have been prepared in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006. The consolidated
financial statements also comply with IFRSs adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in 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.
The group has early adopted the IASB’s Interest Rate Benchmark
Reform Phase 2 amendments, which are effective for accounting
periods beginning on or after 1 January 2021. These amendments,
which address the impact on financial reporting during the reform of
an interest rate benchmark, do not have a material impact on the
group’s financial results.
In the year ended 31 July 2020, the group adopted IFRS 16 Leases,
which replaced IAS 17 Leases and was effective from 1 August 2019.
Future accounting developments
Minor amendments to IFRSs effective for the group from 1 August
2021 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 financial statements are prepared on a going concern basis as
disclosed in the Directors’ Report.
The prior year company balance sheet has been restated to reflect
the derecognition of a right of use asset of £18.3 million and an
associated lease liability in compliance with FRS 102.
(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) 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.
(f) Revenue recognition
Interest income
Interest on loans and advances made by the group, and fee income
and expense and other direct costs relating to loan origination,
restructuring or commitments are recognised in the consolidated
income statement using the effective interest rate method.
The effective interest rate method applies a rate that discounts
estimated future cash payments or receipts relating to a financial
instrument to its net carrying amount. The cash flows take into
account all contractual terms of the financial instrument including
transaction costs and all other premiums or discounts but not future
credit losses.
Fees and commissions
Where fees that have not been included within the effective interest
rate method are earned on the execution of a significant act, such as
fees arising from negotiating or arranging a transaction for a third
party, they are recognised as revenue when that act has been
completed. Fees and corresponding expenses in respect of other
services are recognised in the consolidated income statement as the
right to consideration or payment accrues through performance of
services. 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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 142
1. Significant Accounting Policies continued
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.
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.
(g) Adjusted measures
Adjusted measures exclude amortisation and impairment of intangible
assets on acquisition, goodwill impairment and exceptional items.
Amortisation and impairment of intangible assets on acquisition and
goodwill impairment are excluded to present the performance of the
group’s acquired businesses consistent with its other businesses.
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.
(h) 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
Derecognition
Financial assets are derecognised when the contractual rights to
receive cash flows from the financial assets have expired or where the
group has transferred the contractual rights to receive cash flows and
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 or liability carrying
value is adjusted to reflect the present value of modified cash flows
discounted at the original EIR. The adjustment is recognised within
income on the income statement.
(i) Impairment of financial 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 increase 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.
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 or more past due 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. This is typically 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.
Close Brothers Group plc Annual Report 2021The Notes continued 143
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 exposure at default (“EAD”) and the
loss given default (“LGD”), and includes forward looking
macroeconomic information where appropriate.
Different model-based approaches to estimate PDs are employed
across Retail, Commercial and Property, which represent the
likelihood of a borrower defaulting on its financial obligation. The
framework applied typically includes an economic response model to
quantify the impact of macroeconomic forecasts and a risk ranking
mechanism (e.g. a scorecard) to quantify obligor level likelihood of
default.
EAD is based on the amounts expected to be owed at the time of
default, and is estimated using an amortising schedule or a credit
conversion factor, depending on the nature of lending. 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. LGD estimates vary and can include estimates
for the likelihood of collateral recovery and a separate calculation for
the likely loss on recovery, and for some businesses LGDs are
estimated using liquidation curves based on historical cashflows.
EADs and LGDs are adjusted to account for the impact of discounting
using the effective interest rate.
Risk models are estimated using historical data wherever possible,
and in the absence of sufficient loss history, an expert judgment
approach is considered for some parameters.
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 remain appropriate.
By their nature, limitations in the group’s expected credit loss
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 or quantitative back-testing to ensure
expected credit loss provisions adequately reflect all known
information. These adjustments are generally determined by
considering the attributes or risks of a financial asset which are not
captured by existing expected credit loss model outputs.
Management adjustments are actively monitored, reviewed, and
incorporated into future model development where applicable.
At 31 July 2021, £38.9 million of the expected credit loss provision
was attributable to adjustments (31 July 2020: £34.2 million). Across
2020 and 2021, the use and quantum of adjustments has been at a
higher level than typically employed, driven by the unique
circumstances emerging from the Covid-19 pandemic.
During the course of the financial year, the nature and granularity
of adjustments have evolved to incorporate the developing and
uncertain macroeconomic environment and its potential impact on
our customers, where not fully captured in our expected credit loss
models.
forbearance. Adjustments also reflect the application of expert
management judgement to determine the appropriate allocation of
some loan balances between Stages 1 and 2 and the review of
provision coverage at the individual and portfolio level. This approach
has incorporated our experience, knowledge of our customers, the
sectors in which they operate, and the assets which we finance.
We will continue to monitor the use or need of adjustments as new
information emerges.
Separate from the ongoing 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 Asset Finance and
Invoice Finance businesses. The changes were made to ensure
modelled provisions better reflect future loss emergence. The impact
of model changes to the expected credit loss provision are
disclosed in note 11b.
(j) 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.
(k) 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.
(l) Leases
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, which
comprises the lease payments receivable and any unguaranteed
residual value, 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.
In particular, adjustments have been required to capture the
macroeconomic uncertainty due to the pandemic and the associated
government response, the 80% guarantee under government lending
schemes and our on-going monitoring of Covid-19 related
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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 144
1. Significant Accounting Policies continued
(m) 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.
(n) 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 (h).
(o) Offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount
presented on the consolidated balance sheet if, and only if, there is a
legally enforceable right to set off the recognised amounts and there
is an intention to settle on a net basis, or to realise an asset and settle
the liability simultaneously.
(p) Derivatives and hedge accounting
On adoption of IFRS 9 Financial Instruments in 2018, the group
elected to continue applying hedge accounting under IAS 39
Financial Instruments: Recognition and Measurement.
In general, derivatives are used to minimise the impact of interest,
currency rate and equity price changes to the group’s financial
instruments. They are carried on the consolidated balance sheet at
fair value which is obtained from quoted market prices in active
markets, including recent market transactions and discounted cash
flow models.
On acquisition, certain derivatives are designated as a hedge and the
group formally documents the relationship between these derivatives
and the hedged item. The group also documents its assessment,
both at hedge inception and on an ongoing basis, of whether the
derivative is highly effective in offsetting changes in fair values or cash
flows of hedged items. If a hedge was deemed partially ineffective but
continues to qualify for hedge accounting, the amount of the
ineffectiveness, taking into account the timing of the expected cash
flows where relevant, would be recorded in the consolidated income
statement. If the hedge is not, or has ceased to be, highly effective,
the group discontinues hedge accounting.
For fair value hedges, changes in the fair value are recognised in the
consolidated income statement, together with changes in the fair
value of the hedged item. For cash flow hedges, the fair value gain or
loss associated with the effective proportion of the cash flow hedge is
recognised initially directly in equity and recycled to the consolidated
income statement in the period when the hedged item affects
income.
(q) 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:
Goodwill on acquisitions of subsidiaries is included in intangible
assets. Goodwill is assessed annually for impairment and carried at
cost less any accumulated impairment.
(r) 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
(s) 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.
(t) Employee benefits
The group operates defined contribution pension schemes for eligible
employees as well as a defined benefit pension scheme which is
closed to new members and further accrual.
Under the defined contribution scheme the group pays fixed
contributions into a fund separate from the group’s assets.
Contributions are charged in the consolidated income statement
when they become payable.
The expected cost of providing pensions within the funded defined
benefit scheme, determined on the basis of annual valuations using
the projected unit method, is charged to the consolidated income
statement. Actuarial gains and losses are recognised in full in the
period in which they occur and recognised in other comprehensive
income.
The retirement benefit obligation recognised in the balance sheet
represents the present value of the defined benefit obligation, as
adjusted for unrecognised past service cost, and as reduced by the
fair value of scheme assets at the balance sheet date. Both the return
on investment expected in the period and the expected financing
cost of the liability, as estimated at the beginning of the period, are
recognised in the results for the period. Any variances against these
estimates in the year form part of the actuarial gain or loss. The
assets of the scheme are held separately from those of the group in
an independently managed fund.
(u) Share-based payments to employees
At 31 July 2021, 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.
Computer software
Intangible assets on acquisition
3 to 5 years
8 to 20 years
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.
Close Brothers Group plc Annual Report 2021The Notes continued 145
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.
(v) 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.
(w) 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.
(x) 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.
(y) 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, estimates and assumptions that are reasonable. The
group’s estimates and assumptions are based on historical
experience and reasonable 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.
Expected credit losses
At 31 July 2021 the group’s expected credit loss provision was
£280.4 million (31 July 2020: £238.7 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 may 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 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, a number of
enhancements were made to the above-mentioned staging approach
during the course of the 2020 financial year. These incorporate the
effects of Covid-19 into the significant increase in credit risk
assessment and continue to be in operation.
Note 28c sets out the approach to Covid-19 related concessions,
including staging assumptions and cure periods. Additional
monitoring of this cohort of customers continues to be in place until
the relevant cure period has expired, upon which, standard staging
triggers are applied.
Definition of default
The definition of default is an important building block for expected
credit loss 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 a 90 days past due backstop. While
some criteria are factual (e.g. administration, insolvency, or
bankruptcy), others require a judgmental assessment of whether the
borrower has financial difficulties which are expected to have a
detrimental impact on their ability to meet contractual obligations. A
change in the definition of default may have a material impact on the
expected credit loss provision.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 146
2. Critical Accounting Estimates and Judgements continued
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 wide range of factors, could result in a material
adjustment to the carrying amounts of assets and liabilities in the next
financial year.
The accuracy of the expected credit loss provision can be impacted
by unpredictable effects or unanticipated changes to model
estimates. In addition, forecasting errors could also 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 across model estimates.
A representation of the core drivers of the macroeconomic scenarios
that are deployed in our models are outlined on page 147. 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.
Model estimates
Across the Banking Division, expected credit loss provisions are
outputs of models which are based on a number of assumptions.
The assumptions applied involve judgement and as a result are
regularly assessed.
During the year, the calculation of the expected credit loss provision
for Novitas, which forms part of Commercial, has required the group
to update a number of assumptions. This year a significant portion of
the expected credit loss provision reported in Commercial relates to
the Novitas loan book.
Novitas provides funding via intermediaries to individuals who wish to
pursue legal cases. The majority of the Novitas portfolio, and therefore
provision, relates to civil litigation cases. To help protect customers in
the event that their case fails, a standard loan condition is that an
individual purchases an insurance policy which covers loan capital and
varying levels of interest. Across the portfolio there are insurance
policies from a number of well rated insurers.
The key sources of estimation uncertainty for the portfolio’s expected
credit loss provision are case failure rates and recovery rates. Case
failure rates represent a forward-looking probability assessment of
successful case outcomes informed by actual case failure rates.
Recovery rates represent the level of interest and capital that is
expected to be covered by an insurance policy, once a case fails. In
addition an assessment is also undertaken reflecting potential insurer
insolvency risk with resultant expected credit losses held for this.
Assumptions are informed by the latest credit performance data, with
management judgement applied to reflect expected outcomes and
uncertainties. In addition, the provision is informed by sensitivity
analysis to reflect the level of uncertainty. More detailed credit
performance data continues to develop as the portfolio matures,
which over time will reduce the level of estimation uncertainty.
Based on this methodology, and using the latest information available,
the expected credit loss provision for the Commercial division has
seen a significant uplift, reflecting the latest assumptions on case
failure and recovery rates in Novitas. Further details on provisions are
included in note 11b.
Given these assumptions represent sources of estimation uncertainty,
management has assessed and completed sensitivity analysis when
compared to the expected credit loss provision for Commercial of
£172.4 million. At 31 July 2021, a 5% absolute deterioration or
improvement in case failure rates would increase or decrease the
expected credit loss provision by £8.2 million. Separately, a 5%
absolute deterioration or improvement in recovery rates would increase
or decrease the expected credit loss provision by £4.2 million.
Forward-looking information
Determining expected credit losses under IFRS 9 requires the
incorporation of forward-looking macroeconomic information that is
reasonable, supportable and includes 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 forward-looking information varies across the group’s
lending businesses because of the differing sensitivity of each
portfolio to specific macroeconomic variables. The modelled impact
of macroeconomic scenarios and their respective weightings is
overlaid with expert judgement in relation to stage allocation and
coverage ratios at the individual and portfolio level, incorporating
management’s experience and knowledge of customers, the sectors
in which they operate, and the assets financed. The Credit Risk
Management Committee (“CRMC”) including the group finance
director and group chief risk officer meets monthly, to review and, if
appropriate, agree changes to the economic scenarios and
probability weightings assigned thereto. In light of the Covid-19
pandemic, this review has been conducted on a monthly basis. The
decision is subsequently noted at the Group Risk and Compliance
Committee (“GRCC”), which includes the aforementioned roles in
addition to the group chief executive officer.
