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8
BUILDING A BETTER
FINANCIAL WORLD
Funding Circle Holdings plc
Annual Report and Accounts 2018
WE BELIEVE
IN THOSE MADE
TO DO MORE
Arapina is an award-winning healthy lifestyle
bakery based in Greenwich, London. Being an
avid home baker, founder Michaela began
trading in food markets in 2013 with one single
product – the Arapina chocolate cake. Her
delectable treat was an instant hit, and she
started to receive requests from wholesalers.
Demand kept growing and there quickly became
a need to relocate into a larger premises. In order
to fit out the new cafe and kitchen, Michaela
borrowed finance through Funding Circle in 2017.
We ignite opportunities
for businesses and investors
by providing a better deal
for everyone.
Find out more at
fundingcircle.com
Contents
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Chief Executive Officer’s statement
Strategic priorities
Chairman’s statement
Key investment highlights
Funding Circle at a glance
1 Highlights
2
4
6
7
8
10 Our business model
12 Our market
16 Value proposition for borrowers
20 Value proposition for lenders
22 Technology and data
24 Our people
28 Corporate social responsibility
30 Key performance indicators
32 Finance review
36 Risk management
39 Principal risks and uncertainties
44 Viability statement
46 Chairman’s introduction
48 Board leadership and Company purpose
54 Division of responsibilities
55 Composition, succession and evaluation
56 Audit, risk and internal control
57 Report of the Nomination Committee
59 Report of the Audit Committee
63
Report of the Risk and
Compliance Committee
65 Directors’ remuneration report
67 Directors’ remuneration policy
73 Annual report on remuneration
80 Report of the Directors
83
Statement of Directors’ responsibilities
in respect of the financial statements
84
90
Independent auditors’ report
Consolidated statement of
comprehensive income
91 Consolidated balance sheet
92
Consolidated statement of changes
in equity
93 Consolidated statement of cash flows
94
Notes forming part of the consolidated
financial statements
127 Independent auditors’ report
131 Company balance sheet
132 Company statement of changes
in equity
133 Company statement of cash flows
134 Notes forming part of the Company
financial statements
141 Shareholder and Company information
Highlights
Financial and operational highlights
Leading lending platform in the UK, US, Germany and the Netherlands
- Loans under management now exceeding £3 billion (up 55% excl. property)
- Originations of £2.3 billion (up 40% excl. property)
Strong repeat dynamics from existing investors and borrowers
- 43% of Group revenue from existing customers
- 74% of lending came from existing investors in 2018; 85% of borrowers would
approach Funding Circle first in the future, rather than their bank
Deep and diverse investor base
- 85,000 investors lent money directly to SMEs in 2018
- New lending commitments signed, including Waterfall Asset Management (£1 billion)
and the British Business Bank (£150 million)
Market-leading customer satisfaction scores for borrowers
- 27,000 SMEs accessed finance through our platform in 2018
- Net promoter score between 80–90 for borrowers in the UK and US
Building dynamic team
- 217 Circlers joined in 2018 – bringing us to approximately 1,000 globally
Strong Group performance delivering IPO guidance whilst investing for growth
- Revenue of £141.9 million (up 55% excl. property)
- Positive segment adjusted EBITDA of £7.0 million
- Marketing as a % of revenue maintained at ~40%
- Loss before tax of £50.7 million
Revenue
Segment adjusted
EBITDA*
Adjusted EBITDA*
Loans under
management
Originations
£141.9m
£7.0m
£(28.5)m
£3.1bn
£2.3bn
141.9
-4%
margin
5%
margin
-27%
-20%
margin
margin
94.5
7.0
2017
2018
2,107
3,148
2,292
1,738
2017
2018
(3.9)
2018
2017
2018
2017
2018
2017
(25.1)
(28.5)
*
Segment adjusted EBITDA is defined as operating profit or loss before depreciation and amortisation, share-based payments and associated social security costs, foreign
exchange gains/(losses), exceptional items and central costs. Adjusted EBITDA includes central costs. A reconciliation to operating profit or loss is shown in note 4 on
page 111.
Annual Report and Accounts 2018
1
Strategic report Funding Circle at a glance
About Funding Circle
Funding Circle’s aim is to help SMEs grow by
providing them with streamlined access to capital.
Who we are
Funding Circle is a leading global SME loan platform.
By combining cutting-edge technology, sophisticated
data analytics and dedicated customer service, we
help SMEs access finance that allows them to grow
and expand. We’re also opening up a whole new asset
class to investors, to whom we provide stable returns
and a range of investment options.
The vital role of SMEs
SMEs play a vital role in society, driving economic growth,
employment and innovation. In fact, each year they’re
responsible for 50–60% of economic value creation in the
OECD region. But despite their importance to the global
economy, SMEs are often overlooked, underserved and
undersupported. Globally around 53% of SMEs say it’s
difficult to gain access to capital.
Through our platform, we’re helping SMEs to overcome major
barriers to growth and, in turn, make significant contributions
to the global economy.
In the decade since the global financial crisis, the supply
of lending to SMEs by banks has become more restricted.
In the UK alone, total outstanding borrowing facilities from
traditional banks to SMEs have declined by 12%, from
£189 billion in 2011 to £166 billion in 2018.
Structural issues, such as increased capital requirements
under Basel III regulation, have also caused banks to pull
back from lending to SMEs. As a result, banks have tended
to focus on larger corporates and consumer lending.
But thanks to online lending platforms like ours, the situation
is changing.
Where we operate
We help small businesses to access finance in the
UK, the US, Germany and the Netherlands.
Cumulative lending to date (from 2010):
$1.9bn
US cumulative lending
£4.6bn
UK cumulative lending
€210m
Germany cumulative lending
€140m
Netherlands cumulative lending
50–60%*
of economic value is generated by SMEs
70%*
of employment is provided by SMEs
99%*
of all firms are SMEs
*Source: OECD.
23%*
projected increase in SME revenue from 2017–2021
Throughout the report we refer to statistics and numbers excluding property finance. This is because in 2017, Funding Circle
took the decision to cease lending to property developers in the UK, the one market in which it had previously expanded
its product set beyond amortising SME loans. As a result, this is excluded when measuring ongoing business performance.
2
Funding Circle Holdings plc
Strategic report A LONG WAY IN
A SHORT TIME
August 2010
Funding Circle
founded by Samir
Desai, James
Meekings and
Andrew Mullinger
September 2012
£50 million funded
through the platform
by UK retail investors
March 2013
The British
Government started
lending through
the platform
October 2015
£1 billion funded
through the platform
and expanded into
Germany and
the Netherlands,
acquiring Zencap
(now Funding Circle)
December 2015
Launch of FCIF –
a listed investment
fund lending across
all Funding Circle
geographies
June 2016
£100 million
lending partnership
agreed between
Funding Circle
and the European
Investment Bank
October 2013
Expanded into
the US, acquiring
Endurance Lending
Network (now
Funding Circle)
May 2017
Funding Circle
UK granted full
authorisation by
the FCA
August 2017
Lending partnership
in the UK between
Funding Circle
and Aegon
June 2018
£5 billion
lent through
the platform
October 2018
IPO on London
Stock Exchange
September 2018
$1 billion lending
partnership in the US
between Funding
Circle and Alcentra
In September 2018 we
launched our Help Your
Business Fly campaign.
December 2018
£1 billion lending
partnership in the
UK between Funding
Circle and Waterfall
Asset Management
Annual Report and Accounts 2018
3
Strategic report Chief Executive Officer’s statement
BUILDING A BETTER
FINANCIAL WORLD
Andrew, James and I launched Funding
Circle in 2010 with the ambition of rewiring
access to finance for small businesses.
We believed the lending market for small
businesses both in the UK and globally
was underserved, and there was an
opportunity to address this imbalance.
Eight years later, thousands of investors
have lent more than £6 billion to over
60,000 small businesses and Funding
Circle is recognised as the leading small
business loan platform in the UK, the US,
Germany and the Netherlands.
SME financing is broken
SMEs are the lifeblood of an economy, providing employment,
growth and innovation. However, as they represent a tiny
proportion of banks’ overall balance sheets, they have been
repeatedly underserved by the traditional banking system and
very little has changed in the ten years since the financial
crisis. What has changed, however, is the ability to solve this
problem. At Funding Circle, our global online platform allows
a wide range of investors to lend directly to small businesses,
creating a 21st century way to access finance, and opens up
an attractive and stable asset class previously only ever held
on bank balance sheets.
We have attracted a diverse mix of investors, drawn by our
competitive rates of return, including more than 85,000
individuals, banks, asset management companies, insurance
companies, and national and supranational entities such as
the British Business Bank, KfW and the European Investment
Bank. They have remained with us as we have grown loans
under management year-on-year.
Funding Circle helps those made to do more
Every day I am inspired by the work of our team to help
businesses around the world access the finance they need
to fulfil their dreams. These businesses are the unsung heroes
of our economy. From butchers and bakers, to IT consultants
and accountants, these are the businesses that are made to
do more. At the end of 2017, loans outstanding at Funding Circle
had unlocked 75,000 jobs across the four markets we operate
in. It is our mission to build a better financial world, where small
businesses receive the treatment they deserve and access the
finance they need in a fast and affordable way, and investors
can earn attractive stable returns.
2018 financial highlights
2018 was a strong year for Funding Circle. Over the period,
our Group revenue for the year grew 55% (excluding property)
to £141.9 million, exceeding the c.50% guidance we provided.
It was also pleasing to report a positive segment adjusted
EBITDA of £7 million.
Our key drivers of growth are loans under management and
originations. In 2018, loans under management rose 55%
year-on-year, exceeding £3 billion. Loan originations grew 40%
to £2.3 billion for the year, and we were especially proud that
in 2018 in the UK, net lending (£723 million) to SMEs through
Funding Circle was higher than all UK high street banks
combined (£515 million). This is testament to the exceptional
customer experience we deliver to both borrowers and investors.
4
Funding Circle Holdings plc
Strategic report This exceptional level of service leads to high satisfaction
scores and strong and consistent repeat behaviour. I am
proud that in 2018, 43% of our Group revenue came from
existing customers.
In October we raised gross proceeds of £300 million through our
IPO on the London Stock Exchange and were admitted into the
FTSE 250 at the end of the year. I would like to welcome all of our
new shareholders who joined us at the IPO as well as those
that have joined since. It is fantastic to have you on board.
2018 operational highlights
Last year there were record levels of lending across all of our
geographies, helping more than 27,000 businesses globally.
In the UK, we were pleased to welcome a number of new
investors to the platform, including Waterfall Asset Management,
who announced plans to lend £1 billion in the UK over the
next two years. In addition, government and supranational
entities continued to play a valuable role supporting UK small
businesses. The European Investment Fund and KfW, the
German Promotional Bank, announced their investment in
a securitisation of loans originated by Funding Circle in May,
and in December the British Business Bank confirmed plans to
lend £150 million to UK businesses through the Funding Circle
SME Income Fund. Finally in September, we were delighted to
launch Captain Galactic on to people’s screens with our new
TV advertising campaign. The campaign is focused on helping
those who want to go further with their business and we have
enjoyed the positive reaction to it.
Our international business continues to go from strength to
strength and now represents approximately 30% of our overall
business. In the US we delivered record growth in loans under
management to $939 million and originations of $792 million.
And in September we welcomed Alcentra as a new investor,
who announced plans to lend $1 billion to US small businesses
over the next three years.
Our youngest markets, Germany and the Netherlands,
continued their positive trajectory with both businesses
doubling year-on-year and establishing industry leadership
positions in their markets.
Our FC2020 strategy
At the start of 2018 we launched FC2020, our medium-term
strategic plan. Our goal is to grow our business so that it
becomes an integral and important component of the financing
of SMEs globally. We envisage a financial system where a
significant proportion of SME funding needs are addressed by
online lending platforms, such as Funding Circle. FC2020 is
about how we achieve our exciting and inspiring long-term
mission over the next few years.
The plan is based on four key pillars that focus on how we
delight our customers:
1) Drive a better borrower experience
2) Invest in modern data, tech and analytics
3) Diversify funding sources
4) Build a highly scalable global business
Delivering against this plan will lead to a step-change for our
business. We have already made excellent progress against
each of the pillars over the last 12 months and we will continue
to invest in these areas.
We also want to continue to build on our market leadership
position in each of the geographies we operate in. In the
UK, the US, Germany and the Netherlands, we are the number
one online lending platform for SMEs. However, we remain
approximately a 0.5% share of the combined global addressable
market and there is significant opportunity to increase this
substantially over the medium term.
People are what makes Funding Circle a success
All of our successes last year would not be possible without the
exceptional talent of the Funding Circle team. Building an open
and transparent culture has been critical to us since we first
launched the business. We believe that being a great place to
work is an end in itself, and it is our aim to be the best FinTech
company to work for globally. We are proud that every employee
in Funding Circle is a shareholder. In 2018 we were also delighted
to be named as the 16th Best UK Company to Work For in The
Sunday Times’ 2018 annual survey. I am immensely proud of the
fantastically talented team we have built and I would like to thank
them for all their hard work and commitment.
Brexit
We recognise the increasing economic uncertainty caused by
Brexit and we remain vigilant and prepared for the possible
outcomes. Our international operations represent approximately
30% of our overall business and our UK business is not directly
affected on a day-to-day operational basis by the prospect
of the UK leaving the EU. However, we continue to monitor
macroeconomic indicators for any possible impact on UK
SMEs. Whilst current business insolvencies remain low, we
regularly stress test the loanbooks in each of our geographies
to ensure that investor returns would remain resilient in an
economic downturn.
Looking ahead
Our business is in strong condition. Over the past eight years
we have proven that Funding Circle is a mechanism for
individuals, institutions and governments to channel funds
through to the real economy and we will continue to support
small businesses to access the finance they need to grow
and create jobs.
2018 was a milestone year for Funding Circle and I am
humbled by everything we have achieved so far as a company.
But we have big ambitions and are really only just getting
started. For 2019 we have set ourselves high targets for
growing our business volumes and diversifying our customer
base further. This means investing in marketing to build
customer awareness, and investing in technology to automate
what we do and continue to enhance our sophisticated risk
assessment models. Over the next 12 months we will also
launch new investor products and expand into Canada,
helping creditworthy Canadian SMEs to access the finance
they need to grow and stimulate job creation. I look forward
to updating you on our progress through 2019.
Samir Desai
Chief Executive Officer
7 March 2019
Annual Report and Accounts 2018
5
Strategic report Key investment highlights
WHAT MAKES FUNDING
CIRCLE UNIQUE
Illicon
Unlimited Lending Potential
Leading platform
in underserved
market
Funding Circle operates in a segment where
SMEs have been underserved and dissatisfied
with traditional lenders
Superior value
proposition
Superior value proposition for both borrowers
and investors drives strong repeat rates
Virtuous network
effects
Virtuous network effects driven by scale and
an attractive underlying business model
Sophisticated
technology
and data
Strong growth
opportunities
Founder-led
entrepreneurial
culture
Sophisticated technology, data and analytics
drive superior customer experience and
competitive advantage
Compelling growth opportunities with an
improving financial profile
Founder-led and experienced management
team with entrepreneurial culture
6
Funding Circle Holdings plc
Strategic report Chairman’s statement
An important year
The year 2018
This has been a transformational year for Funding Circle.
In October, less than nine years after the business was little
more than an idea in the minds of three young founders above
a waffle shop in Oxford Street, it successfully listed on the
Premium segment of the London Stock Exchange. We raised
£300 million and in December Funding Circle joined the FTSE
250 index.
At the time of our IPO, we indicated a range of performance targets.
We have either reached or exceeded all those that fell in 2018.
Delivering on our strategy
Our mission is to build a better financial world. The model we use
to achieve this is simple – a platform which connects investors
who have money to lend with businesses who need capital.
This simple model, however, is complex to implement as we
balance the needs of hundreds of thousands of small businesses
with billions of pounds of capital from investors. And our
implementation is only successful if we can deliver the right
balance between our borrowers’ need for easy, quick and fair
access to capital and our investors’ need for an attractive and
consistently positive return.
We know that we are doing many things well as we pursue our
mission. We know that our borrowers tell us their experiences
with Funding Circle are incomparably better than their experiences
with the traditional banking sector. We know that the lending
we facilitate to SMEs has a hugely beneficial impact on the
economies in which we operate. We know that a diversified
portfolio of our business loans produces consistently positive
net returns for investors, which are significantly above what
they can earn from elsewhere.
The year ahead
We are confident of continued strong growth in 2019, but
we are by no means complacent. We will only succeed if we
continue to serve our customers through both the good and
the not so good times. Funding Circle was born out of the global
financial crisis when SMEs found it almost impossible to secure
funding from traditional banking sources. If economic conditions
again turn adverse, we will do all we can to ensure that the
Company continues to find funds for SMEs.
To that end, the funds raised at IPO have provided us with a
strong balance sheet. This will enable us both to invest in our
long-term growth and to take advantage of opportunities to
support our business model. The combination of our market
position, financial strength and the best team in the business
gives us full confidence in Funding Circle’s prospects in 2019
and over the longer term.
Our team and our governance
I am enormously fortunate and proud to be Chairman of a
business which has such strong values, pursued by a team
overflowing with passion, commitment and talent.
Our Chief Executive and founder, Samir Desai, has assembled
a group of people that share his vision and commitment to
striving to always be the best in every aspect of what we do,
whether it is in assessing risk, talking with our customers or
interacting with colleagues.
The core culture of the team is consistently apparent through
all our offices. It will be important as a public company to
maintain this culture as well as the creativity, imagination and
dynamism which have been the hallmarks of Funding Circle’s
success to date and are the hallmarks of so many of the small
businesses we serve.
At the same time and for several years prior to listing, we have
focused on maintaining effective corporate governance. The
Board is committed to compliance with the UK Corporate
Governance Code and full details of the work of the Board and
its Committees are set out in the Corporate Governance Report.
We established an open and transparent communication with
our shareholders as we advanced through the listing process,
and we shall seek to maintain this going forward.
In anticipation of becoming a public company, we strengthened
the Board by appointing two new Directors – Geeta Gopalan and
Cath Keers – both of whom have substantial public company
experience and are already adding valuable insight and expertise
to Board and Committee business.
I wish to thank our investors who have supported the Company
in its private guise and continue to do so now that we are a
public company. They have always understood the potential
of Funding Circle and their long-term support is hugely
appreciated. I would also like to warmly welcome all our new
shareholders, large and small – not least those individuals
who were already investors as lenders through our platform.
Finally, I’d like to thank all my colleagues for their extraordinary
endeavours throughout the past year, where they have risen
to the challenge of transforming Funding Circle into a public
company, while meeting the increasing demands of the rapidly
developing business.
Andrew Learoyd
Non-Executive Chairman
7 March 2019
Annual Report and Accounts 2018
7
Strategic report Strategic priorities
Delivering our strategy
1. Drive a better borrower experience
Improving the borrower
experience and increasing
brand awareness support our
efforts to expand our presence
in those areas where we
currently do business.
Our strategy in action
We’ve consistently achieved strong customer satisfaction
and repeat business. By focusing on price, access and
engagement, and by investing in technology and data
analytics, we aim to improve convenience and efficiency
to enhance the overall experience of our borrowers. We
also plan to boost brand visibility through increased
marketing activity.
Link to KPIs:
- Loans under management
- Originations
- Marketing as a % of revenue
- Revenue
- Segment adjusted EBITDA
2. Invest in data, tech and analytics
Innovation is central to our
strategy. By investing in data,
analytics and technology,
we’ll continue to increase
automation, enhance our
credit models and improve
the customer experience.
Our strategy in action
Our approach involves optimising value and managing
credit risk across the entire spectrum of borrower
engagement. Our plan is to expand our data sets and
invest in analytical tools to create more personalised
processes, improving price and access for borrowers.
To this end, we’re developing a unified money and loan
management platform for all our markets.
Link to KPIs:
- Loans under management
- Originations
- Adjusted EBITDA
3. Diversify funding sources
We focus on diversifying
our funding base, attracting
long-term commitments from
investors and enhancing the
predictability and stability
of investments.
Our strategy in action
Since Funding Circle launched, we have consistently
focused on diversifying funding sources. We began
offering fractional loans to retail investors. In 2013, we
launched a whole loan programme focused on
institutional investors. We continue to provide investors
with new ways to access Funding Circle loans, including
launching new fund and bond products.
Link to KPIs:
- Loans under management
- Originations
- Revenue
- Segment adjusted EBITDA
4. Build a highly scalable global business
Our main aim is to continue
growing as a leader in the
platform lending industry. We
believe there’s an opportunity
to reach new markets and build
an even larger base of SMEs
and investors.
Our strategy in action
We have a strong track record of identifying and grasping
expansion opportunities, as our growth rates in the US,
Germany and the Netherlands testify. We’ll continue to
explore market opportunities, either through organic
growth or acquisitions, basing our assessments on SME
demand, investor sentiment, operational complexity and
data availability.
8
Link to KPIs:
- Loans under management
- Originations
- Revenue
- Loss before tax
- Segment adjusted EBITDA
- Adjusted EBITDA
- EPS
- Free cash flow
- Marketing as % of revenue
Funding Circle Holdings plc
Strategic report Willie Powells
Willie D. Powells III worked tirelessly to build a client base
for his Houston, Texas law practice over more than a
decade, securing significant settlements along the way.
In recent years he had been looking for ways to grow the
Law Offices of Willie D. Powells III and Associates, PLLC,
more rapidly.
With a loan from Funding Circle, Willie plans to double or
even triple the size of his client base with an investment
in marketing, including TV commercials. He also plans to
beef up his office with additional personnel.
“
I’m very excited for
everything we have in
store. All the steps we’ve
taken since partnering
with Funding Circle have
been a success.”
Willie Powells
Founder of the Law Offices
of Willie D. Powells III and Associates, PLLC
Annual Report and Accounts 2018
9
Strategic report Our business model
How our business operates
Investors
Thanks to our online lending
platform, a wide range of
investors are now able to invest
in SME loans. The platform
enables both large and small
investors to make incremental
investments, and our investor
base is deep, diverse and stable
– ranging from retail investors to
public bodies.
Since 2016, 40% of funding
through our platform has come
from global investors.
Business
loan
1 – 7 % t ransaction fee
Amazing
borrower
experience
Sophisticated
data analytics
Platform
Cutting-edge
technology
Superior investor
returns
1% annual serv ic i n g
f e e
Monthly
payments
10
Funding Circle Holdings plc
Strategic report
Borrowers
At Funding Circle, we focus
exclusively on SME lending.
Our borrower base is highly
diversified across geographies
and industries, which helps
to ensure stable returns and
mitigate the effects of adverse
economic conditions.
As of 31 December 2018,
borrowers across our
geographies had on average
around £950,000 of revenue,
eight employees, a ten-year
trading history and an average
loan size of £70,000.
Our platform
At Funding Circle, our aim is to help SMEs grow by providing
them with streamlined access to capital. To support this,
we’ve developed a highly efficient and effective platform
that enables SMEs to borrow money directly from investors.
The platform uses cutting-edge technology, proprietary credit
models and sophisticated data analytics, creating a uniquely
attractive and convenient proposition for borrowers and investors
alike. It also provides high repeat rates, helping us to grow
alongside our customers.
Through our platform, we’re able to serve and build long-term
relationships with borrowers, providing them with the fast and
flexible financing they need. For investors, the platform opens
up an alternative asset class with attractive risk-adjusted returns.
How we generate revenue
We generate revenue in two primary ways:
i)
ii)
A transaction fee – typically ranging between 1% and 7% of
the original principal balance of the loan, which is deducted
from the loan proceeds paid to the borrower.
An ongoing servicing fee – of 1% per annum, calculated
monthly on each loan (in most instances as a percentage
of the outstanding principal balance of a performing loan).
The virtuous circle
We believe that the nature and scale of our business model
creates a “virtuous circle” that will continue to enhance our
competitive position and market share around the world.
The speed, price, access and convenience of our offer are highly
attractive to SMEs. As more SMEs come on board, we’re able to
accumulate more data and improve the precision of our risk models,
leading to higher acceptance rates and lower pricing for borrowers.
For investors, our platform presents an opportunity to quickly
invest in a highly diversified loan portfolio, and to invest large
sums of capital should they wish to do so. We also have a strong
track record of delivering stable returns.
As more investors join the platform, the more valuable the platform
becomes for the investment community. This then further enhances
borrowers’ abilities to find loans quickly and efficiently. In 2018, 74%
of lending came from existing investors.
Read more about our borrower proposition on page 16
Read more about our investor proposition on page 20
Read more about the virtuous circle on page 22
Annual Report and Accounts 2018
11
Strategic report Our market
Leading platform in
underserved market
SME market overview
Our market
Over the past decade, SMEs across
various industries have been able to
streamline their processes, increase
their productivity and reach new
geographies thanks to innovation in
technology. But when it comes to
funding, traditional lenders have not
kept pace with change.
SME lending is a massive global market
Expansion beyond the existing four countries presents
an even bigger opportunity.
SME lending market size
The SME lending market is vast and underserved. In the
four countries where we operate, the aggregate market
for SME debt financing is around £1.2 trillion of loans
outstanding. Taking our current participation and strategy
into account, the total addressable market is estimated
at £470 billion.