At 31 July 2020, the scenario weightings were 40% baseline and
60% downside, reflecting the uncertainty and elevated risk resultant
from the pandemic. At 31 January 2021, 10% weighting was moved
from the downside to the upside, reflecting the more optimistic
outlook. At 31 July 2021, the level of economic uncertainty had
reduced, given the lifting of lockdown restrictions, continued
successful vaccine deployment, and falling case numbers. It was
therefore approved to increase the upside weighting, with the
resulting position being 20% upside, 40% baseline, 15% downside
(mild), 15% downside (moderate) and 10% downside (protracted).
In line with the approach taken at the start of the pandemic, refreshed
scenario forecasts are deployed in the IFRS 9 macroeconomic
models on a monthly basis. As at 31 July 2021, the latest baseline
scenario forecasts GDP growth of 6.2% in 2021, with unemployment
of 5.8%.
The baseline Moody’s scenario is focused on continued low Covid-19
case numbers, preventing a further lockdown, with economic
recovery through the second half of 2021. Unemployment spikes at
the end of 2021 as a result of the furlough scheme ending. House
price growth is expected to ease following the end of the stamp duty
holiday scheme, alongside the softening in employment.
Close Brothers Group plc Annual Report 2021The Notes continued 147
The table below shows the key UK economic assumptions within each scenario, and the weighting applied to each at 31 July 2021. The
numbers shown are the forecasts for 2021, 2022, and an average over the five-year period from 2021 to 2025. 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 basis of the scenario forecasts. The portfolio has an average residual maturity of 17 months, with c.98% of loan value having a
maturity of five years or less.
At 31 July 2021
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
6.2%
5.8%
5.3%
0.1%
6.3%
6.3%
(1.8)%
0.2%
7.4%
5.7%
7.2%
0.1%
8.7%
5.4%
7.1%
0.3%
5.1%
5.9%
5.0%
0.1%
4.2%
7.3%
(5.4)%
0.1%
4.6%
6.0%
4.4%
0.1%
2.0%
8.0%
(7.9)%
0.1%
0.8%
4.1%
8.9%
6.1%
3.1% (11.6)%
(0.1)%
0.0%
Weighting
40%
20%
15%
15%
10%
At 31 July 2020
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
2.8%
(8.5)%
7.1%
8.4%
(6.9)% (12.1)%
0.1%
0.2%
(7.2)%
6.8%
(5.9)%
0.3%
4.7%
6.9%
(6.9)%
0.4%
1.6%
(9.4)%
7.4%
9.3%
(7.7)% (16.4)%
0.1%
0.2%
0.3%
(9.5)%
7.8%
10.6%
(8.8)% (21.3)%
0.1%
0.2%
(10.0)% (0.6)%
7.9%
11.4%
(9.3)% (24.5)%
0.1%
0.2%
Weighting
40%
0%
20%
25%
15%
At 31 July 2021
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Weighting
At 31 July 2020
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Weighting
Baseline
Upside (strong)
Downside (mild)
Downside (moderate) Downside (protracted)
Five year average (2021 – 2025)
3.9%
5.5%
4.0%
0.6%
40%
4.4%
4.8%
6.0%
0.8%
20%
3.7%
6.3%
2.7%
0.2%
15%
3.5%
7.1%
0.4%
0.1%
15%
3.1%
7.7%
(1.3)%
0.0%
10%
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
Five 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%
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 148
2. Critical Accounting Estimates and Judgements continued
The tables below provide a summary for the subsequent five-year period (31 July 2021 – 31 July 2025) of the peak to trough range of values of
the key UK economic variables used within the economic scenarios at 31 July 2021 and 31 July 2020:
At 31 July 2021
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
Peak
Trough
Peak
Trough
Peak
Trough
Peak
Trough
Peak
Trough
12.2%
6.6%
6.9%
1.4%
0.9%
4.9%
(5.1)%
0.1%
14.3%
6.3%
10.2%
1.7%
0.9%
4.2%
2.6%
0.1%
11.6%
7.5%
6.7%
0.4%
0.4%
5.7%
(8.0)%
0.1%
(2.1)%
(0.9)% 10.3%
10.6%
9.2%
8.2%
5.9%
5.8%
6.5% (19.9)%
6.4% (14.4)%
(0.1)%
0.1%
0.1%
0.1%
Weighting
40%
20%
15%
15%
10%
At 31 July 2020
UK GDP Growth
UK Unemployment
HPI Growth
BoE Base Rate
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
Peak
Trough
Peak
Trough
Peak
Trough
Peak
Trough
Peak
Trough
13.2%
8.5%
9.9%
0.8%
(12.3)%
6.4%
(19.3)%
0.1%
17.4%
8.3%
5.4%
8.3% (14.6)%
0.2%
1.4%
(10.5)% 10.5% (12.4)%
9.4%
6.9%
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%
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 modelled Stage 1 and 2 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 the resulting impact on stage allocation and provision
measurement.
• Across the businesses adjustments have typically been excluded from the analysis, given a range of outcomes are considered when
determining the appropriate level of adjustment.
• In Retail:
– For some loans a specific sensitivity approach has been adopted to assess 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;
– The sensitivity analysis excludes expected credit loss provisions on loans and advances to customers in Stage 3 because the
measurement of expected credit losses is considered more sensitive to credit factors specific to the borrower than macroeconomic
scenarios; and
– In certain portfolios adjustments are dynamic in nature and are flexed in line with the sensitivity analysis.
• In Property and Commercial the majority of modelled expected credit losses are included in the sensitivity analysis, except where individually
assessed provisions are in place, or for certain sub portfolios which are also deemed more sensitive to credit factors than the
macroeconomic scenarios.
Based on the above analysis, at 31 July 2021, application of a weighting to the upside strong scenario would decrease the expected credit loss
by £12.5 million (31 July 2020: £18.3 million) whilst application to the downside protracted scenario would increase the expected credit loss by
£22.7 million (31 July 2020: £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 28c. The modelled impact presented is based on gross loans and
advances to customers at 31 July 2021; 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 and methodology, comparison between the
sensitivity results at 31 July 2021 and 31 July 2020 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 impact of the Covid-19 pandemic on consumers and businesses, as well as the
withdrawal of government support measures.
Close Brothers Group plc Annual Report 2021The Notes continued 149
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 (2020: 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 2021
Net interest income/(expense)
Non-interest income
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group
£ million
Total
£ million
218.1
70.8
198.8
21.0
122.6
0.4
(0.1)
139.5
(1.4)
183.4
(0.5)
–
537.5
415.1
Operating income/(expense)
288.9
219.8
123.0
139.4
182.0
(0.5)
952.6
Administrative expenses
Depreciation and amortisation
Impairment (losses)/gains on financial assets
(139.1)
(19.1)
(77.9)
(118.6)
(19.4)
(9.9)
(29.1)
(3.8)
(2.3)
(110.8)
(5.1)
0.2
(118.1)
(3.1)
0.1
(24.1)
(1.8)
–
(539.8)
(52.3)
(89.8)
Total operating expenses before amortisation and
impairment of intangible assets on acquisition,
goodwill impairment and exceptional item
Adjusted operating profit/(loss)1
Amortisation and impairment of intangible assets
on acquisition
Goodwill impairment
Exceptional item: HMRC VAT refund
(236.1)
(147.9)
(35.2)
(115.7)
(121.1)
(25.9)
(681.9)
52.8
71.9
87.8
23.7
60.9
(26.4)
270.7
(12.2)
(12.1)
7.4
(0.7)
–
12.3
–
–
–
(1.3)
–
–
–
–
–
–
–
1.1
(14.2)
(12.1)
20.8
Operating profit/(loss) before tax
35.9
83.5
87.8
22.4
60.9
(25.3)
265.2
External operating income/(expense)
Inter segment operating (expense)/income
343.1
(54.2)
258.7
(38.9)
142.3
(19.3)
139.4
–
182.0
–
(112.9)
112.4
952.6
–
Segment operating income
288.9
219.8
123.0
139.4
182.0
(0.5)
952.6
1 Adjusted operating profit/(loss) is stated before amortisation and impairment of intangible assets on acquisition, goodwill impairment, exceptional item and tax.
Summary balance sheet information
at 31 July 2021
Total assets1
Total liabilities
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group2
£ million
Total
£ million
4,191.0
–
2,974.3
–
1,502.1
–
139.7
78.1
897.9
806.5
2,329.5 12,034.5
9,580.6 10,465.2
1 Total assets for the Banking operating segments comprise the loan book and operating lease assets only.
2 Balance sheet includes £2,299.0 million assets and £9,677.8 million liabilities attributable to the Banking division primarily comprising the treasury balances described in the second
paragraph of this note.
Equity is allocated across the group as set out below. Banking division equity, which is managed as a whole rather than on a segmental
basis, reflects loan book and operating lease assets of £8,667.4 million, in addition to assets and liabilities of £2,299.0 million and
£9,677.8 million respectively primarily comprising treasury balances which are included within the Group column above.
Equity
Banking
£ million
1,288.6
Asset
Management
£ million
61.6
Securities
£ million
91.4
Group
£ million
127.7
Total
£ million
1,569.3
Banking
Commercial
Retail
Property
Asset
Management
Securities
Group
Total
Other segmental information
for the year ended 31 July 2021
Employees (average number)1
1 Banking segments are inclusive of a central function headcount allocation.
1,276
1,163
187
706
300
77
3,709
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 150 Close Brothers Group plc
Annual Report 2021
The Notes continued
3. Segmental analysis continued
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 before amortisation of
intangible assets on acquisition, goodwill impairment
and exceptional item
Adjusted operating profit/(loss)1
Amortisation of intangible assets on acquisition
Goodwill impairment
Exceptional item: HMRC VAT refund
Operating profit/(loss) before tax
(241.8)
(183.5)
(61.5)
(107.8)
(104.0)
(23.5)
(722.1)
4.8
(1.7)
–
–
3.1
34.9
(0.3)
–
–
34.6
59.5
–
–
–
59.5
20.4
(1.1)
–
–
19.3
47.9
–
–
–
47.9
(23.5)
–
–
–
144.0
(3.1)
–
–
(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, goodwill impairment, exceptional item and tax.
Banking
Commercial
£ million
Retail
£ million
Property
£ million
Asset
Management
£ million
Securities
£ million
Group2
£ million
Total
£ million
Summary 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.
Equity1
Banking
£ million
1,214.2
Asset
Management
£ million
60.9
Securities
£ million
72.1
Group
£ million
102.4
Total
£ million
1,449.6
1 Equity of the Banking division 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 in the balance sheet information above.
Other segmental information
for the year ended 31 July 2020
Employees (average number)1
1 Banking segments are inclusive of a central function headcount allocation.
1,215
1,080
176
699
281
70
3,521
Banking
Commercial
Retail
Property
Asset
Management
Securities
Group
Total
Strategic Report
Close Brothers Group plc
Annual Report 2021
151
4. Operating Profit before Tax
Interest income1
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Other interest income
Interest expense
Deposits by banks
Deposits by customers
Borrowings
Other interest expense
Net interest income
1 Interest income calculated using the effective interest method.
Fee and commission income
Banking
Asset Management
Securities
Fee and commission expense
Net fee and commission income
2021
£ million
2020
£ million
1.6
–
652.9
2.3
656.8
–
(66.3)
(38.7)
(14.3)
5.2
0.3
619.9
3.7
629.1
(0.1)
(82.6)
(41.6)
(10.8)
(119.3)
(135.1)
537.5
494.0
2021
£ million
2020
£ million
88.2
141.2
16.7
92.3
128.6
9.3
246.1
230.2
(16.1)
(17.6)
230.0
212.6
Fee income and expense (other than amounts calculated using the effective interest rate method) on financial instruments that are not at fair
value through profit or loss were £88.2 million (2020: £92.3 million) and £13.5 million (2020: £15.4 million) respectively.
Fee income and expense arising from trust and other fiduciary activities amounted to £141.2 million (2020: £128.6 million) and £1.9 million (2020:
£1.7 million) respectively.
Other income
Operating lease assets rental income
Other
Administrative expenses
Staff costs:
Wages and salaries
Social security costs
Share-based awards
Pension costs
Depreciation and amortisation
Other administrative expenses
2021
£ million
2020
£ million
75.4
14.0
89.4
69.1
14.3
83.4
2021
£ million
2020
£ million
297.0
44.7
5.7
15.8
363.2
52.3
176.6
269.2
36.6
2.1
14.8
322.7
48.4
167.3
592.1
538.4
Governance ReportFinancial Statements 152 Close Brothers Group plc
Annual Report 2021
The Notes continued
5. Information Regarding the Auditor
Fees payable
Audit of the company’s annual accounts
Audit of the company’s subsidiaries pursuant to legislation
Audit related services
2021
£ million
2020
£ million
0.4
2.2
0.7
3.3
0.2
1.8
0.5
2.5
The auditor of the group was PricewaterhouseCoopers LLP (2020: PricewaterhouseCoopers LLP).
6. Exceptional Item
During the year, the group recorded an exceptional gain of £20.8 million, reflecting a VAT refund from HMRC in relation to hire purchase
agreements in the Motor Finance and Asset Finance businesses. This follows HMRC’s policy in Revenue and Customs Brief 8 (2020) published
in June 2020. The Brief advised businesses who supply goods by way of hire purchase agreements of HMRC’s suggested method for
apportionment of VAT incurred on overheads (and so the reclaimable portion of such VAT). This follows the Court of Justice of the European
Union’s judgement regarding Volkswagen Financial Services (UK) Ltd.
The group submitted refund claims in respect of the period from 2009 to 2020. HMRC agreed the claims and repayment was made to the
group in June 2021. In line with the group’s accounting policy set out in Note 1, this has been presented as an exceptional item as it is material
by size and nature and non-recurring.
7. Taxation
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax
Foreign tax
Adjustments in respect of previous years
Deferred tax:
Deferred tax credit for the current year
Adjustments in respect of previous years
Tax on items not (credited)/charged to the income statement
Current tax relating to:
Share-based 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
Acquisitions
Reconciliation to tax expense
UK corporation tax for the year at 19.0% (2020: 19.0%) on operating profit before tax
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
2021
£ million
2020
£ million
75.1
1.5
(3.4)
73.2
(13.6)
3.5
63.1
–
2.0
0.6
0.3
(1.4)
(1.1)
1.0
1.4
50.4
(0.3)
2.9
19.8
(9.8)
0.1
63.1
35.4
0.2
(10.0)
25.6
(3.1)
8.9
31.4
(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
Strategic Report
Close Brothers Group plc
Annual Report 2021
153
The standard UK corporation tax rate for the financial year is 19.0% (2020: 19.0%). However, an additional 8% surcharge applies to banking
company profits as defined in legislation. The effective tax rate of 23.8% (2020: 22.3%) is above the UK corporation tax rate primarily due to the
surcharge applying to most of the group’s profits partly offset by a write-up in deferred tax assets reflecting an increase in the UK corporation
tax from 19% to 25% applying from April 2023 passed into law in the year.
In the Chancellor of the Exchequer’s Budget 2021 announcement on 3 March 2021, it was indicated that the government intends to legislate in
Finance Bill 2021-22 to ensure that the combined rate of tax on banks’ profits, which comprises the standard corporation tax rate and banking
surcharge, does not increase substantially from its current level. This legislation would have the impact of partially reversing the abovementioned
deferred tax asset increase, and income statement benefit, however the precise quantum of such a reversal remains uncertain.
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 2019
(Charge)/credit to the income statement
Credit/(charge) to other comprehensive income
Credit to equity
Acquisitions
At 31 July 2020
Credit/(charge) to the income statement
Credit/(charge) to other comprehensive income
Credit to equity
Acquisitions
34.7
(3.5)
0.3
–
–
31.5
3.5
1.1
–
–
(1.4)
–
(0.3)
–
–
(1.7)
0.1
(0.6)
–
–
8.3
0.6
–
–
–
8.9
5.2
–
1.4
–
12.7
(3.2)
–
–
–
9.5
(0.7)
–
–
–
1.5
–
0.6
–
–
2.1
–
(2.0)
–
–
(3.3)
0.1
–
–
–
(3.2)
2.5
–
–
(1.0)
(0.3)
0.2
0.1
–
0.2
0.2
(0.5)
(0.3)
–
–
52.2
(5.8)
0.7
–
0.2
47.3
10.1
(1.8)
1.4
(1.0)
At 31 July 2021
36.1
(2.2)
15.5
8.8
0.1
(1.7)
(0.6)
56.0
Company
At 1 August 2019
Charge to the income statement
Charge to other comprehensive income
At 31 July 2020
(Charge)/credit to the income statement
Charge to other comprehensive income
At 31 July 2021
Capital
allowances
£ million
Pension
scheme
£ million
Share-based
payments
and deferred
compensation
£ million
0.2
(0.2)
–
–
(0.6)
–
(1.4)
–
(0.3)
(1.7)
0.1
(0.6)
(0.6)
(2.2)
2.6
(0.8)
–
1.8
0.2
–
2.0
Total
£ million
1.4
(1.0)
(0.3)
0.1
(0.3)
(0.6)
(0.8)
As the group has been and is expected to continue to be consistently profitable, the full deferred tax assets have been recognised.
Governance ReportFinancial Statements 154 Close Brothers Group plc
Annual Report 2021
The Notes continued
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.
Basic
Diluted
Adjusted basic1
Adjusted diluted1
1 Excludes amortisation and impairment of intangible assets on acquisition, goodwill impairment, exceptional item and their tax effects.
Profit attributable to shareholders
Adjustments:
Amortisation and impairment of intangible assets on acquisition
Goodwill impairment
Exceptional item: HMRC VAT refund
Tax effect of adjustments and exceptional item
Adjusted profit attributable to shareholders
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 2020: 40.0p (November 2019: 44.0p)
Interim dividend for current financial year paid in April 2021: 18.0p (April 2020: 0.0p)
2021
134.8p
133.6p
140.4p
139.1p
2020
72.8p
72.5p
74.5p
74.2p
2021
£ million
202.1
2020
£ million
109.5
14.2
12.1
(20.8)
2.9
3.1
–
–
(0.5)
210.5
112.1
2021
million
149.9
1.4
151.3
2020
million
150.4
0.7
151.1
2021
£ million
2020
£ million
59.8
26.8
86.6
65.8
–
65.8
A final dividend relating to the year ended 31 July 2021 of 42.0p, amounting to an estimated £62.7 million, is proposed. This final dividend,
which is due to be paid on 23 November 2021 to shareholders on the register at 15 October 2021, is not reflected in these financial statements.
10. Loans and Advances to Banks
At 31 July 2021
At 31 July 2020
On demand
£ million
121.9
98.5
Within three
months
£ million
Between
three months
and one year
£ million
1.0
12.0
2.2
10.3
Between
one and
two years
£ million
10.5
2.9
Between
two and
five years
£ million
0.7
2.1
Total
£ million
136.3
125.8
Strategic Report
Close Brothers Group plc
Annual Report 2021
155
11. Loans and Advances to Customers
(a) Maturity analysis of loans and advances to customers
The following table sets out a maturity analysis of loans and advances to customers. At 31 July 2021 loans and advances to customers with a
maturity of two years or less was £6,326.6 million (31 July 2020: £6,031.6 million) representing 72.5% (31 July 2020: 76.8%) of total loans and
advances to customers:
On demand
£ million
71.8
78.1
Within three
months
£ million
2,276.6
2,174.0
Between
three months
and one year
£ million
2,289.1
2,348.2
Between
one and
two years
£ million
1,689.1
1,431.3
Between
two and
five years
£ million
2,242.8
1,680.5
After
more than
five years
£ million
155.5
143.3
Total gross
loans and
advances to
customers
£ million
8,724.9
7,855.4
Impairment
provisions
£ million
Total net
loans and
advances to
customers
£ million
(280.4)
(238.7)
8,444.5
7,616.7
At 31 July 2021
At 31 July 2020
(b) 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 2021
Gross loans and advances to customers
Commercial
Retail
Property
Impairment provisions
Commercial
Retail
Property
Provision coverage ratio
Commercial
Retail
Property
At 31 July 2020
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
3,417.2
2,817.0
1,200.1
549.4
175.3
100.5
74.0
6.4
54.6
623.4
181.7
155.1
99.9
43.2
187.3
4,140.5
3,041.9
1,542.5
7,434.3
825.2
135.0
960.2
330.4
8,724.9
55.6
22.1
2.3
80.0
1.6%
0.8%
0.2%
1.1%
30.3
13.3
5.0
48.6
5.5%
7.6%
5.0%
5.9%
33.6
1.9
0.1
35.6
63.9
15.2
5.1
84.2
52.9
30.3
33.0
172.4
67.6
40.4
116.2
280.4
45.4%
29.7%
0.2%
26.4%
10.3%
8.4%
3.3%
53.0%
70.1%
17.6%
8.8%
35.2%
4.2%
2.2%
2.6%
3.2%
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
1,110.9
208.1
125.3
21.1
49.4
59.4
1,132.0
257.5
184.7
126.4
43.4
204.8
3,171.8
2,905.8
1,777.8
5,906.6
1,444.3
129.9
1,574.2
374.6
7,855.4
18.1
28.4
11.1
57.6
0.9%
1.1%
0.8%
59.9
11.1
6.6
77.6
5.4%
5.3%
5.3%
1.5
7.5
0.7
9.7
7.1%
15.2%
1.2%
61.4
18.6
7.3
87.3
5.4%
7.2%
4.0%
44.3
24.3
25.2
93.8
35.0%
56.0%
12.3%
123.8
71.3
43.6
238.7
3.9%
2.5%
2.5%
1.0%
5.4%
7.5%
5.5%
25.0%
3.0%
Governance ReportFinancial Statements 156 Close Brothers Group plc
Annual Report 2021
The Notes continued
11. Loans and Advances to Customers continued
Stage allocation of loans and advances to customers has been applied in line with the definitions set out on page 142, with staging adjustments
made based on management judgement and for Covid-19 related forbearance.
During the year the staging profile of loans and advances to customers has improved. At 31 July 2021, 85.2% (31 July 2020: 75.2%) of loans
and advances to customers were Stage 1 primarily as a result of strong new business growth in Commercial and the encouraging performance
of our forborne book. Stage 2 loans and advances to customers reduced to 11.0% (31 July 2020: 20.0%) reflecting ongoing repayment or
settlement of Stage 2 balances, notably Covid-19 forborne loans. These have more than offset migrations into Stage 2 associated with a
significant increase in credit risk. The remaining 3.8% (31 July 2020: 4.8%) of loans and advances to customers was deemed to be credit
impaired and classified as Stage 3.
At the same time, overall impairment provisions increased to £280.4 million (31 July 2020: £238.7 million), following regular reviews of staging
and provision coverage for individual loans and portfolios. The movement in impairment provisions reflects the benefit of strong underlying
credit performance across Retail, Commercial and Property as well as strong new business volumes in Commercial much of which attract
guarantees under the government lending support schemes, improved macroeconomic scenarios and weightings and the encouraging
performance of our forborne book. Coverage on the residual Stage 2 Covid-19 forborne loan book continues to be monitored and adjusted
where appropriate. While these factors reduced provisions overall, this was more than offset by a significant increase in provisions against
Novitas, across all stages, due to the latest case failure and recovery rate assumptions.
As a result, there has been a marginal increase in provision coverage to 3.2% (31 July 2020: 3.0%).
Provision Coverage Analysis by Business
In Commercial, the impairment coverage ratio increased to 4.2% (31 July 2020: 3.9%) reflecting a significant increase in provisions in Novitas.
These were partly offset by strong new business volumes associated with the government lending support schemes, observed performance of
the Covid-19 forborne loan book and the impact of an improving macroeconomic environment. The significant increase in credit provisions
against the Novitas loan book reflects the latest assumptions on case failure and recovery rates.
In Retail at 31 July 2021, the impairment coverage ratio decreased slightly to 2.2% (31 July 2020: 2.5%) reflecting the performance of the
forborne loan book and strong new business volumes.
In Property the impairment coverage ratio remained broadly stable at 2.6% (31 July 2020: 2.5%) reflecting increased individually assessed
provisions on Stage 3 loans, offset by the favourable impact of changes in the macroeconomic forecasts.
(c) 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. Such
transfers do not represent overnight reclassification from one stage to another. 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 2020
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
At 31 July 2021
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
5,906.6
6,980.2
640.0
(1,054.5)
(133.3)
(547.8)
(4,907.6)
6.3
(3.4)
1,574.2
–
(639.6)
912.4
(113.4)
159.4
(781.4)
9.8
(1.8)
374.6
–
(11.2)
(15.0)
178.6
7,855.4
6,980.2
(10.8)
(157.1)
(68.1)
152.4
(106.5)
(16.0)
(74.1)
(236.0)
(5,795.5)
0.1
(79.3)
7,434.3
960.2
330.4
8,724.9
Strategic Report
Close Brothers Group plc
Annual Report 2021
157
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
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 £293.9 million (2020: £689.4 million). A loss of £0.8 million (2020: £3.4 million) was recognised as a result of these modifications. The gross
carrying amount at 31 July 2021 of modified loans and advances to customers which transferred from Stage 2 or 3 to Stage 1 during the year
was £237.9 million (31 July 2020: £52.8 million).