~£1.2trn
Current geographies’
total SME debt
~£470bn
Current geographies’
addressable market1
US
£220bn
Germany
£140bn
UK
£85bn
Netherlands
£20bn
~£3.1bn
Funding Circle outstanding
loans today
1. Funding Circle’s estimated total addressable market excludes certain segments from the total SME debt finance market, including without limitation commercial mortgages
and loans of more than £500,000, as well as loans having an interest rate of more than 25%.
12
Funding Circle Holdings plc
Strategic report Our competitors
The competitive landscape
Thanks to recent developments and technological advances,
more organisations are providing dedicated products, services
and support to small businesses. We are one of them.
Indeed, the rise of online lending platforms has been hugely
beneficial. Matching borrowers and investors directly, lending
platforms like Funding Circle have become an important
source of finance for SMEs.
Over the last ten years, governments have also introduced
initiatives to support SME lending and promote more choice
and competition within the market. Recent UK regulation, for
example, encourages the development of financial products
and services for SMEs. Meanwhile the UK Government-owned
British Business Bank and the European Investment Bank are
now investing in small business loans through platforms like
ours, recognising the model as an efficient mechanism to
stimulate the real economy.
As a result of these changes, the competitive landscape in
which we operate is now made up of:
Traditional banks
Despite the transformation of the SME funding landscape
since the global financial crisis, banks continue to be the
dominant players in terms of overall SME lending volume in
each of our markets. These markets have different concentration
characteristics, with high concentration in the UK and the
Netherlands, and high fragmentation in the US and Germany.
The outcome for SMEs has been the same, with limited
innovation in SME lending.
Lending platforms
Online lending platforms provide an alternative source of
funding for SMEs. Emerging around the world, they offer fast
and flexible financing at competitive prices through a simple
online application, often resulting in a better experience for
borrower and investor alike. The combination of borrower
demand and investor supply enables online lending platforms
to compete with banks in SME lending and unlock loans that
remain unattractive to banks.
The emergence of online lending platforms has been most
prominent in the UK, the US and China, although the trend is
developing globally. Today, a wide variety of online lending
platforms offer a range of financing products, including
unsecured and secured loans, short-term working capital loans,
asset-backed loans and property development loans.
Specialist lenders
Specialist lenders serve a smaller portion of the overall market.
They differentiate themselves by offering very short-term
loans at short notice, often to resolve liquidity issues.
There are a number of different types of specialist lenders,
who are either focused on specific segments by product, such
as asset finance or invoice finance, or on specific segments
by SME group, such as short-term financing at higher
interest rates.
Captive networks
In recent years, e-commerce platforms and payment
processors have started providing lending products to
their “captive” customer base. These networks tend to
serve specific industry segments of smaller SMEs with
short-term, lower-sized loans. For example, SMEs are now
able to access working capital loans via Amazon, PayPal
or Square, with repayments often deducted from the sales
made on these platforms.
Captive network lenders benefit from being able to see a
substantial portion of their borrowers’ financial and transactional
activities. But as they focus mainly on lending products to
SMEs which use their services, their borrower base remains
relatively small.
Four major groups of competitors in SME space
Borrower proposition:
Traditional
banks
Lending
platforms
Specialist
lenders
Captive
networks
Awareness
Speed and
convenience
Access to finance
Low interest rate
25+
100
75+
100
100
25+
50+
100
50+
25+
75+
100 100
75+
50+
25+
50+ 50+ 50+
For high credit risk
Network only
Annual Report and Accounts 2018
13
Strategic report 14
Funding Circle Holdings plc
Strategic report GET UP
AND GROW
Ambic Ltd
Ambic is a long-established UK
manufacturer focused on making
and fitting educational furniture,
laboratory furniture and fire doors.
They supply schools, universities and
offices in the North East of England
and pride themselves on the quality
of their furniture; and the experience
their staff bring to the field. To help
replenish working capital during busy
back to school periods, Ambic has
accessed £160,000 through Funding
Circle across two loans since 2013.
Amount borrowed by
Ambic Ltd
£160,000
Annual Report and Accounts 2018
15
Strategic report Value proposition for borrowers
Fast flexible finance
At Funding Circle, we combine sophisticated technology with
a human touch. In addition to our cutting-edge lending software
and programmes, our dedicated account managers ensure the
smooth running of all customer applications and relationships.
An industry-leading borrower service
Delivering on price, speed, access and convenience, we provide
a service to SME borrowers that is first class. Through a simple
online application, we deliver fast, flexible and competitively
priced products. This offer is underpinned by expert risk
management and analytics, enabling us to offer:
And it’s a model SMEs appreciate. Indeed, the appeal of
our value proposition for borrowers is reflected in our high
customer satisfaction scores. In both the UK and the US,
we achieved a net promoter score between 80 and 90 in
2018, which is a “world class” ranking. These high levels
of satisfaction encourage repeat custom.
Speed and simplicity:
- Our simple online application is faster and easier than
traditional lending channels, meaning SMEs can access
the capital they need in days rather than months. It typically
takes around ten minutes to complete the application process,
and only a small number of additional documents are required.
We generally make credit decisions within 24 hours in the UK,
and within one to three days in the Netherlands, Germany
and the US.
Competitive market-driven pricing:
- Our online platform lending model provides competitive and
transparent pricing for borrowers – starting at 1.9% a year for
an A+ rated six-month loan in the UK.
Outstanding customer experience and ease of use:
- We’re continually focused on delivering excellent customer
service. Our aim is to enhance the user experience and make
the application process as efficient as possible.
By creating what is effectively a bond market for SMEs,
we’ve enabled access to a diverse range of investors.
This diversity offers SMEs more robust funding in the event
of an economic downturn. Six months after the UK’s EU
referendum, the British Business Bank committed £40 million
to lend through our platform to help stimulate the UK’s small
business ecosystem.
In 2018, 35% of all originations generated through our platform
were to repeat borrowers. According to a 2018 survey conducted
by Oxford Economics, 85% of our borrowers said they would
approach us first should they need additional financing in
the future.
80–90 NPS
Net promoter score in UK and US in 2018
35%
of all originations were repeat borrowers in 2018
85%
of our borrowers said they would approach us first
should they need additional financing in the future
16
Funding Circle Holdings plc
Strategic report The average borrower
Funding Circle focuses exclusively on SME lending.
Borrowers across Funding Circle’s geographies have, on
average, approximately £950,000 of revenue per annum,
eight employees and a trading history of ten years. The
average loan size is approximately £70,000.
Loans originated through Funding Circle’s platform are fully
amortising, with terms ranging between six and 60 months
and an average loan term of 52 months. Interest rates on
loans originated through the platform have averaged
approximately 11%. Borrowers must have a trading history
of at least two years.
Funding Circle benefits from a highly diversified borrower
base across geographies and industries, largely in line with
the general population of SMEs, which helps to ensure
stable returns and mitigates the adverse effects of a
downturn in the economy.
10 years
of trading history
£950,000
annual turnover
8
employees
“
Funding Circle convinced
me: finance that I could
access quickly and without
much hassle.”
Weitblick
Thomas Lerch is the owner of Hotel
Weitblick in the Bavarian Alps. “Weitblick”
means “wide view” or “foresight” – a truly
fitting name for the panoramic view guests
enjoy. With 30 years of experience in the
hospitality business and two established
hotels in the area, Thomas decided to build
a new four-star wellness and conference
facility. With a loan from Funding Circle
he hired and trained 70 new staff for the
grand opening. The investment paid off:
in its first year Hotel Weitblick already
had a turnover of €1,000,000.
Annual Report and Accounts 2018
17
Strategic report GOING
FURTHER
Manna Lebensmittel
Manna Lebensmittel is a
wholesale supermarket and
delicatessen offering a large
selection of high‑quality Greek
food brands in Bad Cannstatt,
a part of Stuttgart. Managing
Director and Owner
Konstantinos Chatziantoniadis
accessed €140,000 through
Funding Circle in early 2018 to
expand his product range and
increase his inventory.
Amount borrowed by
Manna Lebensmittel
€140,000
18
Funding Circle Holdings plc
Strategic report Annual Report and Accounts 2018
19
Strategic report Value proposition for lenders
Attractive stable returns
Through our online lending platform and model, a wide range
of investors are now able to access SME loans, which were
previously only held on bank balance sheets. In this way, we’ve
opened up a new asset class to investors and enabled them to
receive attractive, risk-adjusted returns.
We attract a diverse and sustainable investor base
50+
Funding Circle SME Income Fund
Institutional direct lending
National and supranational entities
50%
12%
6%
Retail
32%
The diversity of our investor base is testimony to the appeal
of our value proposition. Since 2016, 40% of lending through
our platform has come from investors lending in multiple
Funding Circle geographies, reinforcing our scale and providing
a deep and stable source of funding. We’ve attracted retail
and accredited investors, asset management companies,
insurance companies, government-backed entities and funds
– both public and private. We also work with institutional
investors on securitisation programmes which are marketed
as SBOLT.
Our ability to attract such investors is partly due to our
reputation for delivering attractive returns and stable bad
debt rates. Our credit assessment process combines
technology with advanced data analytics and proprietary
risk models. And our specialist Collections, Servicing and
Recoveries team works closely with borrowers who run
into difficulty, which results in industry-leading collections
across all of our geographies.
After an initial investment period of two to three years in any
new market, we’re able to provide healthy yields to investors.
Globally, investors are projected to earn returns ranging from
5% to 8% on loans originated in 2018.
Our strong investment track record has led to high investor
retention rates. In 2018, 74% of lending came from
existing investors.
What’s more, we regularly stress test our loans to assess
the potential impact of adverse economic conditions on
our loanbook. Covering various recessionary scenarios,
our tests suggest that, even in a major economic downturn,
our investors would still make positive returns.
Projected annualised investor returns for loans
originated in 2018, by geography1
5.1–6.0%
5.8–7.8%
5.3–7.3%
6.4–8.4%
Projected bad debt rate for loans originated in 2018,
by geography2
4.6–6.4%
3.0–3.8%
1.7–3.7%
2.2–4.2%
1
2
The graph shows how loans are estimated to perform. Loans are shown by the
year they were taken out, and are after fees and bad debt. Returns equal gross
yield minus net losses minus servicing fee and are estimated, using an internally
managed model, by cohort of origination incorporating actual returns received for
each cohort and adding future expected returns which are determined by using
the same aforementioned model. These expectations may be revised for example
if macroeconomic conditions change and the projected return, projected gross
yield and projected bad debt rate may be adjusted to reflect this.
The graph shows the projected annualised percentage of loans, by loan amount,
that will not be repaid. Loans are shown by the year they were taken out and
include recoveries. It can take up to five years for loans to be fully repaid, so the
projected return, projected gross yield and projected bad debt rate take into
account how each year of loans are performing and how Funding Circle expects
them to perform in future. These expectations may be revisited, for example if
macroeconomic conditions change, and the projected return, projected gross
yield and projected bad debt rate may be adjusted to reflect this.
20
Funding Circle Holdings plc
Strategic report12
+
6
+
32
+
Q
Existing investors continue to grow investment over time
Existing investors
New investors
2011
2012
2013
55%
45%
2014
26%
15%
74%
85%
36%
64%
32%
68%
2015
2016
2017
2018
Other key aspects of our investor value proposition include:
Passive investment:
- All institutional and retail investors, with the exception
of retail investors in Germany and the Netherlands and
accredited investors in the US, invest passively through our
platform.
Random allocation:
- All investors are randomly allocated loans. In each
geography, retail investors purchase fractional loan parts
and institutional investors purchase whole loans.
Diversification:
- We enable investors to lend in a variety of ways, across all
of our markets, and deliver appropriate structures for different
types of investors. By diversifying our portfolio, we help to
manage risk for investors.
Risk management and credit assessment:
- We blend practices from the financial services industry with
innovation in technology to manage risk for all investors.
- We combine cutting-edge technology with the use of
proprietary scoring models and data analytics techniques.
This enhances the precision and efficiency of our credit risk
and performance predictions.
- We continuously monitor credit risk with a range of
measures, including external indicators by region and
sector, internal risk indicators and portfolio performance,
and we are able to react and implement changes quickly.
Combined expertise:
- Our experienced Credit Assessment team works hand in
hand with our Product and Engineering teams, offering a
unique mix of expertise to enhance our investor proposition.
Annual Report and Accounts 2018
21
Strategic report Technology and data
Technology and data
Technology, data and advanced analytics are at the heart
of our business proposition. Through the development of
customer-centric technology, we’ve created an agile, responsive
and unified money and loan management platform. Having built
our technology from scratch, unlike many traditional banks
we’re not burdened by the challenges and costs associated with
legacy systems. We can therefore devote our resources to
developing, innovating and further enhancing our
bespoke technology.
“
The sophistication of our
technology helps us attract
and retain the brightest
and best candidates.”
In 2018, we began the first stage of unifying all of our
geographies on to a single global platform. We completed
the migration of the US platform in 2018, and in 2019 we
are looking to extend this to Germany and the Netherlands,
and begin work on the UK.
Our technology approach embraces agile ways of working,
leading to greater cross-team collaboration and continuous
deployment on a daily basis. We use modern technology
and coding languages, such as Clojure and Kafka, to deliver
cutting-edge solutions for customers.
The sophistication of our technology helps us attract and
retain the brightest and best technology candidates. We
therefore benefit from an exceptional team of software and
data engineers who have a deep understanding of the lending
business and customer needs. As of 31 December 2018, the
Technology team (including contractors) accounted for nearly
30% of our global workforce.
We also apply our technological talent to how we use data
to better inform credit risk decisions.
Over the past eight years we’ve built rich proprietary data
sets on borrowers and borrower performance, based on both
internally generated and publicly available sources. We expect
these data sets to be further enhanced by the new Open
Banking and PSD2 regulations, which will enable increased
sharing of banking data and easier access to new markets.
The Technology team makes up
~30%
of our global workforce
22
Funding Circle Holdings plc
Strategic report A virtuous circle that
drives continuous
improvement
and competitive
advantage
Proprietary data
Over the past eight years, we’ve
accumulated proprietary data sets
across our various geographies,
which we’ve continuously used
to enhance our credit scoring models
and improve the borrower experience.
Increased speed
of funding
By attracting more investors to the
platform, we’re able to increase the
speed with which we provide funding
to SMEs, which is a core value driver
for borrowers.
Improving risk model
As we accumulate more data through
applications and loan performance,
we’re able to improve the precision of
our risk models, which leads to higher
acceptance rates and lower pricing
for borrowers.
Higher loan
conversion rate
This, in turn, results in higher conversion
rates of borrower applications to loans,
enabling us to serve a broader population
of SMEs and reduce marketing and
processing costs per loan. We’re
also able to further reduce costs
to borrowers and therefore attract
more SMEs to the platform, reinforcing
the positive data accumulation cycle.
Annual Report and Accounts 2018
23
Strategic report Our people
Made to do more
Our team consists of a talented group of Circlers who have a
strong alignment with our mission and share the same drive
and passion as our customers; they are “made to do more”.
At a glance
- 1,074 Circlers globally, 217 new
employees in 2018 (25% growth YoY).
- 83% would recommend Funding Circle
as a place to work (December 2018).
- 92% CEO approval on Glassdoor
(December 2018).
- Funding Circle UK was named as
the 16th Best Company to Work
For in The Sunday Times’ 2018
annual survey.
Overview – our people
The dedication and passion everyone brings to Funding Circle
across each of our locations bring our mission to life. Just like
our customers, our people embody the “made to do more” spirit.
Fostering and strengthening our culture is fundamental to our
success. We are proud of our mission-driven, values-based
culture. Our values are embedded within everything we do
as a business, and we work hard to ensure we create the right
environment for Circlers to thrive and feel fully connected
to our Company goals. We strongly believe that building and
sustaining our unique culture is critical to attracting, developing
and retaining the best and most diverse talent. All Circlers are
also owners in the business, through our employee equity
scheme, and will continue to be as we grow.
“
At Funding Circle, our
people are our business.”
24
Funding Circle Holdings plc
Strategic report Building and embedding our culture
Each Tuesday, everyone in the Company takes 30 minutes
out of their day to participate in the weekly Global Gathering.
When the Company first started, the meeting was an effective
way to share important updates across different teams.
Today, the Gathering is much bigger, co-ordinated across all
five office locations at the same time, and led by our CEO
and Leadership Team. New Circlers are introduced by their
buddies and a weekly Mission and Values award is presented
in each office to an individual who has lived the values through
their work and contributions.
At the end of each quarter, a longer Gathering (the “quarterly”)
is held over two to three hours where we reflect on progress
made and look ahead to the coming months. We believe it is
fundamentally important to our business to communicate and
share information with each other through these forums. It is
also important to us that everyone has the opportunity to hear
and understand the strategic direction of the business, the
journey (including the highs and the lows), and of course that
they get to hear this from senior management and our founders.
Measuring our progress
We also use these forums to share the results from our culture
survey and to update on the progress and initiatives we
undertake to strengthen our culture. Funding Circle runs a
global, quarterly culture survey across all businesses and
functions to track employee engagement and satisfaction.
The results are reviewed by the Global Leadership Team, and
help shape and drive actions to improve life at Funding Circle.
Each manager is also provided with access to an online tool
for their own results and encouraged to discuss them amongst
their teams. This is done through a variety of town halls and
team-specific forums, which are run at a local level, and globally
for teams which are dispersed geographically. This helps
foster a strong feedback culture at the Company, where
everyone has a voice. This is reflected in our culture survey
results, with 83% of Circlers recommending Funding Circle as
a place to work and 86% stating they are proud to work here.
Our culture is championed by “culture committees” across
each location of our business. These committees are Circler
led and supported by a member of senior management.
The Company also has a variety of other clubs, social
networks, support groups and committees, which add to
the richness of life at the Company.
Our values play a key role in how we work at Funding Circle.
Our entire recruitment approach and performance
management process is values based and globally aligned.
Individuals are also able to provide 360 feedback to peers
and management.
Read more about our values on page 26
Going further
As a FinTech organisation, we believe in developing new
and innovative ways of doing things, and we are committed
to helping our team develop the skills they need to be
successful. In 2017, we launched FC Academy, a peer-to-peer
learning network where Circlers design and deliver learning
content to each other. This has been hugely successful across
all locations with almost 3,000 registrations and over 200
courses delivered. The Global Leadership Team has delivered
courses ranging from “leading in a competitive environment”
to “how to do a start-up” (delivered by our CEO).
During 2018, we launched Learning Circle, our global online
learning platform which gives each Circler access to a large
learning library to support their personal development.
Learning Circle also allows teams to develop their own content
to ensure it is relevant and personalised to their team’s needs
and requirements.
We also recognise our team may wish to develop skills that
are outside of their current role or immediate team’s need.
“Money to do more” is a development allowance each Circler
can access, in order for them to pursue and develop particular
skills. This can be done individually or collectively as a team.
Throughout the year, we invite customers into our offices to
share their journeys, so our team can share in their real-life
learning experiences. The Company also operates “Bright
Ideas” days, where a Circler can take up to two paid days out
of the office each year to work on a new idea or project for
the Company.
Annual Report and Accounts 2018
25
Strategic report Our people continued
Our values
Each Funding Circle office is unique and brings with it flavours of the
local culture, and at the same time each and every office is exactly the
same, with our values at the heart of everything our business does.
THINK
SMART
MAKE IT
HAPPEN
BE OPEN
STAND
TOGETHER
LIVE THE
ADVENTURE
Challenge assumptions, seek
insights and make informed
decisions. Everyone has a voice,
so be ambitious.
Be courageous and take ownership.
Take small steps fast and commit
to seeing it through.
Treat everybody with respect
and be honest with each other.
Transparency and integrity
build trust.
Listen, understand and support
each other. Win or lose as one.
Bring your passion with you
every morning and have fun.
26
Funding Circle Holdings plc
Strategic report Creating a diverse and inclusive environment
for everyone
At Funding Circle, we recognise the power and value in
building a diverse team, where people’s skills and personalities
complement each other and reflect the customers we are here
to help. It is therefore fundamental we continue to do everything
we can to create an environment where Circlers from all
backgrounds feel supported and can give their best.
Our culture survey tells us that people feel this is the case,
with 85% saying they believe everyone has an equal opportunity
to succeed.
To support and foster an inclusive working environment, in
2018 we successfully established and launched a mentoring
programme, which pairs up senior management with junior
Circlers from different parts of the business, to provide advice
and professional support on an informal basis. There are also
a number of other diversity and support groups across the
Company, many of which are employee led. These include
FC Allies (LGBT), FC Impact (volunteering and charity works,
discussed on page 28) and our aforementioned Culture teams.
These groups of volunteers from each part of our business come
together to help shape and cultivate the Funding Circle culture.
“Stand Together” is one of the core values of our organisation.
At its heart, this means creating an inclusive culture, free from
discrimination of any kind. Funding Circle is committed to
providing equal opportunities to all Circlers, irrespective of
age, disability, gender, marriage and civil partnership, pregnancy
or maternity, race, religion or belief, sex or sexual orientation.
Our policy for the employment of disabled persons is to
provide equal opportunities with other Circlers to develop
skills and secure roles relevant for them and their career
ambitions. This includes making reasonable adjustments to the
workplace to support this. Our recruitment process (outlined
below) ensures all applications, including those from disabled
persons, are treated equally and fairly.
Hiring the FC Way
Launched in 2018, Hiring the FC Way is Funding Circle’s
standard for recruitment. This global process specifies certain
requirements for every hiring process, and helps us ensure a
fair and objective experience for all candidates, free from bias.
For example, every interview panel must include at least one
female, and we aim to have at least one female on our
interview shortlists. We also no longer ask for current
compensation during the interview process.
Diversity training
All of our managers globally undertook diversity, anti-harassment
and unconscious bias training in 2017 and 2018. This training
is now being rolled out to all Circlers, and we are planning to
deliver further diversity training programmes throughout 2019.
Gender diversity
More needs to be done to significantly improve gender
diversity across the sector in which we operate, especially at
senior levels. As a “FinTech” company, we operate across two
traditional industries, financial services and technology, which
have historically experienced low levels of gender diversity.
Analysis of our business and external talent pipelines during
2018 has allowed us to develop a greater understanding of
where the biggest challenges lie, notably within our Engineering
and Capital Markets teams. This remains our biggest focus
and is the prevailing challenge for our industry.
We now regularly report on gender diversity through our
management information. We believe education and awareness
of gender diversity across the business is an important aspect
to moving the dial. Gender diversity is considered an important
management KPI for our business.
Women@FC
Established in early 2015 in the US and 2018 in the UK,
Women@FC is a mixed-gender group of Circlers that focuses
on gender diversity through three pillars: awareness, community
and development. Women@FC founded Women in FinTech
(US) and FinTech Women (UK), an external arm to help women
working in the FinTech sector expand their professional
network and accelerate their career development. In the UK,
Funding Circle has signed up to the Government’s “Women
in Finance Charter” which is a commitment to support the
progression of women into senior roles in the financial
services sector.
Gender breakdown
Gender breakdown
Overall
Gender breakdown
Global Leadership Team
36+
Female
33+
Female
390 / 36%
Male
684 / 64%
Male
4 / 33%
8 / 67%
As at 31 December 2018.
Read the UK’s gender pay
gap report on our corporate
website: corporate.
fundingcircle.com.
Gender breakdown
Group Board
20+
Female
Male
2 / 20%
8 / 80%
Annual Report and Accounts 2018
27
Strategic report67
+
Q
64
+
Q
80
+
Q
Corporate social responsibility
Doing business responsibly
Funding Circle was founded as a response to poor behaviours
and customer outcomes in traditional financial services. Doing
business responsibly is therefore at the heart of everything we do.
We believe in building a better financial world, igniting
opportunities for businesses and investors by providing better
propositions for both. By improving competition in the market
and reducing dependency on bank lending, Funding Circle is
helping SMEs to boost their local economies and communities
through much needed job creation.
Maintaining high industry standards
Since the early days of the business, we have campaigned for
effective and proportionate regulation of our sector, firstly in the
UK and subsequently in all of our geographies. In August 2011,
we formed (together with two other founding members) the
Peer-to-Peer Finance Association, a self-regulatory platform
lending association in the UK. We continued to campaign for
regulation and in 2014 the FCA took over regulation of the
sector and Funding Circle was given an interim permission.
Funding Circle became fully authorised in May 2017.
This commitment to upholding the highest standards in our
industry exists across all of our markets. In April 2016, we
formed (together with two other founding members) the
Marketplace Lending Association in the US, which is focused
on promoting responsible business practices, developing the
role of platform operators for the benefit of investors and small
businesses alike, and sound public policy. Both Associations
in the UK and US have adopted a platform lending code of
conduct (or operating principles). We also co-authored and
adopted the Small Business Borrowers’ Bill of Rights, which
identified the fundamental financing rights to protect SMEs
from the more abusive practices that some credit providers
have employed in the underserved SME lending market, and
represented the first cross-sector consensus on responsible
SME lending practices in the US. In the Netherlands we are
part of the Nederland Crowdfunding Association and in 2018
we began work to create our own self-regulated platform
lending association in Germany. Over the past 12 months we
have built relationships in the European Union to influence the
development of a pan-European regulatory framework.