Impairment provisions on loans and advances to customers
At 1 August 2020
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
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
57.6
45.0
4.0
(15.7)
(2.2)
(13.9)
(9.0)
0.9
23.0
(0.6)
87.3
–
(15.7)
63.4
(13.3)
34.4
(35.9)
(0.2)
(1.7)
(1.4)
93.8
–
(1.0)
(2.4)
67.6
64.2
(5.0)
(2.8)
56.4
(34.0)
238.7
45.0
(12.7)
45.3
52.1
84.7
(49.9)
(2.1)
77.7
(36.0)
At 31 July 2021
80.0
84.2
116.2
280.4
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
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
24.9
28.1
0.9
(13.9)
(2.5)
(15.5)
3.6
16.9
33.1
(0.4)
57.6
27.1
–
(4.1)
69.1
(8.5)
56.5
3.0
1.3
60.8
(0.6)
87.3
52.3
–
(0.1)
(0.1)
82.9
82.7
(0.3)
(3.6)
78.8
(37.3)
104.3
28.1
(3.3)
55.1
71.9
123.7
6.3
14.6
172.7
(38.3)
93.8
238.7
1 Repayments relate only to financial assets which transferred between stages during the year. Other repayments are shown in the line below.
Governance ReportFinancial Statements 158 Close Brothers Group plc
Annual Report 2021
The Notes continued
11. Loans and Advances to Customers continued
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
2021
£ million
2020
£ million
77.7
10.2
87.9
1.9
89.8
172.7
7.8
180.5
3.2
183.7
The contractual amount outstanding at 31 July 2021 on financial assets that were written off during the period and are still subject to recovery
activity is £19.0 million (31 July 2020: £12.4 million).
(d) 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
31 July 2021
£ million
31 July 2020
£ million
3,554.6
567.1
4,322.8
2,998.0
474.8
4,143.9
8,444.5
7,616.7
The following table shows a reconciliation between gross investment in finance lease and hire purchase agreement receivables included in the
table above 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
Present value of minimum lease and hire purchase agreement payments
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
31 July 2021
£ million
31 July 2020
£ million
1,632.6
1,772.0
865.8
427.2
175.9
48.9
4,922.4
(682.6)
1,461.1
1,520.6
660.3
309.9
102.7
72.0
4,126.6
(546.6)
4,239.8
3,580.0
1,405.5
1,527.3
747.2
368.1
149.7
42.0
1,267.9
1,320.7
573.8
268.7
88.6
60.3
4,239.8
3,580.0
The aggregate cost of assets acquired for the purpose of letting under finance leases and hire purchase agreements was £6,775.3 million
(2020: £6,183.4 million). The average effective interest rate on finance leases approximates to 9.8% (2020: 10.2%). 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.
Strategic Report
12. Debt Securities
Long trading positions in debt securities
Certificates of deposit
Sovereign and central bank debt
Close Brothers Group plc
Annual Report 2021
159
Fair value
through profit
or loss
£ million
20.1
–
–
Fair value
through other
comprehensive
income
£ million
–
–
192.5
Amortised cost
£ million
–
264.7
–
Total
£ million
20.1
264.7
192.5
At 31 July 2021
20.1
192.5
264.7
477.3
Long trading positions in debt securities
Certificates of deposit
Sovereign and central bank debt
At 31 July 2020
Movements on the book value of sovereign and central bank debt comprise:
Sovereign and central bank debt at 1 August
Additions
Redemptions
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
24.4
–
–
24.4
Fair value
through other
compre hensive
income
£ million
–
–
72.2
Amortised cost
£ million
–
285.9
–
72.2
285.9
2021
£ million
72.2
313.7
(191.0)
(5.2)
2.8
Total
£ million
24.4
285.9
72.2
382.5
2020
£ million
48.3
22.7
–
(0.8)
2.0
192.5
72.2
31 July
2021
£ million
30.8
1.1
31 July
2020
£ million
29.2
0.8
31.9
30.0
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 2021
31 July 2020
Exchange rate contracts
Interest rate contracts
Notional
value
£ million
104.5
3,267.8
3,372.3
0.2
18.1
18.3
Notional
value
£ million
99.2
3,132.8
0.2
21.1
21.3
3,232.0
Assets
£ million
Liabilities
£ million
1.0
38.9
39.9
0.4
20.4
20.8
Assets
£ million
Liabilities
£ million
Notional amounts of interest rate contracts totalling £2,849.6 million (31 July 2020: £2,130.2 million) have a residual maturity of more than one year.
Governance ReportFinancial Statements 160 Close Brothers Group plc
Annual Report 2021
The Notes continued
14. Derivative Financial Instruments continued
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
Notional
value
£ million
780.7
1,483.5
31 July 2021
31 July 2020
Assets
£ million
Liabilities
£ million
Notional
value
£ million
Assets
£ million
Liabilities
£ million
2.2
14.7
1.2
747.1
–
17.8
1,234.3
35.3
8.4
7.9
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 five (2020: six) 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 2021
31 July 2020
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
–
–
70.8
4.9
41.3
40.5
1.0
382.1
482.9
404.6
887.5
402.2
1,483.5
1,234.3
Fair value hedges have an average fixed rate of 1.9% (31 July 2020: 2.7%).
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
2021
£ million
Hedge
ineffectiveness
recognised in
income statement
2021
£ million
Changes in fair
value of hedging
instrument used for
calculating hedge
ineffectiveness
2020
£ million
Hedge
ineffectiveness
recognised in
income statement
2020
£ million
8.9
(29.0)
0.1
(0.1)
(2.0)
4.8
(0.1)
0.1
The carrying amount of hedging interest rate swaps is held within derivative financial instruments and the hedge ineffectiveness is held within
other income.
Strategic Report
Close Brothers Group plc
Annual Report 2021
161
Details of the hedged exposures covered by the group’s hedging strategies are set out below.
At 31 July 2021
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 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
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
192.5
88.5
281.0
21.2
842.6
222.7
1,086.5
4.5
1.8
6.3
0.1
(0.5)
0.8
0.4
1.2
(2.5)
(1.3)
1.5
27.6
1.1
30.2
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)
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 2021
31 July 2020
Changes in fair value of
hedged item used for
calculating hedge
ineffectiveness
£ million
Loss on
discontinued
hedges
recognised in other
comprehensive income
£ million
Gains/(losses) from
changes in value of
hedging instrument
recognised in other
comprehensive income
£ million
Amounts
reclassified
from reserves to
income
statement1
£ million
(8.8)
1.9
(1.5)
–
8.9
(1.9)
(0.3)
–
1 Amounts have been reclassified to other income since hedged cash flows will no longer occur.
Governance ReportFinancial Statements 162 Close Brothers Group plc
Annual Report 2021
The Notes continued
15. Intangible Assets
Co st
At 1 August 2019
Additions
Disposals
At 31 July 2020
Additions
Disposals and write offs
At 31 July 2021
Amortisation and impairment
At 1 August 2019
Amortisation charge for the year
Impairment charge for the year
Disposals
At 31 July 2020
Amortisation charge for the year
Impairment charge for the year
Disposals and write offs
At 31 July 2021
Net book value at 31 July 2021
Net book value at 31 July 2020
Net book value at 1 August 2019
Goodwill
£ million
Software
£ million
Intangible
assets on
acquisition
£ million
Group total
£ million
Company
software
£ million
150.8
2.3
(0.1)
153.0
2.0
(12.1)
201.2
46.9
(14.8)
233.3
46.2
(6.7)
67.5
–
–
67.5
4.2
(20.7)
419.5
49.2
(14.9)
453.8
52.4
(39.5)
142.9
272.8
51.0
466.7
47.9
–
–
–
47.9
–
12.1
(12.1)
47.9
95.0
105.1
102.9
105.0
25.3
–
(14.8)
115.5
29.4
–
(2.5)
142.4
130.4
117.8
96.2
47.2
3.1
–
–
50.3
3.0
11.2
(20.7)
43.8
7.2
17.2
20.3
200.1
28.4
–
(14.8)
213.7
32.4
23.3
(35.3)
234.1
232.6
240.1
219.4
0.4
0.1
–
0.5
–
(0.1)
0.4
0.4
–
–
–
0.4
–
–
–
0.4
–
0.1
–
Software includes assets under development of £60.1 million (31 July 2020: £65.4 million).
Intangible assets on acquisition relate to broker and customer relationships and are amortised over a period of eight to 20 years.
In the 2021 financial year £3.0 million (2020: £3.1 million) of the amortisation charge is included in amortisation of intangible assets on
acquisition and £29.4 million (2020: £25.3 million) of the amortisation charge is included in administrative expenses shown in the consolidated
income statement. An impairment charge of £11.2 million relating to intangible assets on acquisition is excluded from administrative expenses
shown in the consolidated income statement.
Impairment tests for goodwill
At 31 July 2021, goodwill has been allocated to eight (31 July 2020: nine) individual CGUs. Six (31 July 2020: seven) are within the Banking
division, one is the Asset Management division and the remaining one is the Securities division. The number of CGUs with goodwill decreased
by one during the year following full impairment of the goodwill allocated to the Novitas CGU (further detail at the end of this note). 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%
(2020: 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 2021, the results of the review, which includes careful consideration of the impact of Covid-19, indicate there is no goodwill
impairment except for the abovementioned impairment relating to Novitas. 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.
Strategic Report
Close Brothers Group plc
Annual Report 2021
163
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
31 July 2021
31 July 2020
Goodwill
£ million
Pre-tax
discount rate
%
Goodwill
£ million
Pre-tax
discount rate
%
7.1
12.0
–
9.8-10.9
40.2
23.3
–
31.5
95.0
9.0
12.3
12.1
12.1-13.4
38.3
23.3
12.1
31.4
105.1
Impairment of goodwill and intangible assets on acquisition
During the year, the group recorded an impairment charge of £12.1 million relating to the full impairment of goodwill allocated to Novitas, a CGU
within the group’s Commercial segment. In addition, a total impairment charge of £11.2 million was recorded relating to intangible assets on
acquisition, of which £10.1 million related to Novitas.
These impairments reflect the value in use of the Novitas CGU and intangible assets on acquisition falling below carrying value, driven by lower
expected future cash flows following strategic decisions made by management. At 31 July 2021, the value in use of the CGU and intangible assets
on acquisition was £192.4 million and £3.1 million respectively, and the pre-tax discount rate used in the impairment calculations was 9%.
16. Property, Plant and Equipment
Group
Cost
At 1 August 2019
Additions
Disposals
At 31 July 2020
Additions
Disposals
At 31 July 2021
Depreciation
At 1 August 2019
Depreciation and impairment charges for the year
Disposals
At 31 July 2020
Depreciation and impairment charges for the year
Disposals
At 31 July 2021
Net book value at 31 July 2021
Net book value at 31 July 2020
Net book value at 1 August 2019
1 Right of use assets primarily relate to the group’s leasehold properties.
Leasehold
property
£ million
Fixtures,
fittings and
equipment
£ million
Assets
held under
operating
leases
£ million
Motor
vehicles
£ million
Right of use
assets1
£ million
Total
£ million
27.1
0.7
(2.3)
25.5
1.1
(1.4)
55.5
10.8
(6.2)
60.1
17.2
(2.5)
314.1
54.6
(27.3)
341.4
60.6
(41.3)
25.2
74.8
360.7
14.6
2.4
(2.2)
14.8
2.3
(1.4)
15.7
9.5
10.7
12.5
40.2
7.5
(4.8)
42.9
6.8
(2.2)
47.5
27.3
17.2
15.3
93.7
44.3
(18.5)
119.5
44.8
(26.5)
137.8
222.9
221.9
220.4
0.1
–
–
0.1
0.1
–
0.2
0.1
–
–
0.1
–
–
0.1
0.1
–
–
44.8
16.3
(0.7)
60.4
17.6
(6.3)
441.6
82.4
(36.5)
487.5
96.6
(51.5)
71.7
532.6
–
13.2
(0.2)
13.0
13.8
(5.2)
21.6
50.1
47.4
–
148.6
67.4
(25.7)
190.3
67.7
(35.3)
222.7
309.9
297.2
248.2
Governance ReportFinancial Statements 164 Close Brothers Group plc
Annual Report 2021
The Notes continued
16. Property, Plant and Equipment continued
There was a gain of £2.6 million from the sale of assets held under operating leases for the year ended 31 July 2021 (2020: £nil).
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
Company
Cost
At 1 August 2019
Additions
Disposals
At 31 July 2020
Additions
Disposals
At 31 July 2021
Depreciation
At 1 August 2019
Charge for the year
Disposals
At 31 July 2020
Charge for the year
Disposals
At 31 July 2021
Net book value at 31 July 2021
Net book value at 31 July 2020
Net book value at 1 August 2019
1 Prior year comparatives restated – see note 1(c).
The net book value of leasehold property comprises:
Long leasehold property
Short leasehold property
31 July
2021
£ million
31 July
2020
£ million
44.3
28.5
14.6
4.0
1.9
1.2
94.5
43.8
28.5
15.9
6.7
2.2
1.3
98.4
Leasehold
property
£ million
Fixtures,
fittings and
equipment
£ million
Total1
£ million
2.7
0.3
(1.9)
1.1
–
(0.8)
0.3
2.7
–
(1.9)
0.8
–
(0.8)
–
0.3
0.3
–
1.1
5.1
(0.7)
5.5
6.7
(0.4)
3.8
5.4
(2.6)
6.6
6.7
(1.2)
11.8
12.1
1.1
–
(0.7)
0.4
0.6
(0.4)
0.6
11.2
5.1
–
3.8
–
(2.6)
1.2
0.6
(1.2)
0.6
11.5
5.4
–
Group
Company
31 July
2021
£ million
1.5
8.0
9.5
31 July
2020
£ million
1.6
9.1
10.7
31 July
2021
£ million
31 July
2020
£ million
0.3
–
0.3
0.3
–
0.3
17. Other Assets and Other Liabilities
Prepayments, accrued income and other assets
Prepayments
Accrued income
Trade and other receivables
Accruals, deferred income and other liabilities
Accruals
Deferred income
Trade and other payables
Provisions
Provisions movement in the year:
Group
At 1 August 2019
Additions
Utilised
Released
At 31 July 2020
Additions
Utilised
Released
At 31 July 2021
Company
At 1 August 2019
Additions
Utilised
Released
At 31 July 2020
Additions
Utilised
Released
At 31 July 2021
165
31 July
2021
£ million
134.6
15.7
59.3
31 July
2020
£ million
140.7
14.2
54.6
209.6
209.5
182.8
4.1
158.3
21.8
156.3
3.4
139.8
15.8
367.0
315.3
Claims
£ million
Property
£ million
Other
£ million
Total
£ million
0.3
0.2
(0.5)
–
–
6.2
(0.4)
–
5.8
5.9
0.5
–
(0.3)
6.1
0.8
(0.1)
–
6.8
11.7
5.8
(6.0)
(1.8)
9.7
5.9
(2.9)
(3.5)
9.2
17.9
6.5
(6.5)
(2.1)
15.8
12.9
(3.4)
(3.5)
21.8
Property
£ million
Other
£ million
Total
£ million
0.4
–
–
–
0.4
–
–
–
0.4
4.4
0.8
(1.1)
(1.2)
2.9
0.7
(1.0)
–
2.6
4.8
0.8
(1.1)
(1.2)
3.3
0.7
(1.0)
–
3.0
Provisions are made for claims and other items which arise in the normal course of business. Claims relate to legal and regulatory cases, while other
items largely relate to property dilapidations and employee benefits. For such matters, a provision is recognised where it is determined that there is a
present obligation arising from a past event, payment is probable, and the amount can be estimated reliably. The timing and/or outcome of these
claims and other items are uncertain.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 166
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 issue1
31 July
2021
£ million
674.2
7.0
9.4
16.4
31 July
2020
£ million
587.5
8.3
9.1
17.4
690.6
604.9
On demand
£ million
Within three
months
£ million
2.1
576.3
22.7
(0.6)
37.7
1,547.9
–
57.0
Between
three
months and
one year
£ million
110.8
3,343.6
–
161.2
Between
one and two
years
£ million
Between
two and five
years
£ million
After
more than
five years
£ million
–
729.8
–
655.2
–
437.2
490.0
327.5
–
–
–
665.2
Total
£ million
150.6
6,634.8
512.7
1,865.5
At 31 July 2021
600.5
1,642.6
3,615.6
1,385.0
1,254.7
665.2
9,163.6
1 Debt securities in issue of £(0.6) million due on demand include an adjustment relating to the group’s fair value hedges. See note 14 for further information.
Deposits by banks
Deposits by customers
Loans and overdrafts from banks
Debt securities in issue
On demand
£ million
25.5
543.3
6.9
27.1
Within three
months
£ million
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
–
1,151.8
262.0
212.4
Between
two and
five years
£ million
After
more than
five years
£ million
–
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
At 31 July 2021, the parent company held £251.1 million (31 July 2020: £250.8 million) debt securities in issue.
As discussed in note 28(c) at 31 July 2021 the group accessed £490.0 million cash under the Bank of England’s Term Funding Scheme with
Additional Incentives for SMEs (31 July 2020: £228.0 million under the Term Funding Scheme with Additional Incentives for SMEs and
£262.0 million under the Term Funding Scheme). 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 2021
At 31 July 2020
20. Subordinated Loan Capital
Final maturity date
2026
2026
2027
2031
On demand
£ million
–
–
Within
three
months
£ million
Between
three months
and one year
£ million
–
–
–
–
Between
one and
two years
£ million
–
262.0
Between
two and
five years
£ million
490.0
228.0
After
more than
five years
£ million
–
–
Prepayment
date
2021
2021
2022
2026
Initial
interest
rate
7.42%
7.62%
4.25%
2.00%
31 July
2021
£ million
–
–
23.5
199.2
Total
£ million
490.0
490.0
31 July
2020
£ million
15.5
31.0
176.5
–
At 31 July 2021, the parent company held £23.5 million (31 July 2020: £176.5 million) and £199.2 million (31 July 2020: £nil) of subordinated
loan capital with final maturity dates of 2027 and 2031 respectively.
222.7
223.0
Close Brothers Group plc Annual Report 2021The Notes continued 167
21. Called Up Share Capital and Distributable Reserves
Group and company
Allotted, issued and fully paid
Ordinary shares of 25p each
31 July 2021
31 July 2020
million
£ million
million
£ million
152.1
38.0
152.1
38.0
At 31 July 2021, the company’s reserves available for distribution under section 830(2) and 831(2) of the Companies Act 2006 were
£417.5 million (2020: £392.6 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 9.0%, of which 5.1% 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 1.0%, of which 0.6% 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 7.6% and a minimum total capital ratio of 11.5%. 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) and exclusive of any applicable PRA buffer.
A full analysis of the composition of regulatory capital and Pillar 1 risk weighted assets (“RWAs”), a reconciliation between equity and CET1
capital after adjustments 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 2021, the group’s CET1 capital ratio was 15.8% (31 July 2020: 14.1%). CET1 capital increased to £1,439.3 million (31 July 2020:
£1,254.0 million) primarily due to retained profit and the benefit from regulatory changes to the treatment of software assets.
RWAs, calculated using the standardised approaches, increased modestly to £9,105.3 million (31 July 2020: £8,863.2 million) notwithstanding
the 10.9% growth in the loan book, given the significant portion of government guaranteed loans under CBILS which attract a lower risk
weighting and a reduction in the Property loan book due to high levels of repayments. The primary driver of the overall rise in RWAs is the
increase in operational risk RWAs due to higher average levels of income in Winterflood and average loan book balance.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 168
22. Capital continued
CET1 capital
Called up share capital
Retained earnings
Other reserves recognised for CET1 capital
Adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities1
Foreseeable dividend2
Investment in own shares
Pension asset, net of associated deferred tax liabilities
Prudent valuation adjustment
IFRS 9 transitional arrangements3
CET1 capital4
Tier 2 capital – subordinated debt
Total regulatory capital4
RWAs (notional)5 – unaudited
Credit and counterparty credit risk
Operational risk5
Market risk5
CET1 capital ratio4 – unaudited
Total capital ratio4 – unaudited
31 July
2021
£ million
31 July
2020
£ million
38.0
1,555.5
13.1
38.0
1,435.0
17.2
(180.7)
(62.7)
(36.0)
(5.4)
(0.3)
117.8
(236.9)
(59.8)
(33.9)
(5.7)
(0.2)
100.3
1,439.3
1,254.0
223.4
187.0
1,662.7
1,441.0
7,945.8
1,038.5
121.0
7,789.0
945.7
128.5
9,105.3
8,863.2
15.8%
18.3%
14.1%
16.3%
1 In line with the amended Capital Requirements Regulation (“CRR II”), effective on 23 December 2020, the CET1 capital ratio at 31 July 2021 includes a c.50bps benefit related to
software assets which are exempt from the deduction requirement for intangible assets from CET1. The PRA published PS17/21 ‘Implementation of Basel standards’ on 9 July 2021,
confirming the reversal to the earlier position. This will result in the reversal of this benefit and reduction of the CET1 capital ratio upon implementation on 1 January 2022.
2 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2021 and 31 July 2020 for a foreseeable dividend, being the proposed final
dividend as set out in note 9.
3 The group has elected to apply IFRS 9 transitional arrangements for 31 July 2021, which allow the capital impact of expected credit losses to be phased in over the transitional period.
4 Shown after applying IFRS 9 transitional arrangements and the CRR transitional and qualifying own funds arrangements in force at the time. Without their application, and excluding
the benefit related to the current treatment of software assets, at 31 July 2021 the CET1 capital ratio would be 14.2% and total capital ratio 16.7% (31 July 2020: CET1 capital ratio
13.1% and total capital ratio 15.1%).
5 Operational and market risk include an adjustment at 8% in order to determine notional RWAs.
The following table shows a reconciliation between equity and CET1 capital after adjustments:
Equity
Regulatory adjustments to 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
2021
£ million
31 July
2020
£ million
1,569.3
1,449.6
(180.7)
(62.7)
117.8
(5.4)
(0.3)
0.3
1.0
(236.9)
(59.8)
100.3
(5.7)
(0.2)
5.7
1.0
1,439.3
1,254.0
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2021 and 31 July 2020 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 2021, which allow the capital impact of expected credit losses to be phased in over the transitional period.
Close Brothers Group plc Annual Report 2021The Notes continued
The following table shows the movement in CET1 capital during the year:
CET1 capital at 1 August
Profit in the period attributable to shareholders
Dividends paid and foreseen
Change in software assets treatment1
IFRS 9 transitional arrangements
Decrease/(increase) in intangible assets, net of associated deferred tax liabilities
Other movements in reserves recognised for CET1 capital
Other movements in adjustments to CET1 capital
CET1 capital at 31 July
169
2021
£ million
1,254.0
202.1
(89.5)
50.2
17.5
6.0
0.9
(1.9)
2020
£ million
1,169.2
109.5
(59.9)
–
55.7
(20.8)
(3.0)
3.3
1,439.3
1,254.0
1 In line with CRR II effective on 23 December 2020, the CET1 ratio at 31 July 2021 includes a c.50bps benefit related to software assets which are exempt from the deduction
requirement for intangible assets from CET1. The PRA published PS17/21 ‘Implementation of Basel standards’ on 9 July 2021, confirming the reversal to the earlier position. This will
result in the reversal of this benefit and reduction of the CET1 capital ratio upon implementation on 1 January 2022.
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
2021
£ million
112.5
31 July
2020
£ million
163.7
31 July
2021
£ million
107.0
31 July
2020
£ million
153.9
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
2021
£ million
1,310.3
31 July
2020
£ million
1,195.2
1,310.3
1,195.2
Other commitments
Subsidiaries had contracted capital commitments relating to capital expenditure of £88.4 million (2020: £28.9 million).
Operating lease commitments
During the year, the company recognised lease payments as an expense of £2.1 million (2020: £2.1 million). At 31 July 2021, the company had
future minimum lease payments under non-cancellable operating leases relating to property of £2.1 million within one year, £8.3 million between
one and five years, and £8.4 million after more than five years, totalling £18.8 million (31 July 2020: £2.1 million, £8.3 million, and £10.5 million
respectively, totalling £20.9 million).
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 170
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 97 to 125.
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
2021
£ million
2020
£ million
4.6
0.4
5.3
2.5
12.8
2.6
15.4
4.0
0.4
3.6
1.5
9.5
0.9
10.4
Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £3.5 million (2020:
£4.2 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 2021 attributable, in aggregate, to key management were £0.2 million (31 July
2020: £0.3 million).
Close Brothers Group plc Annual Report 2021The Notes continued 171
25. Pensions
The group operates defined contribution pension schemes for eligible employees as well as a defined benefit pension scheme which is closed
to new members and further accrual. Assets of all schemes are held separately from those of the group.
Defined contribution schemes
During the year the charge to the consolidated income statement for the group’s defined contribution pension schemes was £15.5 million
(2020: £14.5 million), representing contributions payable by the group and is included in administrative expenses.
Defined benefit pension scheme
The group’s only defined benefit pension scheme (“the scheme”) is a final salary scheme which operates under trust law. The scheme is
managed and administered in accordance with the scheme’s Trust Deed and Rules and all relevant legislation by a trustee board made up of
trustees nominated by both the company and the members.