We have also been appointed to governmental and regulatory
panels, for example the FinTech Delivery Panel in the UK
(HM Treasury appointee) and the FinTech Advisory Panel
(Conference of State Bank Supervisors appointee) in the US.
FC Impact
Many Circlers are passionate advocates and supporters of
various charitable and non-profit organisations. “FC Impact”,
a volunteer group, enables people to contribute to causes that
matter most to them:
-
-
-
-
In the UK, Circlers are involved in a variety of activities,
from participating in the Whitechapel Breakfast Challenge,
to hosting Techie Tea Parties on behalf of Age UK.
In the US, Circlers co-ordinated a raffle and quiz to
raise funds for victims of the destructive 2018 Northern
California wildfires, in addition to other volunteer and
fundraising activities.
In the Netherlands our company is participating in BNR’s
Spitbrekers, an initiative to find sustainable solutions to the
Netherlands’ car and traffic issues.
In Germany, Circlers supported the Berlin charity
Strassen Kinder by collecting warm winter clothes
for underprivileged children and their families.
28
Funding Circle Holdings plc
Strategic report Human rights
Funding Circle does not have a specific human rights policy in
place; however we respect and promote human rights through
our employment policies and practices, and apply them
equally to everyone who works at or is part of Funding Circle.
Modern slavery
We have a zero tolerance approach to modern slavery and
human trafficking and we are committed to ensuring that
our business operates in a socially responsible way. We are
committed to playing our part in helping the world to improve
practices designed to combat slavery and human trafficking.
We have published a Modern Slavery Act Transparency Statement
in compliance with section 54 of the Act and this is available
to view on our website.
Code of Conduct
Funding Circle is dedicated to implementing and maintaining
the highest standards of behaviour, ethics and integrity among
its workforce, and to creating a culture where adherence to
these standards is recognised and rewarded. We are developing
a Code of Conduct that outlines these standards and which
addresses subjects such as integrity, conflicts of interest and
ensuring our staff bring their passion to work and maintain the
fun, positive working environment that exists at Funding Circle.
The Code of Conduct will support our company mission and
will complement the company values against which each
employee’s performance is appraised. It will provide guidance
as to what conduct we should expect of each other and how
we should interact with others.
Anti-corruption and anti-bribery
We recognise that our reputation for integrity and
trustworthiness is critical to our success. Funding Circle
upholds all laws relevant to countering bribery and corruption
in each jurisdiction where it operates. The Funding Circle
Anti-Bribery and Corruption Policy outlines the management
of bribery risk at Funding Circle. Employees are trained and
tested annually on bribery and corruption risks that may arise
in the course of their employment at Funding Circle, and on
financial crime more generally.
Funding Circle is also an active member of the tech
community. In 2018, we became a member of the Clojure
development community and regularly host best practice
events. Our Engineering teams ran an open-sourced project
on the Clojure Jackdaw library and hosted ClojureBridge, a
free workshop teaching the Clojure programming language,
for those who identify as women, transgender women and
non-binary.
Environmental awareness
As an organisation, Funding Circle is committed to doing
business in a sustainable manner and combating the effects
of climate change. Within our business, the primary drivers of
our natural resource consumption are our physical locations
and work environment, our technology infrastructure and
global travel. It is our policy to ensure our office locations are
as environmentally friendly as possible. Examples of this
include lighting with automatic shut-off to reduce our carbon
footprint and full recycling and waste separation facilities at all
locations. While we support and encourage mobility between
our offices, we ensure this is done in a controlled manner and
is governed by a global mobility policy. Finally, as a technology
platform, we continually seek to drive efficiency through
automation and digitisation. This not only drives a better
experience for our customers, but also helps us reduce our
consumption of natural resources such as paper and our
overall energy consumption.
The Group has presented the greenhouse gas (“GHG”)
disclosures for the first time for the year ended 31 December 2018
as required by the Companies Act.
The calculation of these disclosures has been performed
using the UK Government’s conversion factor guidance in
relation to 2018 in accordance with the Greenhouse Gas
Protocol Corporate Standard.
The Group’s operations that release scope 1 and scope 2
GHG primarily include the usage of gas and electricity at
our leased offices. We do not select or control the provision
of electricity. This is the first time that Funding Circle has
reported on its GHG emissions and we are continuing to
develop and enhance our data gathering capabilities.
We are required to show an intensity ratio and have determined
that the most appropriate for our growing business is tonnes
of CO2 equivalent (“tCO2e”) per £m of revenue.
GHG emissions scope 1 (direct)
GHG emissions scope 2 (indirect)
Total gross emissions (scope 1 and 2)
Total revenue (£m)
Intensity ratio – tCO2e per £m of revenue
2018
tCO2e
154
590
744
141.9
5.24
Annual Report and Accounts 2018
29
Strategic report Key performance indicators
How we measure
our performance
Financial
Revenue
(£m)
Segment
adjusted
EBITDA
(£m)
Adjusted
EBITDA
(£m)
Loss before tax
(£m)
Earnings/(loss)
per share
(pence)
£141.9m
£7.0m
£(28.5)m
£(50.7)m
(18.2)p
+50%
Growth
141.9
94.5
-4%
+5%
-27%
-20%
Margin
Margin
Margin
Margin
7.0
2017
2018
2017
2018
2017
2018
(3.9)
2018
2017
2018
2017
(25.1)
(28.5)
(50.7)
(18.2)
(36.3)
(14.0)
Definition
The Group generates
revenues from two
principal revenue
streams: transaction
fees, being the fees
earned from originating
loans with borrowers;
and servicing fees,
being the fees earned
from servicing of the
loans under
management for the
investors.
Definition
Segment adjusted
EBITDA is defined
as adjusted EBITDA
before central costs,
which include product
development and
corporate costs. This
is the principal profit
measure used by the
Directors in assessing
financial performance
in the Group’s three
geographical segments.
Definition
Adjusted
EBITDA represents
the operating profit/
loss before
depreciation and
amortisation,
share-based
payments and
associated social
security costs, foreign
exchange gains/
(losses) and
exceptional items.
Definition
Loss before tax is
defined as revenue
after taking into
account all operating
expenses and
finance income.
Link to strategy
4
Definition
Earnings/(loss) per
share is defined as the
earnings/(loss) for the
year attributable to
ordinary equity
holders of the Parent
Company divided by
the weighted average
number of ordinary
shares in issue during
the year.
Link to strategy
Link to strategy
Link to strategy
Link to strategy
4
1
3
4
1
3
4
2
4
30
Funding Circle Holdings plc
Strategic report Focus areas relevant to our KPIs
1
2
3
4
Driving a better borrower experience
Investing in modern data, tech and analytics
Diversifying funding sources
Building a highly scalable global business
Free cash flow
(£m)
Operational
Loans under
management
(£m)
Originations
(£m)
Marketing
costs as a %
of revenue
£(42.0)m
£3,148m £2,292m 41%
2017
2018
(35.3)
(42.0)
Definition
Free cash flow
represents the sum
of the net cash outflows
from operating and
investing activities.
The Directors view
this as a key liquidity
measure and is the
net amount of cash
used to operate and
develop the Group’s
platform each year.
Link to strategy
4
+49%
Growth
3,148
+32%
Growth
2,292
41
41
2,107
1,738
2017
2018
2017
2018
2017
2018
Definition
This represents
the total value of
outstanding principal
and interest to
borrowers. It includes
amounts that are
overdue but excludes
loans that have
defaulted.
Link to strategy
Definition
This represents the
monetary value
of loans originated
through the Group’s
platform in any given
year. This is a key driver
of both transaction
revenue and future
expected servicing
fees and loans under
management.
1
2
3
4
Link to strategy
1
2
3
4
Definition
This represents the
total cost of third-party
marketing expenditure
in any particular year
divided by the revenue
earned in that year.
Link to strategy
1
4
Annual Report and Accounts 2018
31
Strategic report Finance review
Our results
A segment profit was recorded at a Group level for the first time with
profitability in all three geographic segments improving year-on-year.
In 2018, the Group saw loans under management growth of 55% and origination growth of 40%, excluding property.
United Kingdom
United States
Developing Markets
Total (excl. property)
Property (UK only)1
Total
Loans under Management
Originations
2018
£m
2,183
736
204
3,123
25
3,148
2017
£m
1,489
427
96
2,012
95
2,107
Change
47%
72%
125%
55%
(74%)
49%
2018
£m
1,525
596
165
2,286
6
2,292
2017
£m
1,157
396
78
1,631
107
1,738
Change
32%
51%
118%
40%
(94%)
32%
1. In 2017, Funding Circle took the decision to cease lending to property developers in the UK, the one market in which it had previously expanded its product set beyond
amortising SME loans. As a result, this is excluded when measuring ongoing business performance.
United Kingdom
In Funding Circle’s largest and most mature business unit,
loans under management (excluding property) grew by 47%
to £2,183 million and originations (excluding property) rose
32% to £1,525 million with nearly 40% of these originations
from loans to existing customers. Together, this loan growth
delivered revenue (excluding property) of £93.2 million, with
49% generated from existing customers (2017: 45%). Revenue
growth of 43% in excess of origination growth of 32% reflected
higher transaction revenue yield and servicing revenue growth
aligned to the change in loans under management.
The funding for these loans continued to come from a
diversified range of sources with c.40% from retail investors
and the balance from institutions, supranational banks and
Funding Circle Investment Fund (“FCIF”), the FTSE listed fund.
During the year, we also saw a £200 million uptake of our new
Innovative Finance ISA product and secured a number of
funding deals, including a £1 billion funding commitment from
Waterfall Asset Management and an additional £150 million of
funding from the British Business Bank. In addition, European
government and supranational entities continued to play a
valuable role supporting UK small businesses. The European
Investment Fund and KfW, the German development bank,
announced their investment in a securitisation of loans
originated by Funding Circle in May.
United States
In the US, loans under management ended the year at
£736 million, an increase of 72% with originations in the
year up to £596 million, a rise of 51%. This strong growth was
32
Funding Circle Holdings plc
Strategic report achieved despite policy changes that resulted in a reduction
in the amount of originations introduced by third-party referral
partners and less originations from consolidation of existing
loans by repeat borrowers. Revenue of £37.1 million rose 66%
with the amount earned from existing customers increasing
to 35% of revenue (2017: 28%). Servicing yield was slightly
lower than in 2017 but transaction yields rose steadily through
2017 and again in 2018 as fewer, low transaction yield, loan
consolidations were originated. The US represented 26% of
the Group’s total revenue in 2018 (2017: 24%).
Funding in the year was primarily from institutional investors
and FCIF with a small contribution from accredited retail
investors. In August 2018, we announced a significant funding
deal with Alcentra, an alternative fixed income specialist for
BNY Mellon Investment Management, which committed to
purchase up to $1 billion in loans originated on the platform
over a period of up to three years.
Since the start of 2019, we have confirmed a new partnership
with the payments infrastructure company Stripe, helping
connect even more US business owners with the affordable
capital they need to go further.
Developing Markets
The Developing Markets’ businesses of Germany and the
Netherlands are in their third full year of operation, lagging the
US by approximately two to three years in terms of maturity.
Both countries delivered significant year-on-year growth, with
increases in both loans under management and originations
of over 100%. Revenue almost trebled in the year to £11.2 million,
including other revenue of £2.6 million (2017: £0.3 million),
and contributed 8% to Group revenues, twice that of the
previous year.
Retail investors funded c.20% of Developing Markets
originations with the rest from institutions, supranational
banks and FCIF.
Segment results and adjusted EBITDA
i) Revenue
In 2018, revenue grew 50% to £141.9 million (2017: £94.5 million)
and 55% to £141.5 million when property revenue is excluded.
United Kingdom
United States
Developing Markets
Total (excl. property)
Property (UK only)
Total
2018
£m
93.2
37.1
11.2
141.5
0.4
141.9
2017
£m
65.3
22.3
3.8
91.4
3.1
94.5
Change
43%
66%
195%
55%
(87%)
50%
Revenue is mainly a function of transaction fees earned on
originations and servicing income earned from servicing
the loans under management.
The growth in revenue within each geography reflected
a combination of price increases, increase in originations and
changes in the mix of originated loans on which different fees
are charged depending on the length of loan and risk bands, as
well as the growth in servicing fees for loans under management.
ii) Segment adjusted EBITDA
The Group uses segment adjusted EBITDA (“segment results”)
as an alternative profit measure to manage the segments as
this removes the impact of items that are not controllable at a
segment level including the centralised product development
and corporate costs as well as the depreciation and
amortisation which arise principally on previously capitalised
development spend.
For the first time, the Group was profitable at the geographic
segment level, recording a segment adjusted EBITDA of
£7.0 million (2017: loss of £3.9 million) and margin of 5%
(2017: loss of 4%).
2018
£m
21.8
(7.4)
(7.4)
7.0
2017
£m
16.9
(10.9)
(9.9)
Change
29%
32%
25%
(3.9)
279%
United Kingdom
United States
Developing Markets
Segment adjusted EBITDA
United Kingdom
Segment adjusted EBITDA increased 29% year-on-year.
A segment margin of 23% was slightly lower than the prior year
25% following a 3% point increase in marketing spend as a
percentage of revenue related to investment in above-the-line
marketing activities. Revenue from new borrowers returned
a negative 16% segment margin, due to the inclusion of most
of the increased marketing spend being attributable to new
borrowers. This compared to a positive 64% in respect of revenue
from existing customers, which accounted for nearly half of
total revenue in 2018, where marketing expenditure is limited.
United States
Segment losses narrowed to £7.4 million from £10.9 million
in 2017, an improvement in segment loss margin from 49%
to 20%. This reflected cost growth of only 34% compared
to revenue growth of 66% as the business demonstrated
operational leverage as it scaled in the year. The segment
margin on new borrower revenue was negative 48% reflecting
the relatively high cost of direct marketing as the business
matures, but the segment margin on existing revenue was
positive 32% reflecting the higher margin servicing revenue.
Annual Report and Accounts 2018
33
Strategic report Finance review continued
Segment results and adjusted EBITDA continued
ii) Segment adjusted EBITDA continued
Developing Markets
A segment loss of £7.4 million in 2018 was 25% lower than
in 2017 with the segment loss margin improving significantly
to 66% (2017: 261%). This reflected the business growing
significantly in scale and spreading its fixed cost base
across a much larger volume of loan originations as well
as generating increasing servicing revenue on a growing
base of loans under management.
Profit and loss
Revenue
Transaction revenue
Servicing revenue
Other revenue
Operating expenses
People costs
(including contractors)
Marketing
2018
£m
7.0
(24.5)
(11.0)
2017
£m
(3.9)
(13.6)
(7.6)
Change
279%
(80%)
(45%)
(28.5)
(25.1)
(14%)
Data and technology
Property-related costs
(8.2)
(8.6)
(0.4)
(5.9)
(6.8)
(4.4)
(0.6)
—
(21%)
(95%)
33%
n/m
Depreciation and
amortisation
Other costs
Exceptional items
(51.6)
(36.9)
(39%)
0.9
1.4
0.6
1.0
(49.3)
(35.3)
(18.2p)
(14.0p)
50%
40%
(40%)
(30%)
iii) Adjusted EBITDA
Segment adjusted EBITDA
Product development
Corporate costs
Adjusted EBITDA
Depreciation and
amortisation
Share-based payments
Foreign exchange loss
Exceptional items
Operating loss
Finance income
Income tax
Loss for the year
Loss per share
Product development costs of £24.5 million (2017: £13.6 million)
relate to the people and overhead costs of running and maintaining
the Group’s IT platforms and the ongoing investment in the
business and is stated after development costs are capitalised
onto the balance sheet as intangible fixed assets.
The growth in corporate costs from £7.6 million to £11.0 million
included additional costs of operating as a listed company
following the IPO.
Share-based payment costs of £8.6 million (2017: £4.4 million)
shown within people costs include the associated social
security costs of £3.6 million (2017: £nil). During 2018, as
Funding Circle neared IPO, the share awards were determined
to be readily convertible assets and the Group was required
to withhold and pay employment taxes to the tax authorities
on the exercise of options.
Exceptional items include the sponsor and adviser costs
associated with the IPO. The total costs associated with the
IPO were £15.0 million of which £5.9 million has been expensed
to the income statement with the remainder offset against
share premium as is required for costs directly associated
with the primary offering.
Operating loss grew to £51.6 million (2017: £36.9 million) with
the operating loss margin reducing to 36% compared with
39% in 2017.
The Group received a research and development tax credit of
£1.4 million (2017: £1.0 million) but remains non-corporate tax
paying given the losses incurred to date.
The loss per share was 18.2 pence (2017: loss per share of
14.0 pence) based on a weighted average number of ordinary
shares in issue of 271.3 million (2017: 251.9 million).
2018
£m
112.9
24.9
4.1
141.9
(79.2)
(57.8)
(9.2)
(8.9)
(8.2)
(24.3)
(5.9)
2017
£m
76.5
17.1
0.9
94.5
(52.3)
(38.7)
(6.5)
(6.8)
(6.8)
(20.3)
—
Change
48%
46%
n/m
50%
(51%)
(49%)
(42%)
(31%)
(21%)
(20%)
n/m
Operating loss
(51.6)
(36.9)
(40%)
(193.5)
(131.4)
(47%)
Revenue
Transaction revenue grew 48% to £112.9 million driven by
origination increases of 40% and a 12% increase in transaction
yields to 4.93% (2017: 4.40%) following price rises.
Servicing revenue, which is a function of loans under
management, grew 46% to £24.9 million. Loans under
management (excl. property) increased by 55% to £3,123 million
although the servicing yield reduced marginally to 0.94%
(2017: 0.98%).
Other revenue of £4.1 million (2017: £0.9 million) arose
predominantly from excess premium earned on financial
guarantees given on past Developing Markets funding.
Operating expenses
Total operating costs increased during the year by 47% to
£193.5 million (2017: £131.4 million) compared with growth in
revenues (including property) of 50%. Excluding the exceptional
items of £5.9 million and social security costs of £3.6 million
that arose due to the IPO, operating expenses increased by 40%.
People costs represent the Group’s largest proportion of
expenditure. People cost increases during the year of 44%
(£27.6 million) were principally driven by the 36% growth in
average headcount and increases in the average cost per head,
together with growth in share-based payments of £4.2 million.
34
Funding Circle Holdings plc
Strategic report Cash outflow generated from operations was £29.9 million
reflecting the adjusted EBITDA loss of £28.5 million and net
working capital outflows.
Net cash generated from operating and investing activities
is defined by the Group as “free cash flow”. This is a key
liquidity measure and is the net amount of cash used to
operate and develop the Group’s platform each year. In 2018
this was a £42.0 million outflow (2017: £35.3 million outflow).
The Group continued to invest in technology during the year
with £10.8 million (2017: £10.1 million) spent on internal
software engineers developing intangible fixed assets,
£2.3 million on office refurbishment and improvement
and £0.2 million on non cloud-based software.
Interest earned on the Group’s cash was £0.9 million
(2017: £0.6 million) following increased funds from the IPO.
Net cash flows from financing activities of £285.6 million
for the year ended 31 December 2018 related to funds
raised though the IPO of £300.0 million, less sponsor and
professional adviser fees totalling £15.0 million.
Additionally the Group paid the £0.5 million dividend on
the Series A preference shares which was triggered by
the completion of the IPO.
Adoption of IFRS 16
From 1 January 2019, the Group will adopt the new leasing
standard, IFRS 16, retrospectively. The impact will be to
recognise a right-of-use asset and a lease liability. The
adoption, when applied, will result in an increase to adjusted
EBITDA of £5.1 million for 2018 with an increase in
depreciation of £4.3 million.
Subsequent events
There have been no subsequent events since the balance
sheet date.
Outlook
In 2019, we expect to report revenues above £200 million
with transaction yields remaining at 2018 exit levels, providing
a year-on-year revenue benefit as lower average 2018 yields
are lapped. Segment adjusted EBITDA margin (including costs
associated with organic expansion into Canada) will more than
double with marketing spend as a percentage of revenue
remaining broadly flat year-on-year.
Adjusted EBITDA losses will reduce from 2018 as a result of
central costs falling to 20%+ of revenue, including investment
in product development and a full year of plc related expenditure.
Capitalised development spend, recorded as intangible fixed
assets, will grow modestly.
This guidance is pre-new investor products and IFRS16.
We expect additional incremental impact from new investor
products and IFRS16 in 2019. New investor products are
expected to add c.£2–3 million to both revenue and adjusted
EBITDA in 2019, and IFRS16 is expected to add a further
c.£5 million to both segment adjusted EBITDA and adjusted
EBITDA, but minimal impact on loss before tax.
People costs
Less capitalised
development spend
2018
£m
90.0
2017
£m
62.4
Change
(44%)
(10.8)
(10.1)
(7%)
People costs net of capitalised
development spend
79.2
52.3
(51%)
Average headcount
(including contractors)
Year-end headcount
(including contractors)
1,004
1,074
739
857
36%
25%
Marketing overhead spend in the year rose to £57.8 million
(2017: £38.7 million) as the Group continued its strategy of
investing significantly in a diversified range of media channels to
drive increased awareness of Funding Circle and grow originations.
Overall Group spend remained at 41% of revenue (2017: 41%)
as efficiencies and operational leverage were reinvested in
above-the-line channels, mainly in the United Kingdom,
including a new brand campaign in the autumn of 2018.
Data and technology costs consisting of software support,
licences and data feed expenses grew by £2.7 million to
£9.2 million driven primarily by headcount increases and
growth in data consumption.
Property-related costs increased by £2.1 million to £8.9 million
following the opening of a new office in Denver, a replacement
office in Amsterdam and no longer subletting a proportion of
the main UK office following growth in London headcount.
Capital reorganisation
Prior to the IPO, the Group undertook a capital reduction in order
to eliminate its deficit on distributable reserves. It then converted
the different classes of ordinary and preferred shares into one
class of ordinary shares. Further details are provided in note 18.
Funding and liquidity
At 31 December 2018, the Group held cash and cash equivalents
of £333 million, significantly increased from 2017 following the
net funds of £285 million raised through the Group’s IPO.
The Group maintains the majority of its cash in the UK with
95% of the Group’s cash denominated in pounds sterling.
2018
£m
(29.9)
1.4
(28.5)
(13.5)
(42.0)
285.6
0.5
244.1
88.9
2017
£m
(23.6)
1.0
(22.6)
(12.7)
(35.3)
81.9
(1.0)
45.6
43.3
333.0
88.9
Cash generated from operations
Tax received
Net cash outflow from operations
Net cash outflow from
investing activities
Free cash flow
Net cash inflow from
financing activities
Effect of foreign exchange
Movement in year
Cash and cash equivalents
at the beginning of the year
Cash and cash equivalents
at the end of the year
Annual Report and Accounts 2018
35
Strategic report Risk management
Growing a global scalable
and sustainable business
Risk management sits at the heart of our business. We recognise that
effective management of all key risks is critical to meet our strategic
objectives and to achieve sustainable long-term growth. Every business
faces risks. These need to be identified, understood and appropriately
addressed to protect the Company, our customers and fellow Circlers.
At Funding Circle, our approach is for all employees, regardless
of their position, to play their part in managing risk within the
business. Our Enterprise Risk Management Framework (“ERMF”)
defines a common approach to risk management, with clear
roles and responsibilities, and provides the foundations for a
strong risk culture and control environment.
We have adopted best practices in corporate governance and
risk management, appropriate to the size, nature and complexity
of our business. We annually review our risk strategy and risk
appetite framework across the Company to continually adapt
our practices to the evolving profile of our business.
Risk appetite
Our risk appetite is defined as the level of risk that we, as
the Company, are prepared to accept whilst pursuing our core
business strategy, recognising a range of possible outcomes
as business plans are implemented. The Funding Circle
Holdings plc Board sets the risk appetite and reviews the
Company risk profile against risk appetite. Risk appetite
provides a guideline for shaping business strategies and
defining the level of controls needed. It also provides a basis
for ongoing dialogue between management and the Board
with respect to Funding Circle’s current and evolving risk profile,
allowing strategic and financial decisions to be made on an
informed basis.
Risk governance
Funding Circle has a risk governance framework that is
documented in the ERMF. Responsibility for defining and
approving the ERMF lies with the Funding Circle Holdings plc
Board. The risk governance framework includes delegations of
authority from the Group Board, the UK Board and Principal
Risk Committees as appropriate.
We operate a Three Lines of Defence model across all
markets in which we operate. Our Chief Risk Officer (“CRO”),
Jerome Le Luel, leads the Group Risk function, which is
independent from Funding Circle’s operational and
commercial functions. He is responsible for developing,
maintaining and implementing the ERMF. He is also
responsible for providing assurance to the Board and
Directors that the principal risks are appropriately managed
and that Funding Circle is operating within risk appetite.
We have identified four principal risks:
- strategic risk;
- credit risk;
- operational risk; and
- reputation and conduct risk.
These four principal risks represent a detailed taxonomy
of key risks.
36
Funding Circle Holdings plc
Strategic report Funding Circle’s Three Lines of Defence model and risk governance structure have been designed to manage these four principal risks
in a consistent manner across the Company, as set out below.