The scheme was closed to new entrants in August 1996 and closed to further accrual during 2012. At 31 July 2021 this scheme had 28 (31 July
2020: 33) deferred members and 53 (31 July 2020: 52) 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
2021
%
3.6
3.2
1.6
1.6
24.0
25.7
24.9
27.0
2020
%
3.1
2.4
1.4
1.4
23.9
25.6
24.8
26.9
1 Based on market yields at 31 July 2021 and 2020 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 (2020: 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 (2020: 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
2021
£ million
2020
£ million
2019
£ million
2018
£ million
2017
£ million
9.4
33.6
0.2
43.2
(35.6)
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)
7.6
7.4
6.7
5.1
3.6
1 There are no amounts included within the fair value of scheme assets relating to the financial instruments of Close Brothers Group plc.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 172
25. Pensions continued
Movement in the present value of scheme liabilities during the year:
Carrying amount at 1 August
Interest expense
Past service cost
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:
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
2021
£ million
(39.2)
(0.5)
(0.1)
5.6
(1.4)
2020
£ million
(36.5)
(0.8)
–
1.3
(3.2)
(35.6)
(39.2)
2021
£ million
46.6
0.6
(5.6)
(0.3)
1.9
2020
£ million
43.2
0.9
(1.3)
(0.3)
4.1
43.2
46.6
2021
£ million
1.9
–
(1.4)
(1.4)
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)
Total actuarial gains/(losses)
0.5
0.9
1.9
1.7
2.7
Total actuarial gains have been recognised in other comprehensive income. Income of £0.1 million (2020: £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
2021 and 2020 is set out below. The analysis reflects the variation of the individual assumptions. The variation in price inflation includes all
inflation-linked pension increases in deferment and in payment.
Key assumption
Discount rate
Price inflation (RPI and CPI)
Mortality
Sensitivity
0.25% increase
0.25% increase
Increase in life expectancy at age 65 by one year
Impact on defined benefit obligation
increase/(decrease)
2021
2020
%
(4.4)
1.8
4.0
£ million
(1.6)
0.6
1.4
%
(4.2)
1.8
4.0
£ million
(1.6)
0.7
1.6
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 22% in global quoted equities, 78% in quoted
bonds and 0% in cash (2020: 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 (2020: 17 years).
Close Brothers Group plc Annual Report 2021The Notes continued 173
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 100 to 110.
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 2021, 1.3 million (31 July 2020: 0.7 million) and 1.5 million (31 July 2020:
1.7 million) of these shares were held respectively and in total £36.0 million (2020: £33.9 million) was recognised within the share-based
payments reserve. During the year £10.0 million (2020: £11.9 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 £13.6 million (2020: £18.3 million). The share-based awards
charge of £5.7 million (2020: £2.1 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:
At 1 August 2019
Granted
Exercised
Forfeited
Lapsed
At 31 July 2020
Granted
Exercised
Forfeited
Lapsed
At 31 July 2021
Exercisable at:
31 July 2021
31 July 2020
SAYE
LTIP
DSA
SMP
Weighted
average
exercise
price
–
933.7p
1,114.2p
1,132.4p
1,157.2p
–
829.5p
1174.2p
923.9p
1208.5p
Number
1,157,394
1,635,667
(212,792)
(654,673)
(4,490)
1,921,106
1,385,804
(208,013)
(801,716)
(61,176)
Number
1,269,230
451,925
(124,951)
(19,447)
(203,638)
1,373,119
502,283
(147,807)
(213,100)
(260,721)
2,236,005
–
1,253,774
11,336
93,424
1,141.0p
1,232.5p
73,936
1,334
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
785,611
391,315
(325,610)
(13,751)
(746)
836,819
146,223
(423,915)
(4,697)
(6,932)
547,498
9,645
7,742
Weighted
average
exercise
price
–
–
–
–
–
–
–
–
–
–
–
–
–
Number
330,773
–
(208,397)
–
(122,376)
–
–
–
–
–
–
–
–
The table below shows the weighted average market price at the date of exercise:
SAYE
LTIP
DSA
SMP
2021
2020
1,451.2p
1,286.9p
1,291.3p
0.0p
1,484.7p
1,355.9p
1,373.8p
1,351.6p
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
174
26. Share-based Awards continued
The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are as follows:
SAYE
Between £7 and £8
Between £8 and £9
Between £9 and £10
Between £11 and £12
Between £12 and £13
Between £13 and £14
LTIP
Nil
DSA
Nil
Total
2021
Options outstanding
2020
Options outstanding
Weighted
average
remaining
contractual
life
Years
3.5
2.7
2.3
1.5
1.1
3.7
Number
outstanding
1,244,571
610,912
114,155
107,211
68,999
90,157
Number
outstanding
–
1,245,235
150,010
426,893
98,968
–
1,253,774
3.7
1,373,119
547,498
4,037,277
1.7
3.1
836,819
4,131,044
Weighted
average
remaining
contractual
life
Years
–
4.0
3.2
1.7
0.5
–
2.1
1.8
2.6
For the share-based awards granted during the year, the weighted average fair value of those options at 31 July 2021 was 453.3p (31 July
2020: 581.0p). The main assumptions for the valuation of these share-based awards comprised:
Exercise period
SAYE
1 Dec 2023 to 31 May 2024
1 Dec 2025 to 31 May 2026
1 Jun 2024 to 30 Nov 2024
1 Jun 2026 to 30 Nov 2026
LTIP
2 Oct 2023 to 1 Oct 2024
DSA
2 Oct 2022 to 1 Oct 2023
2 Oct 2023 to 1 Oct 2024
01 Apr 2022 to 31 Mar 2023
Share price
at issue
Exercise
price
Expected
volatility
Expected
option life
in years
Dividend
yield
Risk free
interest rate
992.5p
992.5p
1648.8p
1648.8p
987.9p
987.9p
987.9p
1612.0p
794.0p
794.0p
1319.0p
1319.0p
–
–
–
–
31.0%
29.0%
32.0%
30.0%
31.0%
–
–
–
3
5
3
5
3
–
–
–
3.8%
3.8%
2.5%
2.5%
0.0%
0.0%
0.2%
0.4%
3.8%
0.0%
–
–
–
–
–
–
Expected volatility was determined mainly by reviewing share price volatility for the expected life of each option up to the date of grant.
Close Brothers Group plc Annual Report 2021The Notes continued 27. Consolidated Cash Flow Statement Reconciliation
(a) Reconciliation of operating profit before tax to net cash inflow from operating activities
Operating profit before tax
Tax paid
Depreciation, amortisation and impairment
Decrease/(increase) 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
Decrease/(increase) in:
Loans and advances to banks not repayable on demand
Loans and advances to customers
Assets let under operating leases
Certificates of deposit
Sovereign and central bank debt
Other assets less other liabilities
Increase/(decrease) in:
Deposits by banks
Deposits by customers
Loans and overdrafts from banks
Net (redemption)/issuance of debt securities
175
2021
£ million
2020
£ million
265.2
(69.7)
123.4
4.6
8.5
(23.2)
27.2
140.9
(86.6)
95.8
(14.5)
(12.9)
0.3
15.2
336.0
138.2
9.6
(906.6)
(43.9)
21.2
(126.6)
74.8
3.9
745.1
14.8
(9.2)
(13.3)
(87.8)
(45.6)
(45.2)
(22.7)
142.6
93.4
284.3
(21.4)
6.9
Net cash inflow from operating activities
119.1
429.4
(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 subsidiaries
Cash consideration received
(d) Analysis of cash and cash equivalents1
Cash and balances at central banks
Loans and advances to banks
At 31 July
1 Excludes £30.7 million of Bank of England and other cash reserve accounts.
(2.9)
(4.6)
2.3
2.3
0.5
0.5
1,314.7
121.9
1,362.8
98.5
1,436.6
1,461.3
During the year ended 31 July 2021, the non-cash changes on debt financing amounted to £18.2 million (31 July 2020: £16.2 million) arising
largely from interest accretions and fair value hedging movements.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
176
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 56 to 67. Details of the significant
accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and
expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 1.
(a) Classification
The following tables analyse the group’s assets and liabilities in accordance with the categories of financial instruments in IFRS 9.
At 31 July 2021
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
comprehensive
income
£ million
Amortised cost
£ million
Total
£ million
–
–
–
–
–
–
–
16.9
–
16.9
–
–
–
–
–
–
–
19.0
–
19.0
–
–
–
–
20.1
31.9
–
1.4
0.1
53.5
16.4
–
–
–
–
–
–
2.3
–
18.7
–
–
–
–
192.5
–
–
–
–
1,331.0
699.6
136.3
8,444.5
264.7
–
51.1
–
62.4
1,331.0
699.6
136.3
8,444.5
477.3
31.9
51.1
18.3
62.5
192.5
10,989.6
11,252.5
–
–
–
–
–
–
–
–
–
–
674.2
150.6
6,634.8
512.7
1,865.5
–
222.7
–
194.8
690.6
150.6
6,634.8
512.7
1,865.5
–
222.7
21.3
194.8
10,255.3
10,293.0
Close Brothers Group plc Annual Report 2021The Notes continued 177
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
comprehensive
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
–
–
–
–
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
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
(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 2021
Fair
value
£ million
226.5
1,908.9
Carrying
value
£ million
222.7
1,865.5
31 July 2020
Fair
value
£ million
227.0
1,885.8
Carrying
value
£ million
223.0
1,870.3
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.
Instruments classified as Level 3 predominantly comprise contingent consideration payable and receivable in relation to the acquisitions and the
disposal of subsidiaries.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021
178
28. Financial Risk Management continued
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 2021 and 2020.
The tables below show the classification of financial instruments held at fair value into the valuation hierarchy.
At 31 July 2021
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 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
Level 1
£ million
Level 2
£ million
Level 3
£ million
Total
£ million
19.0
192.5
6.2
–
–
217.7
5.7
3.2
–
–
8.9
1.1
–
25.4
18.3
–
44.8
1.3
6.2
21.3
–
28.8
–
–
0.3
–
0.1
0.4
–
–
–
3.0
3.0
20.1
192.5
31.9
18.3
0.1
262.9
7.0
9.4
21.3
3.0
40.7
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
Close Brothers Group plc Annual Report 2021The Notes continued Movements in financial instruments categorised as Level 3 were:
At 1 August 2019
Total gains recognised in the consolidated income statement
Purchases and issues
Sales and settlements
At 31 July 2020
Total gains recognised in the consolidated income statement
Purchases and issues
Sales and settlements
At 31 July 2021
179
Equity shares
£ million
0.3
–
–
–
Contingent
consideration
£ million
(3.9)
0.7
(0.6)
3.0
0.3
–
–
–
0.3
(0.8)
2.6
(2.4)
(2.3)
(2.9)
The losses recognised in the consolidated income statement relating to instruments held at the year end amounted to £0.1 million (2020:
£0.4 million).
(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 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. As at 31 July 2021, secured lending accounts for 89.2% of the loan book,
in line with the prior year (31 July 2020: 88.7%).
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
2021
£ million
31 July
2020
£ million
1,331.0
699.6
136.3
8,444.5
477.3
51.1
18.3
62.5
11,220.6
1,375.8
619.7
125.8
7,616.7
382.5
45.8
39.9
53.8
10,260.0
239.6
210.4
11,460.2
10,470.4
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 2021, the group was a participant of the Bank of England’s Term Funding Scheme with Additional Incentives for SMEs (“TFSME”). At
31 July 2020, in addition to TFSME, the group was also a participant of the Bank of England’s Term Funding Scheme (“TFS”).
Under these schemes, asset finance loan receivables of £571.3 million (31 July 2020: £758.5 million), UK gilts with a market value of
£90.2 million (31 July 2020: £nil) and retained notes relating to Motor Finance loan receivables of £72.1 million (31 July 2020: £109.0 million)
were positioned as collateral with the Bank of England, against which £490.0 million of cash was drawn (31 July 2020: £228.0 million under
TFSME and £262.0 million under TFS).
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 180
28. Financial Risk Management continued
The term of these transactions is four years from the date of each drawdown but the group may choose to repay earlier at its discretion. The
risks and rewards of the loan receivables remain with the group and continue to be recognised in loans and advances to customers on the
consolidated balance sheet.
The group has securitised without recourse and restrictions £1,386.0 million (31 July 2020: £1,601.1 million) of its insurance premium and motor
loan receivables in return for cash and asset-backed securities in issue of £915.7 million (31 July 2020: £1,037.1 million). This includes the
£72.1 million (31 July 2020: £109.0 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 184.
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
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. This team reports through the chief credit risk officer to the group chief risk officer
and provides monthly reporting to the CRMC and 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 deployed throughout 2021 in light of the increase in required concessions
relating to Covid-19.
Government lending schemes
In addition to the Covid-19 specific forbearance measures covered below, following accreditation, customers facilities were offered 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 to small businesses. We saw
good demand for loans under these schemes with 6,449 loans totalling £1,278.4 million approved within the Invoice Finance, Property Finance,
and Asset Finance and Leasing businesses ahead of the 31 May 2021 deadline. As at 31 July 2021, 5,763 facilities were drawn, with a residual
balance of £983.9 million (31 July 2020: £193.8 million) following commencement of repayments in some instances. Any undrawn approvals are
valid until 30 November 2021.
We have also received accreditation to offer products under the Recovery Loan Scheme, and schemes in the Republic of Ireland. To date, a
small volume and value of applications have been received and approved.
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 remains
effective.
Covid-19 approach
Whilst 2021 has seen forbearance request levels below those observed at the start of the pandemic, we have continued to experience
customers requesting additional financial support. Our approach to classifying forbearance as Covid-19 related or otherwise has been carefully
considered and has evolved throughout the financial year.
As the global pandemic has progressed, the impact on customers and their ongoing performance and requirements have been monitored,
including the uptake of concessions, payment performance, the resumption of normal payment terms and the requirement for further
concessions. 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 continues to report on Covid-19 related concessions to the CRMC and GRCC, which utilise this enhanced
forbearance reporting for tactical and strategic planning, and to assess the impacts of concessions granted. Additional reporting tracks the
trajectory of Covid-19 related concessions across the businesses and examines sector and asset concentrations.
Close Brothers Group plc Annual Report 2021The Notes continued 181
Covid-19 related concessions granted to customers as a consequence of Covid-19 have been varied across our lending businesses. In all
instances, where further support has been 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 fallen to 17,706 from 66,153 at the end of the prior
financial year.
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. 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.
For the Covid-19 forborne customers the following staging assumptions continue to apply:
• A Covid-19 related payment concession or loan extension has not in itself automatically 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 and combined with observed customer behaviour we have applied a distinction between the impact of the
pandemic on consumers and businesses, with the expectation that businesses 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
as follows:
– Commercial: concessions granted as a result of Covid-19 have 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, and 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 concessions; broadly, if up to date, the
concession 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 concession has been considered an indicator of a significant increase in credit risk and the exposure has migrated to Stage 2.
Where, subsequent to the granting of a Covid-19 related concession, a customer has not adhered to this agreed concession, then that
customer will migrate to Stage 2 accordingly.
A customer will be treated as forborne until a cure period has been met. The cure periods of Covid-19 related forborne exposures are subject to
expert judgement and are underpinned by carefully considered assumptions. These are subject to regular review and during the course of the
financial year have been adjusted to reflect the ongoing implications of Covid-19. Our cure approach varies per business and ranges from
instant cure when concession ends (subject to confirmation of no adverse performance) to a cure period of between 3 and 12 months,
commencing upon resumption of full repayments in instances where partial repayments had been agreed for a period of time. Covid-19
forborne exposures in Commercial comprise the majority of forborne loan balances and are subject to this 12-month cure period. In some
instances where the facility is of short tenor the exposure may remain forborne for the residual life of the facility.
The overall macroeconomic conditions have stabilised and the shorter-term impacts of Covid-19 on our customers have begun to unwind. In
line with regulatory guidance, new concessions granted in some portfolios are no longer considered Covid-19 forbearance. However as
macroeconomic uncertainties remain, and the full impact on some customers may be yet to materialise we continue to monitor repayment
performance and apply expert management judgement to ensure adequate staging and coverage.
Non-Covid-19 forbearance
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. Furthermore, other forms of forbearance such as
moratorium, covenant waivers, and rate concessions are also offered.
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 2021 the gross carrying amount of exposures with forbearance measures was £615.0 million (31 July 2020: £1,596.2 million). The
key driver of this decrease has been repayment and curing of Covid-19 related forbearance, the total of which amounts to £454.8 million at
31 July 2021 (31 July 2020: £1,410.4 million).
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 182
28. Financial Risk Management continued
An analysis of forborne loans as at 31 July 2021 is shown in the table below:
31 July 2021
Non-Covid-19 forbearance
Covid-19 forbearance
31 July 2020
Non-Covid-19 forbearance
Covid-19 forbearance
Gross loans
and advances
to customers
£ million
8,724.9
8,724.9
7,855.4
7,855.4
Forborne
loans
£ million
160.2
454.8
615.0
185.8
1,410.4
1,596.2
Forborne loans
as a percentage
of gross loans and
advances to
customers
%
Provision on
forborne loans
£ million
Number
of customers
supported
1.8%
5.2%
7.0%
2.4%
18.0%
20.3%
35.5
47.3
82.8
34.5
71.9
106.4
12,679
17,674
30,353
3,039
66,153
69,192
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
31 July 2021
31 July 2020
Covid-19
£ million
Non-Covid-19
£ million
287.4
49.2
118.2
19.8
9.2
131.2
Total
forborne
loans
£ million
307.2
58.4
249.4
Covid-19
£ million
Non-Covid-19
£ million
832.8
251.0
326.6
50.1
4.1
131.6
Total
forborne
loans
£ million
882.9
255.1
458.2
454.8
160.2
615.0
1,410.4
185.8
1,596.2
The following is a breakdown of the number of customers supported by segment:
Commercial
Retail
Property
31 July 2021
31 July 2020
Covid-19 Non-Covid-19
2,291
15,333
50
136
12,485
58
Total number
of customers
supported
2,427
27,818
108
Covid-19
Non-Covid-19
7,322
58,644
187
284
2,700
55
Total number
of customers
supported
7,606
61,344
242
17,674
12,679
30,353
66,153
3,039
69,192
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 2021
31 July 2020
Covid-19
£ million
Non-Covid-19
£ million
123.5
1.2
329.7
0.4
121.9
5.3
16.1
16.9
Forborne
loans
£ million
245.4
6.5
345.8
17.3
Covid-19
£ million
Non-Covid-19
£ million
440.1
0.5
969.8
–
138.0
15.2
28.6
4.0
Forborne
loans
£ million
578.1
15.7
998.4
4.0
454.8
160.2
615.0
1,410.4
185.8
1,596.2
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. During the pandemic, Commercial has provided additional support to customers using the CBILS and CLBILS product
which benefit from BBB guarantee support. 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.
Close Brothers Group plc Annual Report 2021The Notes continued 183
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.
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
and illustrates the allocation of these per IFRS 9 staging category for comparative purposes. 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 the borrower considered likely 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 2021
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 2020
Gross loans and advances to customers
Low risk
Medium risk
High risk
Ungraded
Undrawn commitments
Low risk
Medium risk
High risk
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
7,217.8
210.5
0.5
5.5
7,434.3
1,249.2
51.1
–
1,300.3
8.1
–
–
8.1
328.4
616.5
13.6
1.7
960.2
10.8
31.5
283.0
5.1
7,557.0
858.5
297.1
12.3
330.4
8,724.9
5.6
3.0
–
8.6
–
1.0
–
1.0
–
–
1.4
1.4
–
–
0.5
0.5
1,254.8
54.1
1.4
1,310.3
8.1
1.0
0.5
9.6
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
5,777.5
112.5
5.1
11.5
1,134.1
345.3
89.6
5.2
34.7
25.0
309.6
5.3
6,946.3
482.8
404.3
22.0
5,906.6
1,574.2
374.6
7,855.4
1,163.7
–
–
1,163.7
12.2
7.6
–
19.8
10.6
0.1
1.1
11.8
1,186.5
7.7
1.1
1,195.3
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 184
28. Financial Risk Management continued
Trade receivables1
Low risk
Medium risk
High risk
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
3.7
–
–
3.7
–
4.5
–
4.5
–
–
2.6
2.6
3.7
4.5
2.6
10.8
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 87% (31 July 2020: 89%) of the overall portfolio, reflective of our prudent and consistent
approach to credit risk management. 83% (31 July 2020: 74%) of total advances are classified as low risk Stage 1, driven by the strong quality
of the portfolio. Low risk Stage 2 represents 4% (31 July 2020: 14%) of loans and advances to customers, largely comprising early arrears
cases, or agreements which have triggered a significant increase in credit risk indicator, or the 30 days past due backstop. The reduction during
the year is driven by repayment and cure of Covid-19 forbearance. Low risk Stage 3 loans and advances to customers primarily relate to
agreements which have triggered the 90 days past due backstop but where full repayment is expected.
Medium risk accounts for 10% (31 July 2020: 6%) of total loans and advances to customers, of which the majority is in Stage 2. Medium risk
Stage 1 has increased to 2% (31 July 2020: 1%) as certain parts of the Novitas loan book have been moved to medium risk, reflecting the latest
case failure rates. Medium risk Stage 2 represents 7% (31 July 2020: 4%), as the latest information on Covid-19 forborne loan payment
performance has been reflected in our approach to risk categorisation. Loans and advances to customers reflected as medium risk 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 loans account for 3% (31 July 2020: 5%) of total loans and advances to customers with the majority corresponding to Stage 3.
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 businesses
include residential and commercial property and charges over business assets such as equipment, inventory and accounts receivable. Within
Retail 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 2021
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
1,301.7
203.9
333.5
494.2
1,103.4
237.2
330.5
136.1
171.5
172.3
363.3
1,154.9
461.7
240.4
437.5
40.3
1,162.2
251.8
27.1
6.0
7.3
88.1
–
–
2,635.4
628.0
723.9
1,655.1
1,572.4
565.7
768.0
176.4
4,140.5
3,041.9
1,542.5
8,724.9
1 Government lending scheme facilities totalling £983.9 million (31 July 2020: £193.8 million), 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.
Close Brothers Group plc Annual Report 2021The Notes continued 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
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 2021
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
185
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
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
19.8
2.0
6.4
12.8
15.2
14.0
13.0
16.7
99.9
2.8
2.8
6.3
12.9
9.0
5.1
3.0
1.3
10.1
60.0
15.8
6.0
7.3
88.1
–
–
32.7
64.8
28.5
31.7
31.5
107.2
16.0
18.0
43.2
187.3
330.4
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
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 £51.1 million (31 July 2020: £45.8 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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 186
28. Financial Risk Management continued
The following table shows the ageing of settlement balances:
At 31 July 2021
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
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
615.2
81.6
–
–
696.8
–
–
1.2
–
1.2
–
–
–
1.8
1.8
–
–
–
(0.2)
615.2
81.6
1.2
1.6
(0.2)
699.6
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Impairment
provisions
£ million
598.9
18.4
–
–
617.3
–
–
0.7
–
0.7
–
–
–
2.0
2.0
–
–
–
(0.3)
(0.3)
Total
£ million
598.9
18.4
0.7
1.7
619.7
(d) Market risk
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 (“IRRBB”) 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.
Two measures are used for measuring IRRBB, namely Earnings at Risk (“EaR”) and Economic Value (“EV”):
• EaR measures short term impacts to earnings, including basis risk, highlighting any earnings sensitivity should rates change unexpectedly;
and
• EV measures longer term earnings capacity due to rate changes, it highlights potential future sensitivity of earnings, and ultimately risk to
capital
The table below sets out the assessed impact on our base case (no stress) EaR due to a parallel shift in interest rates at 31 July:
0.5% increase
0.5% decrease
2021
£ million
(11.6)
8.3
2020
£ million
(9.8)
1.7
The Bank of England base rate has remained at 0.1% since March 2020. This low external interest rate environment resulted in an increased
EaR in 2020 under a 0.5% increase due to embedded floors on some variable rate loans generating additional earnings in the lower rate
environment. This benefit is at risk should rates rise. In the event of market rates decreasing further, additional earnings would be generated
primarily due to the optionality explained above increasing EaR further.
The table below sets out the assessed impact on our base case EV due to a shift in interest rates at 31 July:
0.5% increase
0.5% decrease
2021
£ million
(4.2)
4.3
2020
£ million
(3.1)
3.3
Close Brothers Group plc Annual Report 2021The Notes continued
187
The impact above is on a comparable 0.5% increase and decrease basis. The Bank measures and monitors EV internally under a non-parallel
“Short rates down, long rates up” yield curve stress for risk management. This scenario is used as an appropriate test of the Bank’s repricing
profile and the external interest rate environment in 2021. The impact on our base case EV due to a “Short rates down, long rates up” shift in
interest rates at 31 July 2021 was a £6.7 million decrease (2020: £3.4 million decrease).
In July 2021, reflecting changes in regulation, the Bank updated its interest rate risk methodology for both EV and EaR by updating the interest
rate shock scenarios prescribed by the PRA. The non-parallel shocks (including the “Short rates down, long rates up” scenario used above)
apply a greater magnitude of stress and a post interest rate shock floor on the same balance sheet profile resulting in increased metrics.