Three Lines of Defence
FC CEO
FC Board
D
i
r
e
c
t
a
c
c
e
s
s
t
o
F
C
B
o
a
r
d
First line
UK MD
US MD
CE MD
Global CRO
Global General
Counsel
Second line
UK CRO
US CRO
CE CRO
ERM
Credit
quality
Investor
analytics
European
compliance
US
compliance
Compliance
monitoring
and testing
Third line
Internal Audit
Risk governance structure
Funding Circle Holdings plc Board
UK Board
Funding Circle Holdings plc Board Risk
and Compliance Committee
Executive Risk
Committee
Technology Security Risk
Sub-committee
Operational Risk
Committee
Credit Risk
Management
Committee
Reputation and
Conduct Risk
Committee
Disclosure
Committee
The Board’s Risk and Compliance Committee is supported by the
Executive Risk Committee (“ERC”) comprising the Funding
Circle Global Leadership Team. The ERC has sub-committees
focused on each principal risk, as set out below.
Reputation and Conduct Risk Committee
The Reputation and Conduct Risk Committee focuses on the
management of regulatory, reputation and conduct risks and
also oversees new product approvals.
Executive Risk Committee
Operational Risk Committee
The Executive Risk Committee meets on a quarterly basis and
reviews all principal risks across the Group. Strategic risks are
directly supervised and managed by the leadership team of each
Business Unit and reviewed at the Executive Risk Committee.
The focus of the Operational Risk Committee is to ensure that
operational controls are effective and that operational and
financial crime risks are adequately managed in each
Business Unit.
Credit Risk Management Committee
Disclosure Committee
Credit Risk Management Committees are held monthly in
each Business Unit. They focus on ensuring that the credit
risk exposure of each Business Unit is adequately managed.
The Board has delegated to the Disclosure Committee
responsibility for overseeing the disclosure of information by
Funding Circle to meet its obligations under the Market Abuse
Regulations, the FCA’s Listing Rules and Disclosure and
Transparency Rules.
Annual Report and Accounts 2018
37
Strategic report
Risk management continued
Risk culture
At Funding Circle, we believe that an open and strong risk
culture encourages ethical behaviour and professional
conduct. We promote our risk culture as part of our ongoing
effort to reinforce our Company values and have a Group-wide
programme of “Doing the Right Thing” every day for our
customers, employees and community.
Risk assessment framework
A standard risk assessment framework is used to evaluate
risks at both the Business Unit and Group levels, enabling
consistent measurement. Risk assessments are carried out
by those individuals, teams and departments that are best
placed to identify and assess the potential risks. They are
supported in this process by our Risk and Compliance teams.
We typically follow the evaluate/respond/monitor methodology:
1
Enterprise risk
management
3
2
1. Evaluate
-
Identify key risks
- Set risk appetite
- Assess adequacy
of existing controls
- Estimate residual risk
2. Respond
- Design control improvement plans
- Prioritise remediation work
and assign responsibilities
3. Monitor
- Track business performance
vs risk appetite
- Report, analyse and escalate
risk incidents
-
Identify new/emerging risks
- Track delivery of agreed
control improvements
Evaluate
As part of its responsibilities under the ERMF the Board has
formally recognised a series of risks that are continuously
present in Funding Circle and can materially affect the
achievement of Funding Circle’s objectives. These risks have
been organised under a consistent and simple taxonomy with
a hierarchy of risk categories, which facilitates risk management
and oversight. The management of these risks is assigned to
clear business owners who formally assess on a regular basis
the level of these risks, the adequacy of controls and the need
for further mitigations.
Respond
The appropriate risk response ensures that risks are kept
within appetite. At Funding Circle we see four types of possible
risk responses:
- accept the risk;
-
take mitigation actions (such as additional risk controls)
to reduce the risk;
- stop the existing activity/do not start the proposed activity
to remove the risk; or
- continue the activity and lay off the risk to another party
(e.g. insurance).
Monitor
Monitoring and reporting on Funding Circle’s risk exposures
are undertaken through risk governance structures. The Board
Risk and Compliance Committee (“RCC”) receives a consolidated
risk report no less than three times a year detailing the risks facing
the Group and mitigation plans, as well as risk outlook. The
RCC is also provided with metrics and regular reports about
the activities of the Risk and Compliance functions.
Risk assurance
Assurance on the management of risk is provided by the
Three Lines of Defence model and the Funding Circle Internal
Audit function. We also execute external annual controls
assurance (e.g. United Kingdom ISAE3402 and United States
SOC1 Type 2) reports certified by auditors in various
geographies in which we operate.
38
Funding Circle Holdings plc
Strategic report Principal risks and uncertainties
as at 31 December 2018
The Board confirms that through 2018 a robust assessment of the
principal risks facing Funding Circle was completed. A comprehensive
list of Group-wide risks and emerging risks was reviewed and monitored
throughout the year. The most significant risks and uncertainties faced by
Funding Circle are listed in the table below, categorised by principal risk:
Strategic risk
Strategic risk is defined as the failure to build a sustainable, diversified and profitable business that can successfully adapt
to environment changes due to the inefficient use of Funding Circle’s available resources.
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Marketplace funding
Investor funding shortfall or
failure to maintain a diversified
investor base may impact
Funding Circle’s operations and
ability to originate new loans.
The ability to attract investors
and secure sufficient funding
from existing or new investors
depends on, among other things:
- Funding Circle’s ability to
continue to provide attractive
investor returns;
- compliance with the terms
and conditions of funding
agreements with
investors; and
- effective maintenance and
scaling of financial and
risk management and
compliance controls
and procedures.
Funding Circle’s business model is
to be a direct lending platform that
matches the supply of capital to
the demands of SME borrowers
more efficiently and sustainably
than banks.
We carefully manage the match
between capital supply and SME
loan demand by:
- considering a broad range
of management information
and key performance indicators
at Funding Circle’s Liquidity Risk
Forum, Executive Risk
Committee and Board;
- maintaining a strong
forward-looking pipeline
of potential investors;
- having a seasoned Capital
Markets team responsible
for structuring transactions; and
- managing concentration risk and
diversifying sources of funding.
We have continued to diversify our
funding sources from investors,
across institutional, retail,
government and Funding Circle
managed funds.
We have also expanded our
marketplace funding strategy
into private funds – to help support
the growth of our business through
economic cycles. We plan to use a
portion of our equity to seed new
Funding Circle funds. This will be
done within strict guardrails
agreed with the Board and
monitored thereafter.
We have reorganised our Capital
Markets team into dedicated Sales
and Structuring teams. This will
allow the relevant teams to focus
on investor origination and deal
execution. We will open a dedicated
institutional sales office in New York
to build stronger investor relationships
with US credit investors.
Annual Report and Accounts 2018
39
Strategic report Principal risks and uncertainties continued
as at 31 December 2018
Strategic risk continued
Strategic risk is defined as the failure to build a sustainable, diversified and profitable business that can successfully adapt
to environment changes due to the inefficient use of Funding Circle’s available resources.
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Economic environment
Financial risk that is associated
with macroeconomic or
political factors that may
affect Funding Circle’s
financial and/or
credit performance.
There is a high level of uncertainty
regarding the UK credit environment
in the context of Brexit negotiations
and the possible macroeconomic
repercussions of the exit from
the EU.
Relevant SME-related
macroeconomic indicators
remain stable but are trending
negatively, e.g. individual
insolvencies in the UK have been
trending upwards over the past
two years and Q3 2018 (seasonally
adjusted) reached its highest level
since Q1 2012, slightly above the
historical average. Company
insolvencies in the UK in Q3 2018
rose to the highest quarterly level
since Q1 2014.
We are also noticing negative
signals from recent business
surveys in the UK.
We continually monitor the credit
health of the loan portfolios under
management and perform stress
test simulations to help ensure that
returns would remain resilient in the
context of risk volatility. Latest
stress test simulations suggest that
investors’ returns would remain
positive in every geography where
we operate even under severe
economic conditions.
Key management actions include
(but are not limited to):
- annual stress testing of loan
portfolios in each market
and independent review by
external party;
- resilient pricing and credit
strategy;
- monthly monitoring of internal
and external signals as part of
the Credit Risk Management
Committee;
-
independent validation and
continuous monitoring of the
performance of risk models;
- continuous tuning of risk and
pricing parameters to correct for
possible deviations in returns;
- agile capability to rapidly deploy
pricing and credit strategy
adjustments deemed necessary;
and
-
in-house experienced collections
and recoveries capabilities with
built-in scalability.
40
Funding Circle Holdings plc
Strategic report
Credit risk
Credit risk is the risk of suffering financial loss should any borrower fail to fulfil their contractual repayment obligations.
Since we typically have not lent from our own balance sheet, we are not directly exposed to credit risk. Credit risk performance
does affect the returns received by our investors and the attractiveness of Funding Circle SME loans as an investment.
Hence, credit of loans is managed on behalf of investors with the utmost care and attention to deliver credit performance
in line with expectations.
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Portfolio risk management
Errors in borrower acquisition,
credit approval, scoring
models and credit risk
management processes may
result in increasing defaults
and loss rates not aligned
to investors’ expectations.
Our fundamental approach to credit
risk management remains unchanged.
We have fully embedded the
operating principles of the Enterprise
Risk Management Framework.
Our global Risk and Analytics team
has grown in size with the addition
of experienced risk professionals
capable of supporting the increasing
size and complexity of our operations.
We have kept strengthening the
quality of our risk scorecards,
leveraging larger and more mature
data sets to develop refined models.
In 2018 we have deployed in the
US our fourth generation of risk
scorecards, and in the UK the
seventh generation.
We have deployed across all markets
an automated collections workflow
tool to enable systematic treatment
of borrowers in arrears with greater
productivity and scalability.
Funding Circle’s aim is for
well-balanced loan portfolios
that generate positive returns
for investors through the
economic cycle.
Our Chief Risk Officer is responsible
for managing credit risk by:
-
formulating credit risk policies
(covering credit assessment and
risk grading, portfolio monitoring
and reporting, collections and
recoveries) and ensuring
adherence to these policies;
- recruiting, training and managing
expert risk professionals with
the adequate skills, objectives
and capacity;
- establishing the formal mandates
and authorisation structure for
setting risk parameters and
approving loans;
- performing independent quality
control of credit decisions;
-
limiting concentration risk to
counterparties and industries;
- actively monitoring the
performance of the loan
portfolios and the market trends
that could affect performance;
-
implementing adequate
procedures to control for model
risk (including the independent
validation and monitoring of
credit scoring models); and
- performing annual stress tests
with high quality standards.
Annual Report and Accounts 2018
41
Strategic report
Principal risks and uncertainties continued
as at 31 December 2018
Regulatory, reputation and conduct risk
Regulatory, reputation and conduct risk is defined as engaging in activities that detract from Funding Circle’s goal of being a
trusted and reputable financial services company with products, services and processes designed for customer success
and delivered in a way that will not cause customer detriment or regulatory censure.
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Regulatory risk
The risk that Funding Circle’s
ability to effectively manage
its regulatory relationships is
compromised or diminished,
that the Group’s governance
and controls framework is not
satisfactory given business
growth or that there is
business interruption by
reason of non-compliance
with regulation or the
introduction of business-
impacting regulation.
Reputation/brand risk
Operational or performance
failures could lead to
negative publicity that could
adversely affect the Group’s
brand, business, results,
operations, financial
condition or prospects.
Client detriment
Funding Circle’s activities (or
the failure to satisfactorily
perform its activities) could
impact the delivery of fair
customer outcomes.
We maintain vigilance as to
proposed changes affecting our
business and we engage with
policy makers where relevant. We
have continued to invest time and
resources in external relations,
including to educate policy makers,
regulators and other influencers on
the features, benefits and impact
of platform lending.
We have expanded our teams
focusing on governance and
controls, and continue to train all
employees in such matters as
relevant to their role.
We continue to implement and
maintain business practices and
controls focused on reputation
management, including:
- appraising employees against
our core values and behaviours;
- ensuring Risk and Compliance
Committee consideration of new
or iterated products and initiatives;
- undertaking specific projects to
address identified risk topics
and issues; and
- updating and refining our
approach to issue and risk
identification and management.
Improvements have been
made to the way in which loan
performance is reported and
additional oversight and controls
have been implemented.
Investments have been made
in our Compliance Testing and
Monitoring and Internal Audit
functions, and customer-impacting
topics have been the subject of
review (for example data privacy,
complaints handling and
sales conduct).
We consider that the external and
regulatory environment is in a state
of flux at present given a number of
regulatory consultations ongoing in
the markets in which Funding Circle
operates and the uncertain political-
economic landscape generally.
Our overall approach to prudent
management of reputational and
brand risk remains unchanged.
Ensuring positive customer outcomes
continues to be a fundamental priority
for Funding Circle.
42
Funding Circle Holdings plc
Strategic report
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events.
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Information security
Failure to protect the
confidential information
of Funding Circle’s borrowers,
investors and IT systems may
lead to financial loss,
reputational damage and
regulatory censure.
Financial crime
Risk of regulatory breach,
financial loss or reputational
damage arising from a failure to
adequately manage or prevent
money laundering, terrorist
financing, bribery and
corruption, or to comply with
sanctions regulations.
Technology risk
Failure of the technology
platform could have a material
adverse impact on Funding
Circle’s business, results of
operations, financial condition
or prospects.
Our Chief Information Security Officer
is responsible for managing information
security and technology risk by
formulating security and technology
policies and performing security
penetration tests and other assurance
activities to protect Funding Circle
client information and other assets.
The Board Risk and Compliance
Committee and Executive Risk
Committee review our key information
security risks to ensure that they are
within risk appetite.
We have a dedicated Information
Security team which has implemented
a robust, multi-layered security
infrastructure that includes prevention
and detective controls.
The Board has adopted policies to
address financial crimes that have
been implemented by Business
Units through formal standards
and procedures.
We have a dedicated Financial Crimes
Operations team within the first line
of defence that is advised, challenged
and monitored by the second line
Compliance team.
The Board Risk and Compliance
Committee and Executive Risk
Committee review our key technology
risks to ensure that they are within
risk appetite.
We invest significantly in the Group’s
technology infrastructure to ensure
that the platform is resilient and
scalable to support business growth.
Key risk indicators are reviewed as part
of the Operational Risk Committee.
We have a dedicated Information
Technology Risk team that is
responsible for risk oversight
and governance.
Through our Information Security
Roadmap, we continue to make
significant progress on mitigating
our top information security risks
with a focus on data protection,
visibility and incident response.
The establishment of the Technology
Security and Risk Committee
ensures oversight over the mitigation
of key risks in this area.
Complying with the laws and
regulations designed to counter
money laundering, terrorist
financing, corruption and bribery
is fundamental to Funding
Circle’s operations.
Our migration to Amazon Web
Services data centres has allowed
for mitigation of some of our key
technology risks for migrated
applications. The establishment
of the Technology Security and Risk
Committee ensures oversight over
the mitigation of key risks in this area.
Annual Report and Accounts 2018
43
Strategic report Principal risks and uncertainties continued
as at 31 December 2018
Operational risk continued
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events.
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Client money risk
Failure of Funding Circle
to adequately protect and
segregate client money
may lead to financial loss,
reputational damage
and regulatory censure.
We segregate funds for retail individuals
and institutional investors in compliance
with CASS regulation across a diverse
range of banks.
We continue to manage the risk by:
- a monthly Client Money governance
sub-committee solely focused on
making decisions in relation to client
money, as well as reviewing
management information and
regulatory returns;
- oversight from the Funding Circle
Holdings plc Board and the Funding
Circle Ltd Board including an annual
report, prepared by the CF10a, that
highlights client money risks; and
- external UK Client Money audit report
executed by PwC and reviewed by the
Funding Circle Ltd Board.
The structure of our Financial
Operations and Payments teams
remains unchanged.
We have enhanced controls
in relation to payment creation,
payment authorisation, reconciliation
review and monthly reporting.
We have introduced best practices
in relation to the holding and
treatment of client money and
perform daily reconciliations across
all geographies, not just the UK.
Viability statement
In accordance with the UK Corporate Governance Code
(the “Code”), the Directors have assessed the future prospects
and viability of the Group for a period significantly longer than
12 months from the approval of the financial statements.
Assessment of prospects
The Directors have determined that a three-year period to
31 December 2021 constitutes an appropriate period over
which to perform the assessment as:
-
-
it is consistent with the Group’s medium-term planning process;
it represents a period over which there is a reasonable
degree of confidence in the reliability and accuracy
of forecasts; and
- periods beyond this point in a high growth business like
Funding Circle are significantly harder to predict accurately.
The Group’s overall strategy and business model, as set out
on pages 8 to 23, are fundamental in driving the growth of the
business and therefore its future prospects. The key factors that
are likely to affect the future prospects of the Group include
the ability to:
- grow awareness of the Funding Circle brand in order to
increase our market share of lending to SMEs;
- diversify and increase funding from a variety of investors
in order to meet future borrower demand; and
- continue to invest in data analytics and technology,
leading to expanded data sets, enhanced credit models
and a better customer experience.
Funding Circle’s future prospects are assessed through the
Group’s strategic planning process. The strategic planning
process involves a detailed review of the plan by the CEO and
CFO. This is done in conjunction with the Global Leadership
Team, consisting of regional and functional leaders, together
with a presentation and discussion at the Board.
The first year of this strategic plan consists of the Group’s
2019 annual budget and is subject to a reforecast part way
through the year. The budget is extended into the second
and third year of the plan using expected growth rates already
experienced across the Group. Progress against the financial
budget and forecasts is then reviewed monthly by the Global
Leadership Team and reported to, and challenged by, the Board.
44
Funding Circle Holdings plc
Strategic report Key assumptions
The key assumptions underpinning the strategic plan
(before severe but plausible scenarios) include:
- controlled cost growth;
- no fundamental breakdown in the IT infrastructure
or major data loss; and
- originations, LuM and revenue growth across the Group;
- no significant impact on the business model or operations
- conservative forecasts for gaining market share
in each geography;
from a recession or Brexit.
Assessment of viability
The output of the process above reflects the Directors’ best assessment of the future prospects of the Group over the next three
years. The Directors have carried out a robust assessment of the principal risks as set out on pages 39 to 44. They have also
considered the potential impact of the risks on the viability of the Group.
The financial plan was then subject to differing scenarios to assess those risks and quantify their financial impact on the Group.
The one that represented the most severe but plausible scenario was modelled as described below. This sensitivity took into
account the likely mitigating actions to the operations.
Scenarios
Severe global
downturn impacting
originations in each
of our geographies
Link to principal risks
and uncertainties
Impact on the business model
- Strategic risk
Under a severe downturn it is expected that:
- Credit risk
-
-
-
there would be a significant increase in the number of borrowers defaulting;
the returns for investors would be negatively affected resulting in a withdrawal of funding; and
this in turn would reduce the level of originations unless much higher incentives were offered
to investors to continue funding.
A further subset of risks including the reduction in trust from both borrowers and investors has
also been considered within this scenario.
The mitigating actions that would be taken by management include a reduction in the overall
marketing spend, a tightening of the credit models to improve the levels of return for investors
and increased costs of borrowing for SMEs.
Going concern
As a result of the work undertaken above to support the
viability statement, the Directors also consider it appropriate
to prepare the financial statements on a going concern basis.
The above scenario is hypothetical and severe but designed to
stress the business model and the viability of the Group. The
stress testing confirmed that the Group’s forecast net cash
position remained positive and that none of the scenarios
would threaten the viability of the Group over the forecast
period. In all cases including the severe scenario above, with
appropriate management actions, the scenarios were
controllable to mitigate the impact on the Group’s liquidity.
Based on this assessment, the Directors have a reasonable
expectation that the Group will be able to continue in operation
and meet its liabilities and obligations as they fall due over the
period to 31 December 2021.
Annual Report and Accounts 2018
45
Strategic report Chairman’s introduction
Promoting long-term success while
maintaining a culture of openness
and transparency
I am pleased to present Funding Circle’s first Corporate
Governance Report which incorporates reports from the
Chairs of each of our Board Committees.
Governance activity
Our Corporate Governance Report describes the work we
have done throughout the IPO process to develop our Board
and Committee processes and to support the development
of a robust governance structure. I would like to thank the Board
members for their continued support in ensuring timely, robust
and constructive challenge around the Board table.
In preparation for listing, the Board either approved existing policies
or established new policies, where necessary, with the aim of
further strengthening the Company’s governance framework.
We consider a sound governance framework key in the
creation of value for our shareholders and in growing the
Company over the medium to long term. We aim to maintain
open and transparent communication with our shareholders
and we laid the foundations for this ongoing shareholder
dialogue as we progressed through the listing process this
year. We have held a number of meetings with institutional
shareholders prior to and since admission to trading and we
look forward to continuing to proactively engage with
shareholders in an open and transparent way throughout 2019.
Bringing together an experienced, highly skilled and well-balanced
Board was a key aim for our listing. We are delighted with the
addition of Geeta Gopalan and Cath Keers, whose experience
complements our existing Board and will be invaluable as we
continue to grow and build a category-defining global company.
The Board and I look forward to an exciting year ahead in the
evolution of the business and I would like to thank all of our
colleagues for their contribution during 2018.
Andrew Learoyd
Chairman
7 March 2019
Dear shareholders
UK Corporate Governance Code
The Board is committed to the highest standards of corporate
governance and, since the date of admission, has complied with
the UK Corporate Governance Code published in April 2016
(the “2016 Code”).
The Board has also considered the impact of the revised
UK Corporate Governance Code published in July 2018
(the “New Code”). The New Code places increased emphasis
on culture and stakeholder (including workforce) engagement.
As people and culture have always been considered fundamental
to the success of the business, we believe we are already in a
good place in these areas, but intend to spend some time during
the coming year to ensure that our approach is in line with the
New Code requirements whilst remaining appropriate for our
business. The Corporate Governance Report section of the
Annual Report sets out how we have complied with the principles
of the 2016 Code during the year, highlighting key areas of focus
and challenge for the Board and its Committees.
46
Funding Circle Holdings plc
Corporate governance This Corporate Governance Report explains key features of the Company’s governance
framework and sets out how the Company has applied the main principles of the 2016 Code.
The 2016 Code can be found on the FRC website, www.frc.org.uk. The Board considers that
the Company has been compliant with the 2016 Code provisions as applied during the period
since listing.
We discuss our focus for the coming year with reference to the New Code. This report is set out
under the following headings of the New Code:
e
c
n
a
n
r
e
v
o
G
1. Board leadership and Company purpose
see page 48
2. Division of responsibilities
see page 54
3. Composition, succession and evaluation
see page 55
4. Audit, risk and internal control
see page 56
5. Remuneration
see page 56
Consideration of the New Code
The Board has considered the New Code, which applies to financial years commencing on
or after 1 January 2019.
A detailed analysis of the impact of the New Code has been carried out by the Company
Secretary, who has identified areas requiring further attention over the coming year including
formalisation of the extensive workforce engagement already in place. The Company Secretary
will work with the Board and its Committees in 2019 to ensure that appropriate steps are taken to
move towards compliance with the New Code. We will report further on any changes to the
Company’s governance framework in next year’s Annual Report and Accounts.
Annual Report and Accounts 2018
47
Corporate governance
Board leadership and Company purpose
An
experienced
and effective
leadership
team
Board Committees
A
R
N
RC
Audit Committee
Remuneration Committee
Nomination Committee
Risk and Compliance
Committee
Committee Chair
Andrew Learoyd
Chairman of the Board
R
N
Samir Desai CBE
Co-founder, Chief Executive Officer
Andrew spent 23 years working in investment
banking as a research analyst in corporate
finance, equity capital markets and finally
as COO of the Equities Division in Europe of
Goldman Sachs. He retired as a Managing
Director of Goldman Sachs in 2006; since then
he has been involved as an angel investor,
Non-Executive Director and consultant to
several start-up businesses. He became involved
with Funding Circle at the outset when he met
three ambitious young entrepreneurs with no
office and no coffee but an idea to change the
world of banking.
Samir co-founded Funding Circle in 2010. He
was previously a management consultant at
the Boston Consulting Group and an investment
executive at Olivant, a private equity firm that
invests in financial services businesses in
Europe, the Middle East and Asia. In 2015,
Samir was awarded a CBE for services to
financial services.
Cath Keers
Non-Executive Director
R
N
Hendrik Nelis
Non-Executive Director
RC
Cath currently serves as Chair of Ustwo Fampany
Limited, an independent digital product, games
and venture business, and as non-executive
director at Sage group plc and TalkTalk Telecom
Group plc. She is also an adviser to a number of
small businesses predominantly in technology.
Hendrik joined Accel in 2004 and invests in
both early and late-stage internet and software
companies. Before joining Accel, Hendrik was at
Perry Capital, a $10 billion hedge fund, where he
invested in public communications, media and
technology companies and Goldman Sachs.
Cath has recently held non-executive roles at
the Royal Mail, Home Retail Group, LV= and
Telefonica Europe. She previously held a number
of commercial roles including marketing and
business development at Sky TV, Avon and
Next, latterly Marketing Director and Customer
Director at O2, the mobile network, and
Chairman of Tesco Mobile, O2’s joint venture
with Tesco.