Interest rate benchmark reform
A programme is in place to transition the group away from the use of LIBOR to alternative benchmark rates in loan documentation, treasury
transactions and other forms of contract. Good progress was made during the year and at 31 July 2021, loans and advances to customers
amounting to £995.5 million and derivatives with a notional value of £84.7 million were yet to transition to an alternative benchmark rate. The
group remains fully on track and the programme is expected to be materially completed by 31 December 2021, in compliance with the
requirements set by the Prudential Regulation Authority and Financial Conduct Authority. There are no significant changes to the nature of the
risks arising from financial instruments to which the group is exposed as a result of the transition.
Foreign exchange risk
A change in the euro exchange rate would decrease the group’s equity by the following amounts:
20% strengthening of sterling against the euro
2021
£ million
(0.9)
2020
£ million
(2.8)
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 risk
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 2021
Equity shares
Long
Short
Debt securities
Long
Short
For the year ended 31 July 2020
Equity shares
Long
Short
Debt securities
Long
Short
Highest
exposure
£ million
Lowest
exposure
£ million
Average
exposure
£ million
Exposure
at 31 July
£ million
49.0
22.8
24.8
5.8
28.6
12.9
19.1
4.5
30.9
11.0
19.9
22.7
8.6
14.1
30.8
9.4
21.4
20.1
7.0
13.1
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
With respect to the long and short positions on debt securities £9.1 million and £0.1 million (2020: £12.4 million and £0.3 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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 188
28. Financial Risk Management continued
Based upon the trading book exposure given above, a hypothetical fall of 10% in market prices would result in a £2.1 million decrease (2020:
£2.0 million decrease) in the group’s income and net assets on the equity trading book and a £1.3 million decrease (2020: £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 2021 of £11.1 billion (31 July 2020: £10.2 billion). This funding is
significantly in excess of its loans and advances to customers at 31 July 2021 of £8.4 billion (31 July 2020: £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.
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 2021
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
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
–
2.1
576.1
22.7
–
–
–
–
0.2
18.2
674.2
37.7
1,549.4
0.1
58.3
–
1.0
5.3
3.8
158.4
–
105.8
1,985.0
0.1
75.5
–
1.0
3.7
3.2
6.7
–
5.0
1,372.0
0.2
106.6
–
2.0
8.7
6.8
8.1
–
–
1,202.0
491.1
1,048.7
–
21.0
67.8
35.0
47.5
In more
than five
years
£ million
–
–
–
–
705.0
–
243.9
43.5
13.5
1.3
Total
£ million
674.2
150.6
6,684.5
514.2
1,994.1
–
268.9
129.0
62.5
240.2
Total
619.3
2,488.2
2,181.0
1,509.4
2,913.1
1,007.2
10,718.2
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
Other financial liabilities
On
demand
£ million
–
25.1
543.2
6.9
–
17.9
–
–
0.1
13.0
In less
than three
months
£ million
587.5
123.3
1,105.8
1.1
38.4
–
1.7
5.3
5.5
95.2
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
–
0.3
1,358.0
0.1
523.3
–
3.7
3.9
3.4
4.2
–
4.1
1,464.5
0.2
416.1
–
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
Close Brothers Group plc Annual Report 2021The Notes continued 189
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 2021
At 31 July 2020
On
demand
£ million
–
–
In less
than three
months
£ million
68.0
79.5
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
4.0
3.5
9.0
7.6
67.8
21.9
In more
than five
years
£ million
43.5
5.2
Total
£ million
192.3
117.7
(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 2021
Derivative financial assets
Derivative financial liabilities
At 31 July 2020
Derivative financial assets
Derivative financial liabilities
Gross
amounts
recognised
£ million
Master netting
arrangements
£ million
Financial
collateral
£ million
Net amounts
after offsetting
£ million
18.3
21.2
39.9
20.7
(16.0)
(16.0)
(2.0)
(16.9)
0.3
(11.7)
(14.2)
(14.2)
(25.0)
(4.0)
0.7
2.5
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 £5,467 million at 31 July 2021 (31 July 2020:
£4,821 million). Included in revenue on the consolidated income statement is management fee income of £35.4 million (2020: £33.4 million)
from unconsolidated structured entities managed by the group.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 190 Close Brothers Group plc
Annual Report 2021
30. Investments in Subsidiaries
In accordance with section 409 of the Companies Act 2006, the following is a list of the group’s subsidiaries at 31 July 2021, which are all wholly
owned and incorporated in the UK unless otherwise stated.
Securities
W.S. (Nominees) Limited3
Winterflood Client Nominees Limited3
Winterflood Gilts Limited3
Winterflood Securities Holdings Limited3
Winterflood Securities Limited3
Winterflood Securities US Corporation (Delaware, USA)15
Asset Management
Adrian Smith & Partners Limited19
Cavanagh Financial Management Limited7
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 Brothers Asset Management (Guernsey) Limited17
Close Investments Limited1
Close Portfolio Management Limited1
EOS Wealth Management Limited1
Lion Nominees Limited1
Place Campbell Close Brothers Limited (50% shareholding)8
PMN Financial Management LLP1
Group
Close Brothers Holdings Limited1
Banking
Air and General Finance Limited2
Armed Services Finance Limited4
Arrow Audit Services Limited1
Brook Funding (No.1) Limited10, 20
Capital Lease Solutions Limited1
CBM Holdings Limited1
Close Asset Finance Limited2
Close Brewery Rentals Limited5
Close Brothers Asset Finance GmbH (Germany)13
Close Brothers Factoring GmbH (Germany)13
Close Brothers Finance plc1
Close Brothers Limited1
Close Brothers Military Services Limited4
Close Brothers Premium DAC (Ireland)16
Close Brothers Technology Services Limited1
Close Brothers Vehicle Hire Limited12
Close Business Finance Limited2
Close Credit Management (Holdings) Limited1
Close Finance (CI) Limited (Jersey)14
Close Invoice Finance Limited1
Close Leasing Limited11
Close Motor Finance Limited4
Close PF Funding I Limited9, 20
Commercial Acceptances Limited6
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 plc18, 20
Orbita Funding 2017-1 plc10, 20
Orbita Funding 2020-1 plc10, 20
Orbita Holdings Limited10, 20
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 Roman House, Roman Road, Doncaster, South Yorkshire DN4 5EZ, United Kingdom.
5 Unit 1, Kingfisher Park, Headlands Business Park, Ringwood, Hampshire BH24 3NX, United Kingdom.
6 100 George Street, London W1U 8NU, United Kingdom.
7 4th Floor, The Athenaeum Building, 8 Nelson Mandela Place, Glasgow G2 1BT, United Kingdom.
8 Wilmington House, High Street, East Grinstead, West Sussex RH19 3AU, United Kingdom.
9 10th Floor, 5 Churchill Place, London E14 5HU, United Kingdom.
10 1 Bartholomew Lane, London EC2N 2AX, United Kingdom.
11 Olympic Court Third Avenue, Trafford Park Village, Manchester M17 1AP, United Kingdom.
12 Lows Lane, Stanton-By-Dale, Ilkeston, Derbyshire DE7 4QU, United Kingdom.
13 Grosse Bleiche 35-39, 55116, Mainz, Germany.
14 Conway House, Conway Street, St Helier JE4 5SR, Jersey.
15 1209 Orange Street, Wilmington 19801, New Castle, Delaware, USA.
16 Swift Square, Building 1, Santry Demesne, Northwood, Dublin, DO9 AOE4, Ireland.
17 PO Box 186, Royal Chambers, St Julian’s Avenue, St Peter Port GY1 4HP, Guernsey.
18 40a Station Road, Upminster, Essex, RM14 2TR, United Kingdom.
19 Bishop Fleming LLP, 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, EX1 3QS, United Kingdom.
Subsidiaries by virtue of control:
20 The related undertakings are included in the consolidated financial statements as they are controlled by the group.
The Notes continued 191
Glossary and Definition of Key Terms
Adjusted
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; and any exceptional and other adjusting items which do not
reflect underlying trading performance
Adjusted operating profit
(“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 daily 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 V
(“CRD V”)
Capital Requirements Regulation
(“CRR”)
CDP
European Union regulation implementing the Basel III requirements in Europe, alongside CRR
UK onshored provisions of EU regulation 575/2013
Formerly the “Carbon Disclosure Project”, a leading, internationally recognised independent rating
agency and assessor of corporate carbon emissions disclosures and actions
CET1 capital ratio
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 certain intangible assets and 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. The scheme closed at the end of March 2021
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
Customer satisfaction (“CSAT”)
score
A measure of customer satisfaction expressed as a percentage of positive responses from the total of
those surveyed
Discounting
The process of determining the present value of future payments
Dividend per share (“DPS”)
Comprises the final dividend proposed for the respective year, together with the interim dividend
declared and paid in the year
Earnings per share (“EPS”)
Profit attributable to shareholders divided by number of basic shares
Effective 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 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
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 192
Glossary and Definition of Key Terms continued
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 financial 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”)
Includes 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
Modification 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
Net flows
Net flows as a percentage of opening managed assets calculated on an annualised basis
Close Brothers Group plc Annual Report 2021 193
Net interest margin (“NIM”)
Net promoter score (“NPS”)
Net zero
Operating margin
Paris Agreement
Personal Contract Plan (“PCP”)
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 net
loans and advances to customers and operating lease assets
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
Target of completely negating the amount of greenhouse gases produced by reducing emissions or
implementing methods for their removal
Adjusted operating profit divided by adjusted operating income
International treaty on climate change, adopted in 2015, with a goal to limit global warming to well
below 2, and preferably to 1.5 degrees Celsius, compared to pre-industrial levels
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
Recovery Loan Scheme
Launched in April 2021 as a replacement to CBILS. Under the terms of the scheme, businesses of
any size that have been adversely impacted by the Covid-19 pandemic can apply to borrow up to
£10m, with accredited lenders receiving a government-backed guarantee of 80% on losses that may
arise. The scheme is due to close at the end of December 2021
Return on assets
Adjusted operating profit attributable to shareholders divided by total closing assets at the balance
sheet date
Return on average tangible
equity
Adjusted operating profit attributable to shareholders 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 attributable to shareholders 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 in line with the CRR. 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
Scope 1, 2 and 3 emissions
Categorisation of greenhouse gas emissions, as defined by the Greenhouse Gas (GHG) Protocol, into
direct emissions from owned or controlled sources (Scope 1), indirect emissions from the generation
of purchased electricity, heating and cooling consumed by the reporting company (Scope 2), and all
other indirect emissions that occur in a company’s value chain (Scope 3)
Secured debt
Senior debt
Debt backed or secured by collateral
Represents the type of debt that takes priority over other unsecured or more junior debt owed by the
issuer. Senior debt is first to be repaid ahead of other lenders or creditors
Significant increase in credit risk
(“SICR”)
An assessment of whether credit risk has increased significantly since initial recognition of a loan
using a range of triggers. Accounts which have experienced a significant increase in credit risk will be
allocated to Stage 2
Standardised approach
Generic term for regulator-defined approaches for calculating credit, operational and market risk
capital requirements as set out in the CRR
Subordinated debt
Represents debt that ranks below, and is repaid after claims of, other secured or senior debt owed by
the issuer
Task Force on Climate-related
Financial Disclosures (“TCFD”)
Regulatory framework to improve and increase reporting of climate-related financial information,
including more effective and consistent disclosure of climate-related risks and opportunities
Term Funding Scheme (“TFS”)
The Bank of England’s Term Funding Scheme
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 194
Glossary and Definition of Key Terms continued
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
Close Brothers Group plc Annual Report 2021 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
195
Date
November 2021
18 November 2021
23 November 2021
January 2022
31 January 2022
March 2022
May 2022
July 2022
31 July 2022
September 2022
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.
Governance ReportFinancial StatementsStrategic ReportClose Brothers Group plc Annual Report 2021 196
Independent Auditor
PricewaterhouseCoopers LLP
Solicitor
Slaughter and May
Corporate Brokers
J.P. Morgan Cazenove
UBS AG London Branch
Registrar
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
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.linkgroup.eu
Online proxy voting: www.signalshares.com
Registered Office
Close Brothers Group plc
10 Crown Place
London EC2A 4FT
Telephone: +44 (0)333 321 6100
Email: enquiries@closebrothers.com
Website: www.closebrothers.com
Company No. 520241
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 https://register.fca.org.uk/s/
• 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 https://register.fca.org.uk/s/
• 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: https://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 https://www.fca.org.uk/consumers/report-scam-us. You can
also find out more about investment scams at https://www.fca.org.uk/scamsmart/how-avoid-investment-scams. 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 plc
10 Crown Place
London EC2A 4FT
Tel: +44 (0)333 321 6100
www.closebrothers.com
LENDING | DEPOSITS | WEALTH MANAGEMENT | SECURITIES