Having started his career at Hewlett-Packard,
Hendrik founded E-motion, a venture-backed
software company. He is an active member of
the World Economic Forum and serves on the
Selection Committee of the WEF Technology
Pioneers Programme. Hendrik serves as manager,
partner and/or director at a number of Accel
entities, as well as a director or supervisory
board member of several other companies.
48
Funding Circle Holdings plc
Corporate governance Sean Glithero
Chief Financial Officer
Eric Daniels
Non-Executive Director
A
RC
Geeta Gopalan
Non-Executive Director
A
RC
As Global CFO, Sean serves on the Funding
Circle Board and is responsible for all aspects
of finance including internal audit, tax, treasury,
procurement and investor relations.
Prior to joining Funding Circle in 2017, Sean
served as a Director and Chief Financial Officer
of Auto Trader Group and helped it undertake
an initial public offering and join the FTSE 250.
Sean qualified as a chartered accountant with
Ernst & Young, working within both the audit
and corporate finance departments.
Eric currently holds a range of business
appointments which include as an advisor, a
non-executive director, a trustee or a board
member. He also advises several innovative
technology companies.
Eric was previously Group Chief Executive Officer
of the Lloyds Banking Group, the FTSE 100
listed banking group, retiring in 2011. Prior to
joining Lloyds in 2001, he spent 25 years with
Citigroup in a range of management positions.
Eric holds a Master of Science in Management
from the Massachusetts Institute of Technology
and a Bachelor of Arts in History from
Cornell University.
Geeta has over 25 years of experience of
financial services and retail banking, particularly
payments and digital innovation. Geeta was
formerly Executive Chair of Monitise Europe.
Among the many roles in her financial services
career, Geeta was Director of Payment Services
with HBOS plc and previously Managing Director,
UK Retail Bank and Business Development Head
EME at Citigroup. She is a chartered accountant.
Geeta serves as Non-Executive Director
of CYBG plc, Ultra Electronic Holdings and
Wizink Bank SA, of which she is chair of
the audit and risk committee.
Neil Rimer
Non-Executive Director
Bob Steel
Senior Independent Director
N
Ed Wray
Non-Executive Director
A
R
Neil is a co-founder and partner of Index
Ventures. Before starting Index Ventures, he
spent four years with Montgomery Securities
in San Francisco. Neil is currently a Director
or observer on various boards of companies
based in the UK, Europe and US including
Prodigy Investments Limited, Raisin GmbH,
Peat GmbH and Pitch Software GmbH.
He is also a Director of Human Rights Watch.
Neil was previously a Director of Photobox
Holdco Limited, Supercell Oy and
The Climate Corporation.
Bob is a partner at Perella Weinberg Partners.
Bob was New York City’s Deputy Mayor for
Economic Development, where he was responsible
for the Bloomberg Administration’s economic
development strategy and job creation efforts.
As CEO of Wachovia Corporation in 2008, Bob
oversaw the sale of the bank to Wells Fargo & Co.
and served on the Wells Fargo board of directors.
Bob has also served as the Undersecretary for
Domestic Finance of the United States Treasury,
the Vice Chairman of Goldman Sachs and a
board member of Barclays.
Bob is director of Cadence Bancorp, LLC.,
Chairman of the Aspen Institute’s Board of
Trustees and has served as Chairman of Duke’s
Board of Trustees, Senior Fellow at the Harvard
Kennedy School of Government, member of the
FDIC Advisory Committee on Economic Inclusion,
Chairman of The After-School Corporation, and
Co-Founder of SeaChange Capital Partners.
Ed co-founded Betfair in 1999 with Andrew
Black and was Chief Executive until 2003, when
he moved to Australia to set up the company’s
joint venture. He became Chairman in 2006.
Betfair floated on the London Stock Exchange
in 2010, valued at £1.4 billion. Prior to setting up
Betfair, Ed spent eight years at J.P. Morgan & Co.
as a Vice President in the debt capital markets
and derivatives area.
Ed also serves as a director for a number of
companies in the UK.
Annual Report and Accounts 2018
49
Corporate governance Board leadership and Company purpose continued
The Board has a collective objective of promoting the long-term
success of the Company for its shareholders and we provide
dedicated leadership in the development and promotion of
the Group’s strategy and monitoring of its implementation on an
ongoing basis. A key part of the Board’s role is ensuring that
the Group has the appropriate people, financial and other
resources to achieve its aims. Along with the standing
Committees, we are responsible for ensuring an appropriate
system of governance is in operation throughout the Group.
This includes a robust system of internal controls and a
sound risk management framework.
Board gender diversity
Female
Male
20%
80%
Executive
Non-Executive
20%
80%
<1 year
1–3 years
5+ years
20%
60%
20%
Board composition
20+
20+
20+
Board tenure
Purpose, values and culture
We consider our employees and culture fundamental to
the success of our business. Our team consists of a talented
group of individuals who have strong alignment with our
mission and share the same drive and passion as our customers.
We believe that creating the right culture is crucial for both
attracting and retaining talent. All permanent employees hold
options and/or shares in the business, which ensures they are
aligned with our mission, vision and objectives. We have
developed a strong and engaging culture in each of our offices,
as well as a set of five core values that represent who we are
and how our team behaves (as described in the Strategic
Report on page 26). The Board regularly receives reports
on people-related matters and results from the culture surveys
and the individual Directors spend time with employees, for
example by participating from time to time in global quarterly
meetings and town halls.
Matters reserved to the Board and role
of the Committees
Board meetings are planned around the key events in
the corporate calendar, including the half-yearly and final
results and the Annual General Meeting (“AGM”) and a strategy
meeting is held each year. The Board also receives a monthly
management report. During the year, the Chairman and
Non-Executive Directors have regularly met without Executive
Directors present and the Chairman regularly gathers the views
of the Non-Executive Directors outside formal Board meetings.
The Board has adopted a formal schedule of matters reserved
for its approval and delegated other specific responsibilities to
the Committees. The matters reserved to the Board and its
Committees include:
- Group strategy, which is reviewed by the Board
and management regularly during the year;
-
the Group’s annual operating budget;
- major investments, acquisitions and capital projects;
-
internal controls and risk management;
- material contracts and expenditure;
- certain shareholder communications;
- Board membership and other appointments;
- corporate governance matters; and
- remuneration of Directors and the Global Leadership Team.
50
Funding Circle Holdings plc
Corporate governance80
+
Q
80
+
Q
60
+
20
+
Q
Each Board Committee has written Terms of Reference defining its role and responsibilities as summarised in the table
below. Further details regarding the role and activities of each of the Board Committees can be found in the Committee reports.
The schedule of matters reserved for the Board and Board Committees’ Terms of Reference are also available on the Group’s
corporate website: corporate.fundingcircle.com.
Nomination Committee
Key objectives
Principal responsibilities
Reviewing the structure, size and composition
of the Board, reviewing succession planning
and making recommendations on appointments
to the Board.
Membership
Andrew Learoyd (Chair)
Bob Steel
Cath Keers
- Leads the process for Board appointments and makes recommendations
to the Board
- Reviews the structure, size and composition of the Board and makes
recommendations to the Board about any changes
- Considers plans and makes recommendations to the Board for orderly
succession for appointments to the Board and senior management
- Keeps the Executive and Non-Executive leadership needs of the Group
Nomination Committee Report – page 57
under review
Audit Committee
Key objectives
Overseeing the financial and corporate
reporting and internal financial controls of the
Group, managing internal and external audit
procedures and reviewing and overseeing the
Group’s procedures in relation to whistleblowing,
bribery, fraud, money laundering and other
financial crime.
Membership
Geeta Gopalan (Chair)
Ed Wray
Eric Daniels
Audit Committee Report – page 59
- Evaluates the combination of skills, knowledge, experience, independence
and diversity on the Board
- Reviews the results of the Board performance evaluation process, where
they relate to the composition of the Board
- Makes recommendations to the Board about the re-election of Directors
Principal responsibilities
- Monitors the integrity of the Company’s financial statements
- Reviews and reports to the Board on significant financial reporting issues
and judgements
- Assesses the effectiveness of the Group’s financial reporting procedures
- Monitors and keeps under review the adequacy and effectiveness of the
Group’s internal financial controls and (in conjunction with the Risk and
Compliance Committee) internal control systems
- Reviews and approves the role and mandate of the Group’s Internal Audit
function and monitors and reviews the effectiveness of its work
- Oversees the relationship of the Company with the external auditors,
recommends their appointment and reviews their effectiveness, fees,
terms of reference and independence
Annual Report and Accounts 2018
51
Corporate governance Board leadership and Company purpose continued
Matters reserved to the Board and role of the Committees continued
Risk and Compliance Committee
Key objectives
Principal responsibilities
Reviewing and making recommendations to the
Board in relation to the Group’s risk management
and compliance systems and compliance with the
Group Enterprise Risk Management Framework,
the Group’s compliance with legal and regulatory
requirements and policies and the effectiveness
and appropriateness of the Group’s corporate
governance framework.
Membership
Eric Daniels (Chair)
Hendrik Nelis
Geeta Gopalan
Risk and Compliance Committee Report – page 63
- Assesses the emerging and current principal risk exposure of the Company
and the Group and advises the Board on those risk exposures and future
risk strategy
- Advises the Board on the Company’s overall risk appetite, tolerance
and strategy
- Reviews the Company’s capability to identify and manage new risk types
- Monitors and keeps under review the adequacy and effectiveness of the
Group’s internal risk management systems
- Considers and approves the remit of the Risk Management and
Compliance functions, in conjunction with the Audit Committee
- Provides advice and challenge necessary to embed and maintain
a supportive risk and compliance culture throughout the Group
- Monitors and keeps under review the policies and overall process for
identifying and assessing strategic, operational, credit and reputational and
conduct risks and managing their impact on the Company and Group
- Considers and approves the annual risk and compliance monitoring and
testing plans
Remuneration Committee
Key objectives
Principal responsibilities
Determining the remuneration of the Directors
and senior employees of the Group and
determining the policy for the Executive Directors
as well as monitoring and reviewing its ongoing
appropriateness and relevance.
Membership
Cath Keers (Chair)
Andrew Learoyd
Ed Wray
Directors’ remuneration report – page 65
- Considers, monitors and reviews the ongoing appropriateness and
relevance of the remuneration policy (including its level and structure)
and consults with significant shareholders and other stakeholders
as appropriate
- Promotes long-term shareholdings by Executive Directors that support
alignment with long-term shareholder interests
- Considers, determines and approves the provisions of the service agreements
of the Executive Directors and ensures that any payments that may be
made under such provisions are fair to the individual and the Company
- Reviews workforce remuneration and related policies and the alignment
of incentives and rewards with culture and takes these into account when
determining the remuneration of the Executive Directors
- Agrees the policy for authorising claims for expenses from the Directors
- Reviews the design of any new share incentive schemes for approval
by the Board and, as required, the Company’s shareholders
Disclosure Committee
In addition, the Board has delegated to the Disclosure Committee responsibility for overseeing the disclosure of information
by Funding Circle to meet its obligations under the Market Abuse Regulations, the FCA’s Listing Rules and the Disclosure and
Transparency Rules. The Disclosure Committee comprises the Chair of the Board, the Chair of the Audit Committee, the CEO,
the CFO, the CRO and the Global General Counsel.
Day-to-day management of the Group, including the implementation of the Group’s business plan and strategy, is delegated by
the Board to the Global Leadership Team, chaired by the Chief Executive Officer, Samir Desai. The Global Leadership Team is
responsible for managing the business, delivering the strategy, managing risk, ensuring regulatory compliance, establishing
financial and operational targets and monitoring performance against those targets.
52
Funding Circle Holdings plc
Corporate governance Board activity
The Board held a number of meetings during 2018, both before
and after the IPO. In 2018, following the IPO and the formal
establishment of the Board Committees, two Board meetings
and two Committee meetings were held and all Directors and
Committee members were present at all meetings (all except one
being present in person). In total, prior to the date of this report,
five Board meetings and eight Board Committee meetings
have been held since the IPO. The Company Secretary or her
Deputy attended all meetings. In addition, more than 10 Board
meetings were held prior to the IPO before the Company was
required to comply with the 2016 Code.
The table below sets out attendance at Board and Committee
meetings in 2018 following the IPO.
Post-IPO
Board
Audit
Compliance Remuneration Nomination
Risk and
—
—
No. of meetings
Andrew Learoyd
(Chairman)
Samir Desai
Sean Glithero
Eric Daniels
2
2
2
2
2
Geeta Gopalan
1 1
Cath Keers
Hendrik Nelis
Neil Rimer
Bob Steel
Ed Wray
2
2
2
2
2
1
1
1
1
1
1
1
1
1. Appointed 1 November 2018 – attended October Board meeting but not as a Director.
The Board and Board Committee meeting schedule for 2019 has
been approved by the Board and the Board will meet formally at
least six times per year with an additional Board strategy session.
Ad hoc meetings may be called as and when appropriate.
The activities undertaken by the Board in 2018 since admission
were intended to promote the success of the Company. The
meetings held focused on the following main themes:
Theme 1) Corporate governance and the role
of the Board following IPO
Theme 2) The Group’s funding strategy
Theme 3) Marketing strategy
Theme 4) Approval of 2019 budget and review
of management accounts
Theme 5) Tech and product developments,
including a review of cyber and
information security
In addition, at each Board meeting the standing agenda includes:
- approval of minutes (circulated to all Directors in advance
for comment) and review of outstanding actions;
- corporate governance and Committee reports;
-
investor relations and communications (including quarterly
shareholder analysis reports);
- report from the CEO, including key developments in the
Group’s business; and
-
financial and operational review.
Agendas and accompanying papers are distributed to the Board
and Committee members well in advance of each Board or
Committee meeting. These include reports from Executive
Directors, other members of senior management and external
advisers. All Directors have direct access to senior management
should they require additional information on any of the items
to be discussed.
The Board and the Audit Committee receive further regular
and specific reports to allow the monitoring of the adequacy
of the Company’s systems of internal controls (described in
more detail in the Audit Committee Report on page 59).
Shareholder and stakeholder engagement
The Board believes that engaging regularly with the Company’s
shareholders is vital to the Group’s success. The Group aims
to maintain an active dialogue with its shareholders, including
institutional shareholders, to discuss issues relating to the
performance of the Group. Communicating and engaging
with shareholders means the Board can express clearly its
strategy and performance and receive regular feedback. It also
gives the Company the opportunity to respond to questions
and suggestions.
The Non-Executive Directors are available to discuss any matter
shareholders might wish to raise and to attend meetings with
shareholders and analysts, as required. Investor relations
activity is a standing item on the Board’s agenda and ensuring
a satisfactory dialogue with shareholders is a matter reserved
to the Board.
Our Senior Independent Director, Bob Steel, serves as an
additional point of contact for shareholders should they feel
that any concerns are not being addressed properly through
the normal channels. He may be contacted through the
Company Secretary.
The Company’s Annual General Meeting (“AGM”) will take
place on 5 June 2019 at 65 Fleet Street, London, EC4Y 1HS.
The Chairman, and the Chairs of the Audit, Remuneration and
Risk and Compliance Committees, will be present to answer
questions put to them by shareholders. Electronic proxy voting
will be available to shareholders through both our Registrar's
website and the CREST service. Voting at the AGM will be
conducted by way of a poll and the results will be announced
through the Regulatory News Service and made available on
the Company’s website.
We discuss other stakeholders, in addition to shareholders,
within our Strategic Report.
Annual Report and Accounts 2018
53
Corporate governance Division of responsibilities
There is a clear division of responsibilities between the Chairman and the CEO (which has been set out in writing and approved
by the Board) and these responsibilities, as well as the role of the Senior Independent Director and other members of the Board,
are set out below:
The Board
Chairman
Chief Executive Officer
Senior Independent Director
Responsible for:
Responsible for:
Role is to:
-
the leadership and overall
effectiveness of the Board and for
upholding high standards of
corporate governance throughout
the Group and particularly at
Board level.
- setting the Board agendas
with the Company Secretary and
CEO and the recommendation of
an annual Board and Committee
meeting schedule.
- promoting a culture of openness
and debate, in particular by
facilitating the effective contribution
of Non-Executive Directors, and
ensuring constructive relations
between Executive and
Non-Executive Directors.
- ensuring effective communication
with shareholders and discussing
governance, remuneration and
strategy with major shareholders.
-
-
leadership of the Global
Leadership Team in the executive
management of the Group.
the development of the Group’s
strategy, annual budget and
business plans and commercial
objectives with the Board.
- setting an example and
communicating to the Group’s
employees the expectations
of the Board in relation to the
Group’s culture, values
and behaviour.
- ensuring appropriate, timely and
accurate information is disclosed
to the market.
- managing the Group's risk profile
in line with the extent of risk
identified as acceptable by the
Board and ensuring appropriate
internal controls are in place.
- be available to shareholders
if they have concerns, which
contact through the normal
channels of the Chair, CEO or
other Executive Directors has
failed to resolve.
- attend sufficient meetings
with and listen to the view
of major shareholders.
- provide a sounding board for the
Chair and act as an intermediary
for shareholders when necessary.
- meet other Non-Executive
Directors without the Chair
present once a year to appraise
the Chair's performance.
Chief Financial Officer
Non-Executive Directors
Company Secretary
Responsible for:
Responsible for:
Responsible for:
- all aspects of finance including
internal audit, tax, treasury
procurement and investor
relations.
- working with the CEO to develop
and implement the Group’s
strategic objectives.
- ensuring effective financial
compliance and control.
- providing objective and constructive
challenge to management.
- being available to all Directors to
provide advice and assistance.
- assisting with the development
- providing governance advice.
of strategic proposals.
- scrutinising and monitoring
financial and operational
performance and the Group’s
risk management framework.
- ensuring compliance with the
Board’s procedures and with
applicable rules and regulations.
54
Funding Circle Holdings plc
Corporate governance Composition, succession and evaluation
As at the date of this report, the Board comprised the Chair,
the Executive Directors and the Non-Executive Directors,
including the Senior Independent Director. The current
Directors served throughout all of 2018, except for Cath Keers
and Geeta Gopalan who were appointed in May 2018 and
November 2018, respectively.
The 2016 Code recommends that at least half of the Board,
excluding the Chairman, should comprise independent
Non-Executive Directors. Circumstances likely to impair,
or which could appear to impair, a Director’s independence
include whether a Director participates in the Company’s
share option plan. As an early stage private company, which
did not pay Directors’ fees, the Company has historically granted
options to certain Non-Executive Directors under the Company’s
share option plan. Although the options granted will continue
to vest and be held by those Non-Executive Directors following
admission, no further options will be granted to Non-Executive
Directors under any of the Company’s share option plans.
The Board does not consider that the historical granting of
options to Non-Executive Directors, or the continued vesting
of options already granted, under the existing share option
plan impairs the independence of those Directors concerned
and considers that all Non-Executive Directors other than
Hendrik Nelis and Neil Rimer are independent in character and
judgement and are free from any business or other relationships
which could materially affect the exercise of their judgement.
Additionally, the Directors, both individually and collectively,
have the range of skills, knowledge, diversity of experience
and dedication necessary to lead the Group and have the
requisite strategic and commercial experience to contribute
to the leadership of Funding Circle.
Appointment and election
The Non-Executive Directors are expected to devote sufficient
time to the Company’s affairs to fulfil their duties as Directors.
Their letter of appointment states that the nature of the role
makes it impossible to be specific about the maximum time
commitment. Each of the Non-Executive Directors has
confirmed that they continue to be able to devote sufficient
time to discharge their duties effectively as Directors of the
Company. The Nomination Committee reviews the other
directorships and commitments held by the Directors and
is satisfied that this is the case.
The Board considers all Directors to be effective and committed
to their roles. The Board has decided to comply with provision
B.7.1 of the 2016 Code and accordingly all members of the Board
will be offering themselves for re-election at the Company’s
future Annual General Meetings.
Board induction and training
All new Directors receive a comprehensive induction plan
on joining the Board. This includes the following:
- overview of Funding Circle through meetings with members
of the Global Leadership Team;
- overview by the Chairman on the Board structure, Committees
and roles and responsibilities and an overview of the Board
calendar, key dates and Board documentation by the
Company Secretary;
- overview of key customers (borrowers and investors)
and partners;
-
training on public company duties; and
- meeting with internal and external auditors and key advisers
as appropriate.
The Board is committed to the training and development
of Directors and employees. The Company Secretary is
responsible for helping the Chairman regularly review and
organise appropriate training for the Directors. In order for
our Directors, particularly the Non-Executive Directors, to
discharge their responsibilities, it is essential they have a
detailed understanding of our business. All Directors have
the opportunity to visit the Company’s offices and operations.
They have continuous access to the knowledge and expertise
of senior management and regularly receive its input at Board
meetings. All Directors are required to undertake relevant
compliance training and receive training on public company
duties and relevant regulations.
Board evaluation and succession planning
As the Nomination Committee has only been established for a
short time, a formal performance evaluation has not yet been
conducted. It is intended that an internal performance evaluation
will be conducted in 2019 and reported in the Company’s 2019
Annual Report and Accounts. Succession planning will also be
a key focus of the Nomination Committee in 2019.
Annual Report and Accounts 2018
55
Corporate governance Members of the Global Leadership Team are responsible for
the application of the ERMF, for implementing and monitoring
the operation of the systems of internal control and for providing
assurance to the Audit Committee, the Risk and Compliance
Committee and the Board. Risk management and compliance
constitute the second line of defence. The Risk Management
function is accountable for the quantitative and qualitative
oversight and challenge of the identification, measurement,
monitoring and reporting of principal risks and for developing
the ERMF. The Compliance function supports and advises the
business on the identification, measurement and management
of its regulatory and conduct risks. It is accountable for
maintaining the compliance standards and framework within
which the Group operates, and monitoring and reporting on
its compliance risk profile. The third line of defence is Internal
Audit, which is currently outsourced to KPMG. This function
provides independent and objective assessment on the
robustness of the ERMF and the appropriateness and
effectiveness of internal controls to the Audit Committee,
the Risk and Compliance Committee and the Board.
Remuneration
The Board has delegated responsibility to the Remuneration
Committee for the remuneration arrangements of the Group’s
Executive Directors and Chairman. It also recommends and
monitors the remuneration level and structure for the Global
Leadership Team. You can find out more about this in the
Directors’ Remuneration Report starting on page 65.
Audit, risk and internal control
The Board has delegated to the Audit Committee responsibility
for overseeing the financial and corporate reporting and
internal financial controls of the Company and its subsidiaries.
This includes reviewing the content of the Annual Report and
Accounts and advising the Board on whether, taken as a whole,
it is fair, balanced and understandable. You can find details
of this process and the focus of the review and of the Audit
Committee’s role, activities and relationship with the external
auditors on page 60 of the Audit Committee Report.
Responsibility for preparing the Annual Report
and Accounts
The Board is responsible for maintaining adequate accounting
records and seeks to ensure compliance with statutory and
regulatory obligations. An explanation from the Directors
about their responsibility for preparing the financial statements
in the Statement of Directors’ Responsibilities is on page 83.
The Company’s external auditors explain their responsibilities
on page 89.
Risk management and internal control systems
The Board is responsible for promoting the long-term
success of the Company for the benefit of shareholders,
as well as taking account of other stakeholders including
employees and customers. This includes ensuring that an
appropriate system of risk governance is in place throughout
the Group. To discharge this responsibility, the Board has
established frameworks for risk management and internal
control using a “Three Lines of Defence” model and reserves
for itself the setting of the Group’s risk appetite.
The Board oversees the Group’s risk management and
internal control system and is responsible for reviewing its
effectiveness. In preparation for the IPO, the Board carried out
a robust assessment of the principal risks and uncertainties
facing the Group, which are described in more detail on pages
39 to 44 of the Strategic Report, the Report of the Risk and
Compliance Committee and the Report of the Audit Committee.
The Board retains ultimate responsibility for the Group’s systems
of internal control and risk management but has delegated
in-depth monitoring of the establishment and operation of
prudent and effective controls in order to assess and manage
risks associated with the Group’s operations to the Risk and
Compliance Committee and Audit Committee. The Risk and
Compliance Committee also monitors compliance with the
Group Enterprise Risk Management Framework (“ERMF”). More
information on the ERMF is provided on pages 36 and 38.
56
Funding Circle Holdings plc
Corporate governance Report of the Nomination Committee
Committee members
Andrew Learoyd (Chair)
Bob Steel (Senior Independent Director)
Cath Keers (Independent Non-Executive Director)
“The main focus of the
Committee will be to
oversee succession
planning for the Board and
senior management and to
ensure there is a diverse
and appropriate balance
of skills on the Board.”
Dear shareholders
On behalf of the Board, I am pleased to present our
first Nomination Committee Report for the year ended
31 December 2018.
Committee composition, skills and experience
The Committee was formally established by the Board prior
to the IPO in September 2018. Bob Steel and Cath Keers
join me as the other members of the Committee. We confirm
that we have complied with the 2016 Code recommendation
that the Committee comprises a majority of independent
Non-Executive Directors.
Role of the Committee
The Committee assists the Board in reviewing the structure,
size and composition of the Board. It is also responsible for
ensuring plans are in place for orderly succession to both Board
and Global Leadership Team positions, and making appropriate
recommendations to the Board for appointments to the Board.
The key responsibilities of the Committee are summarised
on page 51 of the Corporate Governance Report and further
details on the Committee’s roles and responsibilities can
be found in our Terms of Reference on our website at:
corporate.fundingcircle.com.
Operating rhythm of the Committee
The Committee will meet at least once a year and on an ad
hoc basis as required throughout the year. Although we did
not meet formally in 2018, the first formal Committee meeting
took place on 29 January 2019. The meeting focused on the
role, and key areas of focus, of the Committee for 2019, as set
out below. We are satisfied that we have a good balance of
skills and experience on the Board to support the Company’s
future development and, accordingly, recommend to the Board
that each Director stand for election at the forthcoming AGM.
Key focus of the Committee for 2019
In 2019, the key areas of focus for the newly formed
Committee will be:
- developing plans for orderly succession to both the
Board and the Global Leadership Team, keeping in
mind the importance of a diverse pipeline;
- keeping the balance of skills, experience, independence
and knowledge of the Board as a whole – this was carefully
considered at the time of the IPO and the Committee is
satisfied with the current balance of the Board but, as set
out below, a further internal review will be carried out in
2019 to consider the composition and diversity of the
Board and how effectively the Directors are working
together to achieve the Board’s objectives; and
- promoting diversity – the Committee recognises the emphasis
in the New Code on diversity and it intends to take an active
role in setting and meeting diversity objectives and strategies
for the Company as a whole and in monitoring the impact
of diversity initiatives.
Annual Report and Accounts 2018
57
Corporate governance Report of the Nomination Committee continued
Board induction and training
All new Directors receive a comprehensive induction plan on
joining the Board. Further details of this are set out on page 55
of the Corporate Governance Report.
Diversity and inclusion
The Company is committed to creating an inclusive culture,
free from discrimination of any kind, and this extends to Board
appointments. The Board recognises the benefits of diversity,
including gender diversity, on the Board, although it believes
that all appointments should be made on merit, whilst ensuring
that there is an appropriate balance of skills and experience
within the Board. See the gender breakdown of the Board and
the Global Leadership Team on page 27.
We have published the UK's gender pay gap report on our
website. This also sets out our aims to achieve high levels of
diversity across the Company. Further details of our diversity
and inclusion initiatives are set out on page 27.
Board appointments
During the year (and in preparation for the IPO) the Board
appointed two Non-Executive Directors, Cath Keers and
Geeta Gopalan, selected primarily on the basis of their industry
and public company skills, knowledge and experience, but
also to promote greater diversity on the Board. An external
recruitment consultant, Heidrick & Struggles, was appointed
which did a thorough review of available candidates, taking
into account the required skills, knowledge and experience the
Board had identified and the Company’s diversity objectives.
As part of the process, an assessment of the candidates’ skills
was undertaken and interviews were held with members of
the Board and the Global Leadership Team on a one-on-one
basis prior to appointment. The Committee is satisfied that
the recruitment consultant used has no other connection with
the Company and that the advice it received is independent.
Annual evaluation
As the Committee has only been established for a short time,
we have not conducted a formal performance evaluation but
we plan to do so during 2019. We will report on this in the
2019 Annual Report and Accounts.
Andrew Learoyd
Chair of the Nomination Committee
7 March 2019
58
Funding Circle Holdings plc
Corporate governance Report of the Audit Committee
Committee members
Geeta Gopalan (Chair)
Eric Daniels (Independent Non-Executive Director)
Ed Wray (Independent Non-Executive Director)
“
The Committee’s primary
responsibility is to assist
the Board through the
oversight and monitoring
of financial reporting and
keeping under review the
adequacy and effectiveness
of the Group’s internal
financial controls.”
Dear shareholders
On behalf of the Board, I am pleased to present our first Audit
Committee Report for the year ended 31 December 2018.
The Funding Circle Holdings plc Audit Committee was formally
established by the Board prior to the IPO in September 2018.
I was appointed as Chair on my appointment as a Director of
the Group in November 2018. Eric Daniels and Ed Wray join
me as the other members of the Committee. The Committee
members are all independent Non-Executive Directors and
between them have extensive experience in banking and
financial services as well as in technology and high growth
companies. Further detail on the Committee members’
skills and experience is documented in their biographies on
page 48. The Board is satisfied that the Committee meets the
requirement to have recent and relevant financial experience
as recommended under provision C.3.1 of the 2016 Code.
The Board has delegated to the Committee responsibility for
overseeing the financial and corporate reporting and internal
financial controls of the Group, for reviewing the Group’s internal
control systems, for reviewing and overseeing the Group’s
procedures for detecting and preventing bribery, fraud, money
laundering and other financial crime, for managing both internal
and external audit procedures and for maintaining an appropriate
relationship with the external auditors of the Group.
It is our intention to meet at least three times per year. Since the
formation of the Committee in September 2018, it has met on
one occasion in 2018 and on one occasion in 2019. There were
also three meetings of the Funding Circle Holdings Limited
Audit, Risk and Compliance Committee in 2018 prior to the
IPO and formation of the Committee. A summary of the matters
discussed at the meetings of the Committee in 2018 is set out
in the following report.
External auditors
PricewaterhouseCoopers LLP (“PwC”) were appointed as
the Company’s external auditors in 2015. The Committee
has reviewed the effectiveness and independence of PwC
and has recommended to the Board that they are reappointed.
Annual evaluation
As the Audit Committee has only been established for a short
time, we have not conducted a formal performance evaluation
but we plan to do so during 2019. We will report on this in the
2019 Annual Report and Accounts.
We are pleased with the progress we have made since the IPO
and we will continue to work with the management team and
the Board to ensure our governance framework and control
processes operate effectively to support the delivery of the
Group’s strategy.
Annual Report and Accounts 2018
59
Corporate governance Report of the Audit Committee continued
Role of the Committee
The Board has delegated to the Committee responsibility for
overseeing the financial and corporate reporting and internal
financial controls of the Group and for managing both internal
and external audit procedures.
The key responsibilities of the Committee are summarised
on page 51 of the Corporate Governance Report and further
details on the Committee’s roles and responsibilities can
be found in our Terms of Reference on our website at:
corporate.fundingcircle.com.
Meetings
All members of the Committee attended all meetings together
with the CFO, representatives of the external and internal auditors
and, where it was deemed appropriate, members of the senior
management team. The Committee received information on a
timely basis and meetings were scheduled adequately to allow
members to have an informed debate.
In addition to attendance at the Committee meetings, the
Committee also met with the external auditors and internal
auditors without Executive Management present. I also have
direct and frequent confidential communication with our
external audit partner and internal auditors.
Activities of the Committee
The key matters considered at the meetings of the Committee
during the year included:
- review and approval of the internal audit plan for 2019;
- review and approval of external audit plan and fees for the
2018 financial year, including independence, objectivity and
effectiveness of the external auditors;
- review of the ongoing effectiveness of the Group’s internal
controls and risk management systems;
- review and approval of the Group’s non-audit services fees
and policy;
- review of the adequacy and security of the Group's
whistleblowing arrangements and whistleblowing update.
- review of significant audit and accounting judgements,
including viability statement and going concern assessment;
-
-
review and approval of the Group's 2018 Annual Report and
Accounts and preliminary announcement; and
recommendation on reappointment of external auditors.
Significant issues considered in relation to the
financial statements
The Committee assessed the quality, appropriateness and
adherence to the Group’s accounting policies and principles.
It reviewed whether the accounting estimates and judgements
made by management were appropriate. The significant issues
and accounting judgements considered by the Committee in
respect of the year ended 31 December 2018 are set out below.
Reporting issue
Audit Committee action
Principal risks and viability
As a listed company, the Directors must satisfy themselves,
and make a statement in the Annual Report, on the viability
of the Group. The period over which the Directors have
determined this assessment is three years.
The Committee reviewed reports from management that set
out its view on the longer-term viability of the Group. These
included reviewing:
-
-
the Group’s long-term forecasts and its cash and liquidity;
the Group’s principal risks as set out on pages 39 to 44; and
- outcomes of stress testing after applying severe but plausible
scenarios aligned to the principal risks.
Having challenged and considered the outcomes of management’s
assessment the Committee concluded to recommend the viability
statement to the Board for approval.
The Committee reviewed a paper from management which set
out the key assumptions underpinning the value in use assessment
and the level of headroom and sensitivity to those assumptions.
The Group’s external auditors also provided their view of the
assessment to the Committee.
After due challenge and discussion, the Committee concluded
that there remained sufficient levels of headroom over the carrying
values of these geographies.
The Committee received and reviewed various reports from
management during the year that set out the basis of those
calculations undertaken by external valuers.
Taking into account the papers received and with the benefit of
hindsight on the Group’s valuation following the IPO in October 2018,
the Committee concluded that the valuations used for share
awards during the year remained appropriate.
Goodwill
The Group is required to annually assess any goodwill
for impairment. The Group holds goodwill in respect
of the previous acquisitions of Zencap in Europe and
Endurance Lending Network in the US.
For each of these geographies there was significant
headroom over their carrying value.
Share-based payments
The calculation of the fair value of share awards involves a
number of assumptions. Prior to IPO, there was no publicly
available share price and therefore the Group was required to
obtain separate valuations of the business in order to calculate
fair value for IFRS purposes.
This involves a number of assumptions and judgements.
Following the IPO, the Group is able to use the share price as
the starting point for valuing new awards.
60
Funding Circle Holdings plc
Corporate governance Reporting issue
Audit Committee action
Expected credit losses ("ECLs")
The calculation of the ECL provision, where the Group
has provided certain institutional investors with financial
guarantees, requires estimation as to the expected level
of borrower defaults using both historical trends and
forward-looking information.
Exceptional items
The costs associated with the IPO have been treated as
exceptional items in line with the Group’s accounting policy
for such items.
The Committee received and reviewed information from
management during the year on the levels of ECL and the
associated provisioning.
The Committee also received the views and analysis from the
external auditors.
Taking each of these into account, the Committee concluded
that the approach to provisioning and the associated disclosures
for ECLs were reasonable.
The Committee received a paper from management setting out
analysis for the IPO costs together with their accounting treatment
with costs associated allocated between the primary raise and
secondary raise.
The Committee also received the views of the external auditors
on the items that management had included within these costs.
The Committee considered the appropriateness of presenting
these items separately from other costs and the allocation.
It noted that the disclosure as exceptional was consistent with
the Group’s accounting policy as well as other listed companies
following IPOs.
Accordingly it concluded that the amounts and this presentation
were appropriate.
Alternative performance measures (“APMs”)
The Group uses APMs in its segment reporting of segment
adjusted EBITDA and adjusted EBITDA. These measures are
defined within the segmental information note.
The Group uses these measures as they provide an alternative
interpretation of the underlying performance of the business
and how it is managed. They also provide a closer approximation
to cash generation which is key in a fast-growing business.
Additionally, they are measures that the external analysts
use to assess the Group’s performance.
The members of the Committee, also being Board Members,
received management and operational information about the Group’s
underlying performance which included these key measures.
The Group also obtained the view of the use of these measures
from the external auditors.
The Committee considered the appropriateness of these measures
in providing meaningful information about the underlying performance
of the business and concluded that these additional measures
should be used to report externally, assuring itself that these are
not being given undue prominence.
Fair, balanced and understandable reporting
The Board is required to report as to whether the contents of
this 2018 Annual Report and Accounts, when taken as a
whole, is fair, balanced and understandable.
At the request of the Board, the Committee has assessed the
information contained within this Annual Report.
This assessment included discussions with management on the
underlying financial processes, and confirmation from the CFO
and his team and the Group’s Head of Investor Relations and
Communications that the information contained within the
Annual Report is fair, balanced and understandable.
The Committee also discussed the contents of the Annual Report
with the external auditors.
Having considered all of the available information including
previously published information about the business, such as
the IPO Prospectus, it has concluded that, in its judgement, the
Annual Report and Accounts, when taken as a whole, is fair,
balanced and understandable.
Annual Report and Accounts 2018
61
Corporate governance Report of the Audit Committee continued
Internal controls and risk management
The Committee, in conjunction with the Risk and Compliance
Committee, is responsible for reviewing the risk management
systems and internal controls to ensure that they remain effective
and that any identified weaknesses are appropriately dealt with.
During the year the Committee (and, prior to September 2018,
the Audit, Risk and Compliance Committee) assessed the
findings of reviews into internal controls, fraud and misconduct
risk, alongside management responses. The Committee also
considered the effectiveness of systems for internal control,
financial reporting and risk management including a review
of all material financial, operational and compliance controls.
Internal audit
The Group uses KPMG, which are accountable to the Committee,
as its outsourced Internal Audit function. Their work focuses
on areas of key business risk, significant processes and current
areas of concern to define their audit plan. The internal audit
plan for 2019 was approved by the Audit Committee in
November 2018 and covers a broad range of processes
and controls across the business including:
-
-
information and cyber security;
investor and borrower communications;
- compliance with regulatory frameworks including client
money requirement; and
-
financial and non-financial risk oversight.
Actions arising from the audits are monitored through to
completion and reported to the Audit Committee to ensure
they are appropriately addressed.
The Audit Committee will review the effectiveness of the
Internal Audit function after its first full year of operation
across the Group.
Whistleblowing
The Board adopted a revised whistleblowing policy in
January 2019. The Company provides employees with access
to a telephone service run by an independent organisation
to enable employees to report on an anonymous basis.
The Committee is responsible for reviewing the whistleblowing
policy and process, and both the Committee and the Board
receive whistleblowing updates at each meeting as well as
reports on any concerns raised. After due challenge, along
with some suggestions for further improvement, the Committee
concluded that the policy and procedures remain effective.
External auditors
The Committee is responsible for overseeing the
Group’s relationship with its external auditors,
PricewaterhouseCoopers LLP ("PwC"). This includes
the ongoing assessment of the auditors’ independence
and the effectiveness of the external audit process, the
results of which inform the Committee’s recommendation
to the Board as to the auditors’ appointment (subject to
shareholder approval) or otherwise.
PwC was first appointed as the external auditors of the Company
in 2015. The current lead audit partner, Brian Henderson, has
been in place for four years.
The Committee has reviewed the quality of PwC’s audit plan
and its assessment of management’s judgements during the
year and is satisfied that the audit process was effective. It will
undertake a more formal assessment of their effectiveness
during 2019, which will be the first year-end audit post-IPO.
A resolution recommending the appointment of PwC as
external auditors of the Company will be put to shareholders
at the Company’s first Annual General Meeting in June 2019.
In accordance with the 2016 Code and EU legislation, the
Committee intends to put the external audit out to tender
at least every ten years post-IPO.
The Committee confirms that the Group is in compliance with
The Statutory Audit Services for Large Companies Market
Investigation (Mandatory use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014.
Non-audit services
The engagement of the external audit firm to provide non-audit
services to the Group can impact on the independence
assessment, and the Company has, therefore, adopted a policy
which requires Audit Committee approval for non-audit services.
Fees paid to PwC for non-audit services are presented at each
Audit Committee meeting.
During the year ended 31 December 2018, PwC were engaged
to provide non-audit services relating to the following:
Description
Assurance-related work
Tax compliance services (non-EU)
Reporting accountant
£m
0.1
0.1
2.0
During the year, £2.0 million of non-audit services were provided
by PwC in the role of reporting accountant as part of the IPO.
PwC is prohibited from providing certain non-audit services
including but not limited to internal audit work, valuations work
and tax-related work within the EU. Further details on audit and
non-audit fees are shown in note 5 to the financial statements.
PwC has confirmed to the Committee during the year that,
despite the level of non-audit fees, it remained independent.
Geeta Gopalan
Chair of the Audit Committee
7 March 2019
62
Funding Circle Holdings plc
Corporate governance Report of the Risk and Compliance Committee
Committee members
Eric Daniels (Chair)
Geeta Gopalan (Independent Non-Executive Director)
Hendrik Nelis (Non-Executive Director)
“Strong governance, risk
management and controls
are vital to the long-term
sustainability of
Funding Circle.”
Dear shareholders
On behalf of the Board, I am pleased to present the report
of the Risk and Compliance Committee for the year ended
31 December 2018.
The Company’s approach to risk and risk management,
together with the principal risks that face the Group, is set out
on pages 38 to 44 of this report. The Committee has
monitored the Group’s risk management and governance
framework and I am pleased with the progress made over the
year in the management, and reporting, of the key risks facing
the Group particularly in relation to marketplace funding,
portfolio risk management and operational risk.
Committee composition, skills and experience
The Committee was formally established by the Board prior to
the IPO in September 2018. Geeta Gopalan and Hendrik Nelis
join me as the other members of the Committee. We confirm
that we have complied with the 2016 Code recommendations
that the Committee comprises a majority of independent
Non-Executive Directors. The Committee members have
a wealth of risk management experience, including strong
representation in financial services. Further details of their
experience is set out on pages 48 and 49 of this report.
As the Risk and Compliance Committee has only been
established for a short time, we have not conducted a formal
performance evaluation but we plan to do so during 2019.
We will report on this in the 2019 Annual Report and Accounts.
Prior to the IPO and formal establishment of the Committee,
I was Chair of the combined Funding Circle Holdings Limited
Audit, Risk and Compliance Committee which assisted the
Board with its consideration of all aspects of risk management
across the Group and the Group’s compliance with its legal
and regulatory requirements.
Role of the Committee
The main purpose of the Committee is to review and
make recommendations to the Board in connection with
the Group’s risk strategy and its attitude to and appetite
for risk and to monitor and review the Group’s compliance
with the Enterprise Risk Management Framework (“ERMF”).
In addition, the Board has delegated to the Committee
responsibility for reviewing and monitoring the Group’s
compliance with legal and regulatory requirements and
policies and the effectiveness and appropriateness of the
Group’s corporate governance framework.
The key responsibilities of the Committee are summarised
on page 52 of the Corporate Governance Report and further
details on the Committee’s roles and responsibilities can
be found in our Terms of Reference on our website at:
corporate.fundingcircle.com.
The Committee reports regularly to the Board on its activities
and makes recommendations, all of which have been accepted
during the year.
Annual Report and Accounts 2018
63
Corporate governance Report of the Risk and Compliance Committee continued
Governance and operating rhythm of the Committee
The Committee will meet as often as it deems necessary with at
least three scheduled meetings a year. We met on one occasion
in 2018 following the IPO and have had one further formal meeting
since the year end. There were also three meetings of the
Funding Circle Holdings Limited Audit, Risk and Compliance
Committee in 2018 prior to the IPO. A summary of the key
areas of focus for 2018 is set out below.
All members of the Committee have attended meetings held
since the IPO, together with (by invitation) the Chief Risk Officer
and the General Counsel and other members of the senior
management team where it was deemed appropriate. I am
satisfied that the Committee received information on a timely
basis and that the meetings were scheduled adequately to
allow members to have an informed discussion/debate.
As Funding Circle Ltd (“FCL”) is authorised and regulated by
the Financial Conduct Authority, it has its own Risk and
Compliance Committee and Audit Committee, both chaired
by FCL’s independent Director (who is not on the Board),
Matthew King. The FCL Risk and Compliance Committee
meets at the same time as the Committee and Matthew King
has attended all meetings.
Key areas of focus for the Committee in 2018
The Committee has considered a wide range of risks facing
the Group, both existing and emerging, across all key areas
of risk management. Certain risks have been identified which
required further detailed consideration. A summary of these
matters is set out below and includes the key considerations
and conclusions of the Committee.
Marketplace funding
The Committee closely monitored marketplace funding
risk given the broader impact it has on delivering business
performance. The Committee received regular reports of the
Group’s marketplace funding key performance indicators, as
well as developments to the Group’s marketplace funding
governance framework. The Committee oversaw some
improvements in managing marketplace funding risk in 2018
such as improved reporting and ongoing efforts to diversify
marketplace funding sources. This will remain an area
of focus for the Committee in 2019.
Portfolio risk management
The Committee monitored credit risk performance against the
Group’s risk appetite metrics and policies. Whilst the Group is
not directly exposed to credit losses, the Committee monitored
the credit quality of the Group’s lending portfolio to ensure that
investors’ returns were adequately protected. Credit performance
and portfolio returns have been strong in the US, Germany and
the Netherlands. In the UK, some weaknesses have been identified
and the Committee oversaw the tightening of lending criteria
in 2018 to ensure credit performance measures are in line with
credit risk appetite. This will remain an area of focus in 2019.
Economic environment
The Global CRO provided reports on early warning signals
of a possible recession and potential implications to the credit
portfolio performance in each geography. The Committee
received detailed stress testing reports and associated plans
on the potential impact on the UK portfolio in the context of
a “hard” Brexit scenario. The Committee also requested and
received an independently validated report of the Funding
Circle UK stress testing model in October 2017. A further
report will be provided to the Committee in 2019.
Regulatory, reputation and conduct risk
The Committee received regular reports on regulatory, reputation
and conduct risk and continued to monitor ongoing regulatory
change including the consultation by the Financial Conduct
Authority in relation to the industry in the UK and progress on
regulation in the Group’s European geographies. A key area of
focus was on positive customer outcomes and transparency,
particularly in the UK retail market, in light of increasing
uncertainty in the political and macroeconomic environment.
Operational risk
The Committee received regular reports on key operational
risks facing the business such as information security,
technology, client money (UK specific) and financial crime.
The Committee also oversaw improvements in the control
environment with key operational risk performance indicators
trending in the positive direction. The Committee reviewed the
Group’s operational risk appetite on an ongoing basis and this
area will continue to be an area of focus in 2019.
Other principal activities of the Committee have been:
- review of the Enterprise Risk Management Framework
and relevant Group policies;
- review of results of the risk management assessment
process and ongoing risk reports including risk appetite;
- review of internal risk controls (further details of which are
covered in the Corporate Governance Report); and
- review of the compliance programme and the compliance
and risk monitoring and testing plan.
In respect of the Group’s approach to risk and compliance
management, the Committee also reviewed the capability,
resources, remit and authority levels of the Risk and
Compliance functions and is satisfied that the Risk and
Compliance functions are adequately resourced and
sufficiently independent with appropriate authority and
standing within the Group.
Committee focus for 2019
During 2019, the Committee’s focus will continue to be
on reviewing the Group’s risk strategy and risk management
capabilities, as well as closely monitoring any emerging
risks having the potential to increase in size and affect the
performance of the Group. The Committee will continue to
monitor the political environment, the exit of the UK from the
European Union and the global economic environment and
will continue to review the Group’s contingency planning
designed to respond and mitigate the impact of any adverse
macroeconomic conditions.
Eric Daniels
Chair of the Risk and Compliance Committee
7 March 2019
64
Funding Circle Holdings plc
Corporate governance Directors’ remuneration report
Committee members
Cath Keers (Chair)
Andrew Learoyd (Chairman of the Board)
Ed Wray (Independent Non-Executive Director)
“
Our incentives are
simple: we want to build
an ownership mentality
among key executives,
to support growth.”
Dear shareholders
On behalf of the Board, I am pleased to present the Directors’
Remuneration Report for the year ended 31 December 2018
covering the remuneration policy and practice for the first time
as a listed company. In addition to my annual statement as
Chair of the Remuneration Committee, this report contains:
-
-
the current Directors’ remuneration policy (the "Remuneration
Policy”), which will be put to a binding shareholder vote at
the AGM on 5 June 2019 and will apply for three years
from the date of approval; and
the Annual Report on Remuneration, which sets out
payments made to the Directors and details the link
between Company performance and remuneration
for the year ended 31 December 2018. It also sets out
how the Policy is intended to be implemented in 2019.
The Annual Report on Remuneration is subject to
an advisory shareholder vote at the 2019 AGM.
Committee composition and operating rhythm
The Committee was formally established by the Board prior
to the IPO in September 2018. Ed Wray and Andrew Learoyd
join me as the other members of the Committee. We confirm
that we have complied with the 2016 Code recommendation
that the Committee comprises at least three independent
Non-Executive Directors.
It is our intention to meet at least three times a year and on
an ad hoc basis as needed. Although we did not meet formally
prior to the IPO or in 2018, we have met three times since the
year end. Given that the Executive Directors do not participate
in an annual bonus plan, the main activities of the Committee
will be in the early part of 2019, agreeing the performance
conditions for the long-term incentive plan.
As the Remuneration Committee has only been established
for a short time, we have not conducted a formal performance
evaluation but we plan to do so during 2019. We will report on
this in the 2019 Annual Report and Accounts.
Role of the Committee
The Committee’s primary role is to determine the remuneration
of the Directors and senior leadership team of the Group
and to determine the Remuneration Policy for the Executive
Directors as well as monitoring and reviewing its ongoing
appropriateness and relevance.
The key responsibilities of the Committee are summarised
on page 52 of the Corporate Governance Report and further
details on the Committee’s roles and responsibilities can
be found in our Terms of Reference on our website at:
corporate.fundingcircle.com.
Annual Report and Accounts 2018
65
Corporate governance Employee share ownership
Share ownership for all Circlers has always been and remains
an integral part of the Group’s culture and the Company
operates equity incentive arrangements for all permanent
employees. All Circlers contribute to the achievement of the
Group’s long-term success and the Board believes that
extending share ownership throughout the Group enhances
loyalty and engagement. A single discretionary share-based
LTIP was adopted in September 2018, conditional on IPO, and
the Committee approves grants to the Global Leadership Team
under the LTIP and has approved the parameters pursuant
to which awards are made to all other Circlers. Grants to
Circlers, including the Global Leadership Team (other than
the Executive Directors), vest over a period of four years but
are not otherwise normally subject to performance conditions.
2019 AGM
At our first AGM in June 2019, shareholders will be asked to vote
on the Remuneration Policy, which will remain in place for three
years following the date of approval, and on the Annual Report
on Remuneration. In accordance with legislative requirements,
the vote on the Policy will be binding and the vote on the Annual
Report on Remuneration will be advisory. I look forward to
receiving your support on both resolutions.
Cath Keers
Chair of the Remuneration Committee
7 March 2019
Directors’ remuneration report continued
Overview of Remuneration Policy and progress in 2018
Funding Circle is a founder-led business. From inception, the
remuneration philosophy has been to support share ownership
across the business through equity incentives to encourage all
Circlers to behave as owners – taking decisions for long-term
value creation rather than focusing on the short term.
It is the Committee’s intention to continue with that philosophy
and our expectation is that key executives will continue to build
significant personal shareholdings in Funding Circle through
a long-term incentive plan. There is no discretionary annual
bonus scheme.
The Committee has reviewed and built on the work undertaken
by the Board in the lead up to the IPO. In anticipation of the IPO,
the Board reviewed the remuneration framework to ensure an
appropriate remuneration structure and strategy was in place
and sought independent specialist advice in relation to the
remuneration principles that it should apply to Directors.
The Company has established a set of remuneration
principles and a remuneration framework that will:
- attract, motivate and retain executives and senior
management to deliver the Company’s strategic goals
and create long-term shareholder value;
-
incentivise strong financial performance and reward
the delivery of the Company’s business plan and key
strategic goals;
- adhere to principles of good governance and appropriate
risk management; and
- align employees with the interests of shareholders and
encourage widespread equity ownership across the Group.
Focus for 2019
During 2019, the Committee’s focus will be on:
- approval of performance conditions and awards under
the long-term incentive plan (“LTIP”), ensuring that there
is a significant proportion of long-term variable pay linked
to long-term value creation and embedding simplicity and
transparency in both the design and the delivery of our
executive rewards;
- ensuring that executive remuneration decisions are made in
the context of the broader all-employee and external climate;
- reviewing any issues raised by shareholders in relation to
remuneration and the Remuneration Policy; and
- assessing the ongoing appropriateness of the
remuneration arrangements in light of remuneration
trends and market practice.
66
Funding Circle Holdings plc
Corporate governance Directors’ remuneration policy
The Remuneration Policy, as set out in this section, applies to the roles of Chairman, Executive Director and Non-Executive Director.
The Board believes the Remuneration Policy is appropriate to support the long-term success of the Company whilst ensuring
it does not promote inappropriate risk taking.
If approved by the shareholders in a binding vote at the 2019 AGM in June, the Remuneration Policy will apply for a maximum
of three years from the AGM.
Executive Directors’ remuneration
The Remuneration Policy is designed to offer competitive but not excessive remuneration structured so that there is a significant
weighting towards long-term variable pay elements. Reflecting this, the Executive Directors do not participate in an annual discretionary
cash bonus plan. The salary of the Executives is purposefully set at the lower end of market practice for UK companies of a similar
size. The table below provides a full summary of the Remuneration Policy elements for Executive Directors. Samir Desai has
confirmed that he will waive any entitlement to variable remuneration under the LTIP in respect of the 2019 award cycle.
Element of
remuneration
Key features
Purpose and link to strategy Maximum opportunity
Performance measures
Salary
Reviewed annually in March.
Salaries take account of
external market and the
overall employee context.
Supports the attraction
and retention of the
best talent.
No prescribed maximum salary
level or salary increases.
n/a
Account will be taken of increases
applied to employees as a whole
when determining salary increases.
Committee retains the discretion
to award higher increases where it
considers it appropriate, especially
where salary at outset has been
set at a relatively low level.
The value of benefits is not
capped as it is determined by
the cost to the Company, which
may vary.
n/a
Market competitive
(and cost effective)
benefits provide
reassurance and risk
mitigation and support
retention of talent.
Allowances
and benefits
Pension
Bonus
Executive Directors are
entitled to the following
benefits:
-
life assurance; and
- private medical
insurance.
The Committee may
determine that Executive
Directors should receive
additional reasonable
benefits if appropriate,
taking into account typical
market practice and practice
throughout the Group.
Directors are entitled
to receive employer
contributions to the
Funding Circle Ltd defined
contribution pension plan
(although the CEO has
waived his right to receive
this contribution as set
out below).
Executive Directors do not
currently participate in a
discretionary annual cash
bonus plan and Funding
Circle does not have an
all-employee discretionary
cash bonus plan.
To provide retirement
benefits for Executives.
Maximum contribution in line with
contribution to other employees in
the Group, currently 2% of salary,
increasing to 3% in April 2019.
n/a
n/a
n/a
Our policy is to place
greater emphasis on
long-term variable pay
elements. Incentives
are awarded under
the LTIP.
Annual Report and Accounts 2018
67
Corporate governance Directors’ remuneration policy continued
Executive Directors’ remuneration continued
Element of
remuneration
LTIP
Key features
Purpose and link to strategy Maximum opportunity
Performance measures
Executive Directors are
granted awards under the
LTIP (described in more
detail below).
Rewards long-term
sustainable performance,
in line with Funding
Circle’s strategy.
Awards may be made as
conditional share awards
or nil-cost options as
considered appropriate.
Focuses executives on
delivering outstanding
value creation for
shareholders.
Derived from the median of
maximum total direct compensation
for FTSE 250 companies (other
than the top 50 companies to
ensure peer size is relevant).
For2019, these awards would be
£1.98 million for the CEO and
£1.12 million for the CFO.
Awards will be performance
shares with a three-year
performance period.
Following the end of the
performance period and on
termination of employment,
shares will be subject to a
holding period of two years.
The Executives may, at the
discretion of the Committee,
receive dividend equivalents
on vested shares.
The Committee may
adjust and amend awards
in accordance with the
LTIP rules.
Malus and clawback may
be applied in exceptional
circumstances.
Annual revenue
growth and average
annual EPS over
three years. Vesting
governed by
performance on both
measures using
simple matrix.
Vesting on basis of a
single measure can
occur at performance
above Threshold on
one measure.
No awards will vest
unless the share
price at the end of the
performance period
also exceeds the IPO
price of 440 pence.
The Committee
retains certain
discretions, in line
with market practice,
in relation to the
operation and
administration of the
plan as further
described below.
Shareholding
requirement
Executive Directors are
expected to build and
maintain a holding of
shares in the Company.
Supports our
ownership mentality
focus, promotes
stewardship and helps
align management
with shareholders.
n/a
Minimum shareholding
requirement, to be satisfied within
five years of appointment, of no
less than 200% of salary for all
Executive Directors. If any Executive
Director does not meet the
requirement, they will be expected
to retain all of the net of tax
number of shares vesting under
any of the Company’s discretionary
share incentive arrangements until
the requirement is met.
Long-term incentive plan
Plan operation
Beginning in 2019, Funding Circle’s policy will be to make LTIP
Awards to its Executive Directors. These awards are designed
to incentivise Executive Directors over the longer term, and to
deliver performance-related pay, with a clear line of sight for
executives and direct alignment with shareholders’ interests.
Awards under the LTIP will be nil-cost options with a three-year
performance period. After the performance period has ended,
awards will be subject to a two-year holding period, as is consistent
with common market practice. Vesting will be contingent upon
performance against the chosen measures: revenue growth
and earnings per share (“EPS”).
LTIP performance measure selection and target calibration
The Committee believes that using a combination of revenue
growth and EPS performance, together with an underpin of
the IPO share price, to govern the vesting of Funding Circle’s
LTIP is the best way to balance our performance objectives
and align our incentives with the Company’s strategic priorities.
These measures have been selected over the inclusion of total
shareholder returns to ensure that the Executives focus on
the two key areas of performance that we believe will drive
shareholder value. Vesting of LTIP Awards is subject to the
achievement of stretching goals over a three-year vesting
period. Goals for vesting of awards have been set using
several sources, including internal plans, IPO guidance and
analysts' expectations and each measure is independent of
the other, weighted revenue growth: EPS 55:45. The table
below shows how the two measures will be applied together,
in a simple vesting matrix arrangement.
68
Funding Circle Holdings plc
Corporate governance LTIP payout matrix
Revenue growth
Per annum over three years
based off 2018
Performance level
% of award vesting
At and above
50%
At and above
40%
At and above
30%
Below 30%
Stretch
55%
66.3%
77.5%
100%
On target
27.5%
38.8%
50%
72.5%
Threshold
13.8%
25%
36.3%
58.8%
Below
Threshold
—
11.3%
22.5%
45%
Notes:
For performance outcomes between these points, vesting will
be determined on a straight-line interpolation basis.
Below
Threshold
Threshold
On target
Stretch
Above (1.1p)
Positive
Above 1.6p
There will be no vesting if performance on both measures is
below Threshold. There will be no vesting unless the share price
at the end of the performance period also exceeds the IPO price
of 440 pence.
Earnings per share for the year 2021
Why are the measures used in a matrix arrangement?
The matrix reflects the natural and beneficial tension between growth and returns, and is a simple, flexible yet effective way
of making the appropriate tradeoffs inherent in our growth strategy. Executives must achieve an appropriate balance between
both growth and delivery of earnings in order to earn their vested awards, and those awards will – in turn – be worth more as
underlying performance and growth drive shareholder value. If performance on a single measure is above Threshold, while
the other is not, vesting is restricted and applies to the former only.
How have Threshold, On-Target and Stretch goals been calibrated?
The Committee has set challenging performance goals for the various levels of vesting after careful consideration of relevant
reference points including analyst expectations, IPO guidance and internal projections. The table below lists the specific
reference points and rationales that were used to set each performance goal:
Measure
Performance Level
Reference points/Rationale used
Revenue Growth
(CAGR% over 3 years)
Earnings per Share
(Annual average, 2021)
≥50%
≥40%
≥30%
Stretch
Analyst consensus plus c.10% points
On target
Analyst consensus average
Threshold
Analyst consensus less c.10% points
Above 1.6p
Stretch
Above derived analyst range
Positive
On target
Consistent with target of profitability over growth focus
Above (1.1p)
Threshold
Lower end of derived analyst range
We gave detailed consideration to analyst expectations,
referring to the latest available forecasts as at December 2018.
Using 2018 as the base year for growth, consensus projections
for 2021 guided the setting of the on-target goal for Revenue
Growth. Setting the on-target goal according to average analyst
expectations signals to all that ‘expected incentives’ will be
paid for delivering ‘expected performance’. We believe this
is fair.
However, there is no doubt the revenue growth objectives are
exciting but remain challenging. Achieving the analyst consensus
revenue growth merely triggers a Target, not a Maximum
vesting of the shares. The Stretch or Maximum target which
would trigger a 100% vesting is higher again. Maximum is
c.10% points above average Consensus and Threshold (the
point at which any vesting occurs at all) is c.10% points below
the average Consensus.
The Committee believes that the performance range between
Threshold and Stretch around the on-target goal, guided by
analyst estimates, is appropriate, challenging and robust given
a range of market conditions.
Funding Circle’s EPS goals were calibrated in a similar way
to the approach adopted for our revenue goals. We used
analyst estimates and forward forecasts, although analyst
models for forecasting EPS lack some detail. Specifically,
the on-target goal of "Positive EPS" is consistent with the
"Growth strategy". EPS goals have been set after accounting
for expected annual dilution.
Annual Report and Accounts 2018
69
Corporate governance Legacy Arrangements
Executive Directors may be eligible to receive relevant
payments from any award made prior to the approval of the
Remuneration Policy (such as the vesting of share awards
made prior to the IPO or prior to the appointment of an
individual to the Board). Details of any such payments will be
set out in the Annual Report on Remuneration as they arise.
For example, as further explained in note 4 to the single total
figure of remuneration table on page 74 of this Report, the
Executive Directors were awarded unapproved share options
in June 2018 (the “Pre IPO Exec Grants”) which continue to
vest following the IPO.
Malus and clawback policy
All LTIP awards and the Pre IPO Exec Grants are subject to
malus and clawback provisions. In certain circumstances
the Board may at any time prior to the fifth anniversary of the
grant date of an LTIP Award reduce the LTIP Award (to zero
if appropriate) or impose additional conditions on the LTIP
Award to the extent that cash and/or Shares have not yet been
delivered in satisfaction of the LTIP Award; or if cash and/or
Shares have been delivered in satisfaction of the LTIP Award,
require that the participant either returns some or all of the Shares
acquired pursuant to the LTIP Award or make a cash payment
to the Company in respect of the cash or Shares delivered.
The Board will retain the discretion to calculate the amount
subject to recovery, including whether or not to claw back
such amount gross or net of any tax or social security
contributions applicable to the LTIP Award.
The Board may invoke these malus and clawback provisions
where, during the period beginning on the grant date (or, where
an LTIP Award is subject to a performance condition, at the
start of the performance period) and ending on the fifth
anniversary of the grant date, there has been:
- a material misstatement of the audited accounts of a
member of the Group;
- an error in assessing a performance condition applicable
to an LTIP Award or in the information or assumptions on
which the LTIP Award was granted, vests or is released;
- a material failure of risk management in any member of the
Group or a relevant business unit;
- serious reputational damage to any member of the Group
or a relevant business unit; or
- serious misconduct or material error on the part of
the participant.
Directors’ remuneration policy continued
Long-term incentive plan continued
How has the impact of new accounting standards
(specifically IFRS 16) been reflected?
Funding Circle will adopt IFRS 16 in 2019, which will result in
restated financial figures. This is expected to have minimal
impact on revenue and EPS so the proposed goals do not
require adjustment. However, it is possible that future accounting
standard changes may have a larger impact, and the scheme
rules allow for retrospective adjustments to LTIP targets in
this circumstance.
How the matrix works for LTIP payouts
The vesting of LTIP Awards in three years’ time will be based
on the matrix shown above. By way of illustration, if Target
(positive) EPS is achieved at the same time that revenues
grow 40% annually, 50% of the shares vest. This reflects the
underlying difficulty of achieving these two challenging goals
simultaneously. If, instead, EPS is only (-1.1 pence) and
revenue growth is no better than 30% (the threshold level of
performance required for any awards to vest during this
three-year period) then a 13.8% payout will be awarded.
As EPS and revenue growth achievements vary, so does vesting,
as reflected in the matrix. If we have achieved our stretch EPS
goal (+1.6 pence), for example, then improved revenue growth
increases vesting from 58.8% (Threshold revenue growth)
to 72.5% (Target revenue growth), and eventually to 100%
(Stretch revenue growth). This demonstrates the importance
of growth to us over this three-year period.
In turn, if the EPS is at Threshold (above -1.1 pence), then
improvements in revenue growth will increase the vesting from
25% (Threshold revenue growth) to 38.8% (Target revenue
growth), and eventually to 66.3% (Stretch revenue growth).
This again underlines the importance of growth to us over
this three-year period.
The maximum payout of 100% vesting will only occur if both the
revenue growth and EPS stretch goals are met. The maximum
LTIP grant cannot exceed the median of the maximum total
direct compensation of our tailored peer group used for
market benchmarking purposes (less base pay).
Illustrations of the application of the Remuneration Policy
CEO
£
£0.2m
£0.2m
Minimum
CFO
£
£0.3m
£0.3m
Minimum
£2.18m
£1.98m
£0.2m
Maximum
£1.42m
£1.12m
£0.3m
Maximum
£1.19m
£0.99m
£0.2m
Target
£0.86m
£0.56m
£0.3m
Target
Variable
Fixed
70
Funding Circle Holdings plc
Corporate governance If a participant dies, unless the Committee decides otherwise,
their LTIP Award will vest (and be released) as soon as
reasonably practicable after the date of death taking into
account any applicable performance conditions measured up
to that point and, unless the Committee decides otherwise,
the proportion of the performance period which has elapsed.
LTIP Options may normally be exercised to the extent vested
for a period of six months after release or 12 months after
death (or such other period as the Committee may determine).
Vested LTIP Awards: If a participant ceases Group
Employment during the holding period of a vested LTIP Award,
their LTIP Award will normally be released at the end of the
holding period, unless the Committee determines that it
should be released as soon as reasonably practicable after
the cessation of Group Employment. However if the participant
is dismissed as a result of gross misconduct, the vested LTIP
Award will lapse. If a participant dies during the holding period,
their LTIP Award will be released as soon as reasonably
practicable after the date of death.
Where LTIP Options have already vested and been released on
the date of cessation of Group Employment, those LTIP Options
may normally be exercised for a period of six months from the
date of cessation. If a participant dies, a vested LTIP Option
may normally be exercised until the first anniversary of the death.
Pre-IPO Awards: All pre-IPO awards lapse in the event of dismissal
for cause or other disciplinary reasons (as determined by the
discretion of the Committee). Subject to this, unvested pre-IPO
awards lapse unless the Committee exercises its discretion to
permit exercise on terms it determines. Vested pre-IPO awards
may be exercised at any time until the tenth anniversary of the
date of grant.
An Executive Director’s employment may be terminated by
payment in lieu of notice, equal to the basic salary that would
have been payable. The employer may in its discretion determine
that the payment in lieu will be paid in monthly instalments
over the notice period and subject to reduction if the Executive
Director receives income from an alternative employment or
engagement. Discretion to make a payment in lieu of notice
will not be exercised if notice of termination of the CEO’s employment
is given or received in circumstances where he is determined
to be a “good leaver” under the Company’s employee share plans.
Discretions reserved in operating incentive plans
The Committee will operate the LTIP in accordance with its
rules and the above Remuneration Policy table. The Committee
retains certain discretions, consistent with market practice, in
relation to the operation and administration of the plan including:
-
-
-
-
the determination of performance measures and targets
and resultant vesting and payout levels;
the ability to amend or substitute a performance condition if
one or more events occur which cause the Committee to
reasonably consider that an amended or substituted
performance condition would be more appropriate and
would not be materially less difficult to satisfy than
originally intended;
the determination of the treatment of individuals who leave
employment, based on the rules of the LTIP, and the treatment
of the awards on exceptional events, such as a change of
control of the Company; and
the ability to make adjustments to existing awards in certain
circumstances (e.g. rights issues or corporate restructurings).
Executive Directors’ service contracts
The CEO entered into a new service contract in September 2018.
The CFO entered into his service contract in July 2017 and
this contract did not change on IPO. The Executive Directors’
contracts are terminable by either the employer or the individual
on 12 months’ notice for the CEO and six months’ notice for
the CFO.
Executive Directors are eligible to receive a contribution to
the Funding Circle Ltd defined contribution pension scheme.
Currently, contributions are set to 2% of base salary per annum
in line with the contribution made to other Funding Circle
employees. The CEO has waived his right to any pension
contribution. Executive Directors also receive private healthcare
and life assurance. Executive Directors are also entitled to
reimbursement of all travelling, hotel, entertainment and
other expenses incurred in the proper performance of their
respective duties.
Cessation of Employment
Unvested LTIP Awards: Ordinarily unvested LTIP Awards will
lapse upon a participant ceasing to be employed by or hold
office with the Group (“Group Employment”).
Unless the participant is dismissed for cause, the Committee
will have the discretion to allow any unvested LTIP Award to
continue until the date when it would have normally have been
released if the participant had not ceased Group Employment.
The Committee retains discretion, however, to allow the LTIP
Award to vest and be released earlier when the participant
ceases Group Employment, or some other time. The extent
(if at all) to which an LTIP Award vests in these circumstances
will be determined by the Committee, taking into account the
satisfaction of the performance conditions applicable to the
LTIP Award measured over the original performance period
(or to such earlier point, if the LTIP Award is to be released
at an earlier date) and such other factors as the Committee
consider relevant and, unless the Committee decides
otherwise, the proportion of the performance period which
has elapsed on cessation of Group Employment.
Annual Report and Accounts 2018
71
Corporate governance For an internal appointment, any legacy arrangements will
either continue on their original terms or be adjusted to reflect
the new appointment, as appropriate.
For external and internal appointments, the Committee may
agree that the Company will meet certain relocation expenses
as it considers appropriate in the year of appointment and for
a further two years.
For external candidates, it may be necessary to make
additional awards in connection with the recruitment to buy
out awards forfeited by the individual on leaving a previous
employer if it considers the cost can be justified and it is in the
best interests of the Company. Buy out awards are not subject
to a formal cap. The Committee will seek to make buy outs
subject to what are, in its opinion, comparable requirements
in terms of service and performance.
Policy on external appointments
Executive Directors may hold external directorships and retain
any fees for such directorships if the Board determines that
such appointments do not cause any conflict of interest.
Other considerations
Pay and employment conditions generally in the Group are taken
into account when setting Executive Directors’ remuneration.
The Committee receives regular updates on overall pay
and conditions in the Group.
The Committee considers it is important for all employees to
have the opportunity to become shareholders in the Company
and currently all employees are eligible to participate in the
LTIP. Awards made to employees other than the Executive
Directors are not generally subject to performance conditions.
The Company did not consult with employees in preparing this
Remuneration Report.
The Committee understands the importance of listening to the
views of the Company’s shareholders and takes account of the
guidelines of investor bodies and shareholder views in determining
the remuneration arrangements in operation within the Group.
The Chair of the Committee consulted with the Company’s
major shareholders during the development of the Policy set
out above and in preparing this Remuneration Report.
Directors’ remuneration policy continued
Change of Control Policy
In the event of a change of control of the Company, LTIP Awards
will vest (and be released) early. The proportion of any unvested
LTIP Awards which vest will be determined by the Board,
taking into account the extent to which performance conditions
have been satisfied at that time and such other factors as the
Board considers relevant and, unless the Board determines
otherwise, the proportion of the performance period which
has elapsed. LTIP Options will normally be exercisable for one
month following the change of control, after which time they
will lapse. Alternatively, the Board may permit LTIP Awards to
be exchanged for equivalent awards of shares in a different
company (including the acquiring company). If the change of
control is an internal reorganisation of the Group (or if the
Board so decides), participants may be required to exchange
their LTIP Awards.
In respect of pre-IPO awards, the Company has agreed that
additional protection will apply in the event of a termination of
their employment or engagement in anticipation of, upon or
within 12 months following a change of control of the Company,
where such termination is deemed to be connected with the
change of control. In those circumstances, the relevant individual
will be entitled to receive a cash payment or other form of
award (the “replacement award”) which vests upon the
termination of their employment. The value of the replacement
award will be determined by reference to the portion of the
participant’s unvested pre-IPO awards that would have vested
(but for the change of control) over the period of 24 months
following the change of control or, if later, the 24 months
following their termination. The agreed provisions are subject
to the Company’s discretion to determine that a greater
number of Shares subject to a pre-IPO award should vest
upon a change of control.
Shareholding requirements
The Committee recognises the importance of aligning
Executive Directors and shareholders’ interests through
significant shareholdings in the group. The Executive Directors
are expected to build up a shareholding of equivalent value to
200% of their base salary. All of the after-tax number of vested
LTIP shares vested under any of the Company’s discretionary
share incentive arrangements must be retained towards
satisfaction of this requirement, which is expected to be met
within five years of its introduction (subject to personal
circumstances). The extent to which the shareholding
requirements have been met by the Executive Directors is
detailed on page 75.
Recruitment policy
The Company’s recruitment remuneration policy aims to give
the Committee sufficient flexibility to secure the appointment
of high calibre executives to strengthen the management
team and secure the skill sets necessary to deliver the Group’s
strategic aims. While the Committee will seek to align a new
Executive Director’s remuneration package to the Company’s
Remuneration Policy as set out above, there will inevitably
be differences particularly in relation to base pay for new
Executives who are not already significant shareholders.
72
Funding Circle Holdings plc
Corporate governance Annual report on remuneration
Non-Executive Directors’ remuneration
Element of remuneration
Key features
Purpose and link to strategy
Maximum opportunity
Fees
n/a
Fees are set at a level to reflect
the amount of time and level
of involvement required in
order to carry out their duties
as members of the Board and
its Committees and to attract
and retain Non-Executive
Directors of the highest calibre
with relevant commercial and
other experience.
The fees paid to the
Non-Executive Directors are
determined by the Board as
a whole. The Chairman and
the Non-Executive Directors
are paid annual fees and do
not participate in any of the
Company’s post-IPO incentive
arrangements or receive
any pension provision or
other benefits.
Additional fees are payable for
acting as Senior Independent
Directors and for chairing the
Audit Committee, Risk and
Compliance Committee and
Remuneration Committee.
Additional fees are also
payable if a Non-Executive
Director serves on multiple
Committees.
The Non-Executive Directors
are not entitled to any
compensation on termination
of their appointment.
The Non-Executive Directors
are entitled to reimbursement
of reasonable expenses.
As an early stage private company, which did not pay Directors’ fees, the Company has historically granted options to certain
Non-Executive Directors under the Company’s pre-IPO share option plan. Although the options granted will continue to vest and
be held by those Non-Executive Directors going forwards, no further options will be granted to Non-Executive Directors under
any of the Company’s share option plans.
Cath Keers and Geeta Gopalan both received an additional fee on appointment as Director. Cath Keers received a pre-admission
fee of £100,000 in September and Geeta Gopalan received a fee of £100,000 on joining the Board in November, in both cases to
reflect additional work done in advance of their appointment. It was a condition of this additional fee that the post-tax amount be
used to acquire shares in the Company.
Letters of appointment
All Non-Executive Directors have letters of appointment with the Company. The appointments of each of the Non-Executive
Directors are for an initial term of three years from March 2018 for Cath Keers, November 2018 for Geeta Gopalan and
September 2018 for all other Non-Executive Directors, unless terminated earlier by either party on one month’s notice. The
appointment of each Non-Executive Director is also subject to re-election when appropriate by the Company in general meeting.
Recruitment policy
In recruiting a new Non-Executive Director, the Committee will use the policy set out in the table above.
Annual Report and Accounts 2018
73
Corporate governance Annual report on remuneration continued
This part of the report sets out how the Remuneration Policy has been applied since the IPO and how the Committee intends to apply
the Remuneration Policy going forward. An advisory shareholder resolution to approve this report will be proposed at the AGM.
We also give details about the Directors’ share interests and some further details about the Committee.
Single total figure of remuneration (audited)
The following tables set out the aggregate emoluments earned by the Directors in the years ended 31 December 2018
and 2017 respectively.
2018
Executive Directors
Samir Desai
Sean Glithero
Non-Executive Directors
Andrew Learoyd
Ed Wray
Eric Daniels
Bob Steel
Cath Keers2, 6
Geeta Gopalan2, 7
Hendrik Nelis5
Neil Rimer5
Salary
and fees
£000
Taxable benefits 1
£000
Bonus
£000
Pensions 3
£000
210
300
50
16
16
16
154
111
—
—
1
—
—
—
20
—
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
Long-term
incentives 4
£000
3,870
777
—
—
—
—
—
—
—
—
Total
£000
4,081
1,082
50
16
36
16
156
111
—
—
1. For Executive Directors, benefits correspond to the taxable value of benefits received during the relevant financial year and principally include private medical cover and life
assurance cover. Taxable benefits for Non-Executive Directors relate to reimbursement of travel to the workplace. Certain Non-Executive Directors’ expenses have been
classified as taxable benefits. In such cases, the Company will ensure that the Director is kept whole by settling the expense and any related tax. The figures shown include
the cost of the taxable benefit plus the related tax charge.
2. Cath Keers received a pre-admission fee of £100,000 in September and Geeta Gopalan received a fee of £100,000 on joining the Board in November, in both cases to reflect
additional work done in advance of their appointment. It was a condition of this additional fee that the post-tax amount be used to acquire shares in the Company.
3. Executive Directors are entitled to 2% of base salary as pension contribution. The CEO has waived his right to the pension contribution.
4. The Executive Directors were awarded unapproved share options in June 2018 prior to IPO under the pre-IPO share plan ("Pre-IPO Exec Options"). The Pre-IPO Exec Options are
short-term incentives, having no performance conditions other than continued employment and vesting over a five-year period, with the first 25% vesting on 1 June 2020. All of
the options were unvested at 31 December 2018. The number in the table above for the value of the Pre-IPO Exec Options is calculated on the basis of the fair market value on
grant of £1.80. In addition to the above, as set out in the table of Directors' vested and unvested share awards, on IPO the vested and unvested ESS and growth shares that were
granted in previous years were converted into ordinary shares. The unvested portion is held by the trustee of the Company's employee benefit trust and continues to vest on the
same vesting dates as before. Immediately prior to IPO, Samir Desai held 3,845,968 vested and 2,237,532 unvested shares and Sean Glithero held 216,763 vested and 650,290
unvested shares. The offer price at IPO was £4.40.
5. Hendrik Nelis and Neil Rimer, who are not independent Non-Executives, have waived their entitlement to a fee.
6. Appointed 10 May 2018.
7. Appointed 1 November 2018.
74
Funding Circle Holdings plc
Corporate governance 2017
Executive Directors
Samir Desai
Sean Glithero
Non-Executive Directors3
Andrew Learoyd
Ed Wray
Eric Daniels
Bob Steel
Hendrik Nelis
Neil Rimer
Salary
and fees
£000
202
75
—
—
—
—
—
—
Taxable benefits 1
£000
Bonus
£000
Pensions 2
£000
Long-term
incentives
£000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
£000
204
76
—
—
—
—
—
—
1. For Executive Directors, benefits correspond to the taxable value of benefits received during the relevant financial year and principally include private medical cover and life
assurance cover. Taxable benefits for Non-Executive Directors relate to reimbursement of travel to workplace.
2. Executive Directors were entitled to 1% of base salary as pension contribution.
3. No Non-Executive Directors were paid a fee in 2017.
Awards granted to the Executive Directors prior to the IPO continued to vest over time but there were no long-term incentives
awarded or eligible to vest in respect of performance for the financial periods to 31 December 2017 or 31 December 2018.
None of the Directors had a prospective entitlement to a defined benefit pension plan.
Directors’ shareholding and share interests (audited)
Table of Directors’ share interests as at 31 December 2018
Executive Directors
Samir Desai
Sean Glithero
Non-Executive Directors
Andrew Learoyd
Ed Wray
Eric Daniels
Bob Steel
Cath Keers
Geeta Gopalan
Hendrik Nelis
Neil Rimer
Beneficially
owned shares 1,2
Vested
awards
Unvested
awards
Total
14,207,345
162,573
—
—
4,044,813
18,252,158
1,082,140
1,244,713
1,642,888
1,543,538
—
614,754
12,045
13,216
—
—
87,500
658,900
324,610
337,500
—
—
—
—
12,500
12,500
58,594
12,500
—
—
—
—
1,742,888
2,214,938
383,204
964,754
12,045
13,216
—
—
1. Includes shares owned by connected persons. This does not include shares held by Samir Desai’s father (which were included in his stated shareholding for the purposes
of the Company’s prospectus in September 2018).
2. Vested growth and ESS shares are treated as legally owned shares.
The Company’s share ownership requirements are that Executive Directors shall (subject to personal circumstance) build
and maintain a shareholding equivalent to at least 200% of salary over five years. At the 2018 year end the CEO complied with
this requirement. The CFO was appointed to the Board on 28 November 2017 and currently holds vested shares equal to 94%
of two times salary, calculated on 19 February 2019 when the share price was £3.48. Unvested awards are not taken into
account. The shares are subject to a lock up arrangement which expires on close of business 3 October 2019.
Annual Report and Accounts 2018
75
Corporate governance Annual report on remuneration continued
Table of Directors’ vested and unvested share awards (audited)
Executive Directors
Samir Desai
Vested
Unvested
Sean Glithero
Vested
Unvested
Non-Executive Directors
Andrew Learoyd
Vested
Unvested
Ed Wray
Vested
Unvested
Eric Daniels
Vested
Unvested
Bob Steel
Vested
Unvested
Award type 1
Growth
ESS
Growth
Growth
ESS
Growth
Unapproved
Growth
Growth
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
No. of
awards at
31 December
2017
562,500
2,083,437
—
37,500
1,250,063
2,150,000
—
—
867,053
—
62,500
37,500
571,400
62,500
37,500
300,000
82,031
105,469
203,125
62,500
46,875
37,500
Awards
granted
in the year
Awards
lapsed
in the year
Awards
exercised
in the year 2
No. of
awards at
31 December
2018
Exercise price/
subscription price
Market price
on exercise
—
—
—
—
—
—
2,150,000
—
—
431,850
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Awards
vested
in the year
37,500
833,375
671,875
(37,500)
(833,375)
(671,875)
216,763
(216,763)
—
—
—
—
25,000
(25,000)
25,000
(25,000)
46,875
(46,875)
46,875
25,000
(46,875)
(25,000)
Date of
grant/vesting
commence
10/03/2014
18/06/2015
01/08/2017
10/03/2014
18/06/2015
01/08/2017
13/06/2018
01/10/2017
01/10/2017
13/06/2018
18/06/2015
18/06/2015
19/08/2011
18/06/2015
18/06/2015
22/04/2013
01/03/2016
01/03/2016
15/07/2014
18/06/2015
15/07/2014
18/06/2015
(2,708,468)
(54,190)
(104,296)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
600,000
208,344
671,875
—
416,688
1,478,125
2,150,000
162,573
650,290
431,850
87,500
12,500
571,400
87,500
12,500
195,704
128,906
58,594
250,000
87,500
—
12,500
£0.00
£0.00
£0.02
£0.00
£0.00
£0.02
£0.00
£0.02
£0.02
£0.00
£0.32
£0.32
£0.03
£0.32
£0.32
£0.03
£0.39
£0.39
£0.21
£0.35
£0.21
£0.35
n/a
£4.40
n/a
n/a
n/a
n/a
n/a
£4.40
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
£4.40
1. Historically there have been two different types of awards granted to Executive Directors: conditional shares (referred to in the table above as “ESS” and “Growth”) and unapproved
options (referred to in the table above as “Unapproved”). Other than in certain circumstances as set out on page 72 (e.g. on termination of employment or change of control),
unapproved options can be exercised during a period of 10 years from the date of grant.
2. The conditional shares (ESS and Growth) were not exercised but converted to ordinary shares on IPO as explained on page 74 and were sold.
76
Funding Circle Holdings plc
Corporate governance Table of Directors’ vested and unvested share awards (audited)
Awards
granted
in the year
Awards
lapsed
in the year
Non-Executive Directors
Andrew Learoyd
Executive Directors
Samir Desai
Vested
Unvested
Sean Glithero
Vested
Unvested
Vested
Unvested
Ed Wray
Vested
Unvested
Eric Daniels
Vested
Unvested
Bob Steel
Vested
Unvested
Award type 1
Growth
ESS
Growth
Growth
ESS
Growth
Unapproved
Growth
Growth
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
No. of
awards at
31 December
2017
562,500
2,083,437
—
37,500
1,250,063
2,150,000
—
—
—
867,053
62,500
37,500
571,400
62,500
37,500
300,000
82,031
105,469
203,125
62,500
46,875
37,500
2,150,000
431,850
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1. Historically there have been two different types of awards granted to Executive Directors: conditional shares (referred to in the table above as “ESS” and “Growth”) and unapproved
options (referred to in the table above as “Unapproved”). Other than in certain circumstances as set out on page 72 (e.g. on termination of employment or change of control),
unapproved options can be exercised during a period of 10 years from the date of grant.
2. The conditional shares (ESS and Growth) were not exercised but converted to ordinary shares on IPO as explained on page 74 and were sold.
Awards
vested
in the year
37,500
833,375
671,875
(37,500)
(833,375)
(671,875)
—
216,763
(216,763)
—
25,000
(25,000)
—
25,000
(25,000)
—
46,875
(46,875)
46,875
25,000
(46,875)
(25,000)
Awards
exercised
in the year 2
No. of
awards at
31 December
2018
—
(2,708,468)
—
—
—
—
—
(54,190)
—
—
—
—
—
—
—
(104,296)
—
—
—
—
—
—
600,000
208,344
671,875
—
416,688
1,478,125
2,150,000
162,573
650,290
431,850
87,500
12,500
571,400
87,500
12,500
195,704
128,906
58,594
250,000
87,500
—
12,500
Date of
grant/vesting
commence
10/03/2014
18/06/2015
01/08/2017
10/03/2014
18/06/2015
01/08/2017
13/06/2018
01/10/2017
01/10/2017
13/06/2018
18/06/2015
18/06/2015
19/08/2011
18/06/2015
18/06/2015
22/04/2013
01/03/2016
01/03/2016
15/07/2014
18/06/2015
15/07/2014
18/06/2015
Exercise price/
subscription price
Market price
on exercise
£0.00
£0.00
£0.02
£0.00
£0.00
£0.02
£0.00
£0.02
£0.02
£0.00
£0.32
£0.32
£0.03
£0.32
£0.32
£0.03
£0.39
£0.39
£0.21
£0.35
£0.21
£0.35
n/a
£4.40
n/a
n/a
n/a
n/a
n/a
£4.40
n/a
n/a
n/a
n/a
n/a
n/a
n/a
£4.40
n/a
n/a
n/a
n/a
n/a
n/a
Annual Report and Accounts 2018
77
Corporate governance Annual report on remuneration continued
Payments for loss of office
There were no payments for loss of office during the year.
Payments to former Directors
There were no payments made to former Directors during the year.
Performance graph and CEO remuneration table
The chart below illustrates the Company’s TSR performance compared with that of the FTSE 250 Index (excluding investment
companies), which Funding Circle became a constituent of on 24 December 2018. The graph shows the value of £100 invested
in Funding Circle at the IPO offer price of £4.40 per share on 3 October 2018 compared with the value of £100 invested in the
FTSE 250 Index (excluding investment companies).
£
120
100
80
60
40
20
0
03.10.2018
31.12.2018
Funding Circle Holdings plc
FTSE 250 constituents (excluding investment companies)
The table below sets out the CEO’s single figure of total remuneration.
£000
CEO total remuneration1,2
2018
4,081
2017
204
2016
160
2015
160
2014
147
1. Prior to IPO, share options awarded to the CEO did not have performance conditions and therefore the vested number of shares equals the maximum number of shares that
could have been received.
2. The CEO received no bonus during the five-year period.
Percentage change in CEO remuneration compared with employees
The table below shows the average increase in each component between the CEO and the average employee in the Company
from 2017 to 2018.
Salary
Benefits
No bonus was paid to the CEO in 2017 or 2018.
Change in remuneration levels
CEO
4%
—
Average
employee
4%
—
Relative importance of spend on pay
The table below sets out relative importance of spend on pay. There have been no dividends paid to date.
Revenue and adjusted EBITDA have been presented as these are two key performance measures used by the Directors
in assessing performance.
Revenue
Adjusted EBITDA
Employee costs (see note 7)
Average number of employees
2018
£m
141.9
(28.5)
84.8
954
2017
£m
94.5
(25.1)
60.5
719
% change
50%
14%
40%
33%
78
Funding Circle Holdings plc
Corporate governance Fees for the Chairman and Non-Executive Directors
The fees payable to the Non-Executive Directors following the IPO and for 2019 are as set out below:
Chairman
Non-Executive Director base fee
Committee Chairman fees (other than the Nomination Committee)
Senior Independent Director fee
£200,000
£55,000
£10,000
£10,000
In addition to the above fees, Ed Wray receives £10,000 for his involvement on multiple Committees.
Implementation of the Remuneration Policy for the year ended 31 December 2019
The table below shows the salaries for the Executive Directors as at 1 January 2019 in comparison to base salary as at
1 January 2018.
£000
Samir Desai
Sean Glithero
1 Jan 2019
1 Jan 2018
% change
210
300
202
300
4%
—
The CFO will continue to receive a pension contribution currently equal to 2% of base salary. This will increase to 3% of base salary
from 6 April 2019 in line with contributions for other employees. The CEO will continue to waive his right to this pension contribution.
Salaries for Executive Directors are reviewed each year taking into account the Remuneration Policy set out in this report.
LTIP performance measures are set to be stretching and achievable as further described on page 68.
2018 Non-Executive Director remuneration
It has been determined that the Non-Executive Director fees will remain as set out in the table above.
External advisers
During the year ended 31 December 2018, the Committee received advice from Pearl Meyer, who were appointed by the
Committee in November 2018 following a review process. Deloitte also provided advice on remuneration and benchmarking
to the Company in advance of the IPO. The Committee is satisfied that the advice it has received is independent and that the
Pearl Meyer and Deloitte engagement partners and teams that have provided remuneration advice do not have connections
with the Company that might impair their independence. The fees paid to Deloitte and Pearl Meyer in 2018 in relation to advice
provided to the Committee (or to the Company in advance of the IPO) were agreed by the Company in advance for specific
projects and were £130,000 and £20,000 respectively.
This report has been prepared in accordance with the Companies Act 2006, Schedule 8 of the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008 (as amended in 2013) and the UKLA’s Listing Rules.
Annual Report and Accounts 2018
79
Corporate governance Report of the Directors
for the year ended 31 December 2018
The Directors present their report (the "Directors’ Report”) and the Annual Report and Accounts for the year ended 31 December 2018.
During the year the Company changed its name from Funding Circle Holdings Limited to Funding Circle Holdings plc.
Information required to be part of the Directors’ Report either by statute or by Listing Rule 9.8 can be found either in this section
or elsewhere in this document, as indicated in the table below. All information located elsewhere in this document is incorporated
into this Directors’ Report by reference:
Section of Annual Report
Page reference
Information required by LR9.8
Statement of corporate governance
Going concern
Directors’ interests
Corporate Governance Statement (page 46)
Risk Management (page 45)
Remuneration Report (page 75)
Long-term incentive schemes
Remuneration Report (pages 68 to 70)
Powers for the Company to buy back its shares
Directors’ Report (page 81)
Allotment of shares during the year
Significant shareholders
Related party agreements
Statutory information
Employee involvement
Note 18 to the financial statements
Directors’ Report (page 82)
Note 26 to the financial statements
Strategic Report – our people (page 27)
Policy concerning the employment of disabled persons
Strategic Report – our people (page 27)
Financial instruments
Future developments of the business
Greenhouse gas emissions
Significant agreements
Non-financial reporting
Note 2 to the financial statements
Strategic Report (pages 5 to 23)
Strategic Report – corporate social responsibility (page 29)
Directors' Report (page 82)
Strategic Report – see below
Management Report
This Directors’ Report, together with the Strategic Report on pages 1 to 45, forms the Management Report for the purposes
of DTR 4.1.5R.
Strategic Report
Section 414A of the Companies Act 2006 (the “Act”) requires the Directors to present a Strategic Report in the Annual Report
and Accounts. The information can be found on pages 1 to 45.
The Company has chosen, in accordance with Section 414C (11) of the Act and as noted in this Directors’ Report, to include
certain matters in its Strategic Report that would otherwise be disclosed in this Directors’ Report.
Section 414C of the Act requires the Company to include within its Strategic Report a non-financial statement setting out such
information as is required by Section 414CB of the Act. Such information is set out in the our people section on pages 24 to 27,
the corporate social responsibility section on pages 28 and 29, in the Business Model and Risk Profile sections on pages 10 to 23
and in the Risk Management and Going Concern and Viability Statement sections on pages 36 to 45.
Directors
The Directors of the Company during the year and for the period up to the date of this report were:
Andrew Learoyd (Chair)
Samir Desai CBE (co-founder, Chief Executive Officer)
Sean Glithero (Chief Financial Officer)
Eric Daniels (Independent Non-Executive Director)
Geeta Gopalan – appointed 1 November 2018 (Independent Non-Executive Director)
Cath Keers – appointed 10 May 2018 (Independent Non-Executive Director)
Bob Steel (Senior Independent Director)
Ed Wray (Independent Non-Executive Director)
Hendrik Nelis (Non-Executive Director)
Neil Rimer (Non-Executive Director)
80
Funding Circle Holdings plc
Corporate governance Insurance and indemnities
The Company maintains appropriate insurance to cover Directors’
and Officers’ liability for itself and its subsidiaries. In addition
the Company indemnifies each Director under a qualifying
indemnity for the purposes of Section 236 of the Companies
Act 2006 pursuant to a separate deed of indemnity. Such
indemnities contain provisions that are permitted by the
Director liability provisions of the Companies Act and the
Company’s Articles.
Share capital
The Company’s issued share capital comprises ordinary shares
of £0.001, each of which are listed on the London Stock Exchange.
The issued share capital of the Company as at 31 December 2018
comprises 346,033,078 ordinary shares of £0.001 each. Further
information regarding the Company’s issued share capital can
be found on page 118 of the financial statements.
Details of the shares held by the Group’s Employee Benefit
Trust are disclosed in note 18 to the financial statements.
Directors’ interests
The number of ordinary shares in which the Directors were
beneficially interested as at 31 December 2018 are set out
in the Directors’ Remuneration Report on page 75.
In line with the requirements of the Companies Act, each
Director has notified the Company of any situation in which
he or she has, or could have, a direct or indirect interest that
conflicts, or possibly may conflict, with the interests of the
Company (a situational conflict). These were considered and
approved by the Board in accordance with the Articles and
each Director was informed of the authorisation and any
terms on which it was given. The Board has formal procedures
to deal with Directors’ conflicts of interest.
None of the Directors has a material interest in any significant
contract with the Company or any member of its Group.
Results and dividends
The Group’s and the Company’s audited financial statements
for the year are set out on pages 90 to 140. On admission, the
Company paid an accrued dividend of £523,755.54 in cash to
the holders of Series A preferred shares in accordance with
the Articles of Association in place prior to the IPO.
The Directors do not recommend payment of a final dividend
for 2018 (2017: £nil).
Appointment and replacement of Directors
The rules governing the appointment and replacement of
Directors are set out in the Company's Articles of Association
and are governed by the 2016 Code, the Companies Act 2006
and related legislation. At the AGM, all Directors will offer
themselves for re-election to the Company's Board.
Amendment of the Articles
The Company’s Articles of Association may only be amended by
a special resolution at a general meeting of shareholders. No
amendments are proposed to be made to the existing Articles
of Association at the forthcoming Annual General Meeting.
Authority to allot or purchase the Company’s shares
The Articles permit the Directors to issue or approve the
purchase by the Company of its own shares, subject to
obtaining shareholders’ prior approval. The authority to issue
or buy back shares will expire at the 2019 AGM, and it will be
proposed at the meeting that the Directors be granted new
authorities to issue and buy back shares. The Directors
currently have authority to approve the Company's purchase
of up to 34,505,000 of the Company’s ordinary shares.
However, the Company did not repurchase any of its
ordinary shares during the year.
Rights attaching to shares
All shares have the same rights (including voting and dividend
rights and rights on a return of capital) and restrictions as set
out in the Articles, described below. Except in relation to dividends
and rights on a liquidation of the Company, the shareholders have
no rights to share in the profits of the Company. The Company’s
shares are not redeemable. However, following any grant of
authority from shareholders, the Company may purchase or
contract to purchase any of the shares on or off market,
subject to the Companies Act 2006 and the requirements
of the Listing Rules.
Voting rights
All members who hold ordinary shares are entitled to attend
and vote at the AGM. On a show of hands at a general meeting,
every member present in person shall have one vote and on
a poll, every member present in person or by proxy shall have
one vote for every share of which he or she is the holder.
No shareholder holds ordinary shares carrying special rights
relating to the control of the Company and the Directors are not
aware of any agreements between holders of the Company’s
shares that may result in restrictions on voting rights. Shares
held by the Company’s Employee Benefit Trust rank pari passu
with the shares in issue and have no special rights, but voting
rights and rights of acceptance of any offer relating to the
shares rest with the plan’s Trustees and are not exercisable
by employees.
Restrictions on transfer of securities
The Articles do not contain any restrictions on the transfer
of ordinary shares in the Company other than the usual
restrictions applicable where any amount is unpaid on a share.
All issued share capital of the Company at the date of this report
is fully paid. Certain restrictions are also imposed by laws and
regulations (such as insider trading and marketing requirements
relating to closed periods) and requirements of the Listing Rules
whereby Directors and certain employees of the Company
require Board approval to deal in the Company’s securities.
For a period of one year following the IPO each of the Directors
(and certain of their immediate family members) and the
members of the Global Leadership Team agreed not to dispose
of any of the ordinary shares they hold in the Company.
This lock up period expires at the close of business on
3 October 2019.
For a period of 180 days following the IPO, all other shareholders
holding 0.25% of the Company immediately prior to the IPO
agreed not to dispose of any of the ordinary shares they hold
in the Company. This lock up period expires at the close of
business on 1 April 2019.
The above lock up arrangements are subject to certain
customary exceptions.
Annual Report and Accounts 2018
81
Corporate governance Report of the Directors continued
for the year ended 31 December 2018
Change of control
Save in respect of certain awards made to members of the Global Leadership Team and the Executive Directors under the Company’s
pre-IPO share plans (as further described on page 120) and a provision of the Company’s current long-term incentive plan (which may
cause options and awards granted to employees under such schemes to vest on takeover and as further described on page 71
of this report), there are no agreements between the Company and its Directors or employees providing for compensation for
loss of office or employment (whether through resignation, purported redundancy or otherwise) because of a takeover bid.
The Group is party to a limited number of funding agreements that include change of control provisions which, in the event of a
change of control of the Company, could result in the termination of those arrangements, generally resulting in the discontinuation
of further loan origination and termination of servicing by the Group under the affected arrangement.
Significant shareholdings
As at 31 December 2018 and 28 February 2019, the Company has been notified pursuant to DTR5, or is otherwise aware, of the
following significant interests in the issued ordinary share capital of the Company:
Name of Shareholder
Index Ventures
Aktieselskabet af 2.7.2018
Accel Partners
Merian Global Investors
Invesco Perpetual Asset Mgt
DST Managers
Union Square Ventures
Mr Samir Desai
Baillie Gifford & Co
Mr James Meekings
Number of
ordinary shares
as at
31 December
2018
Percentage
issued
share capital
as at
31 December
2018
Number of
ordinary shares
as at
28 February
2019
Percentage
issued
share capital
as at
28 February
2019
58,618,351
35,100,000
26,906,743
26,568,379
21,994,488
16,505,378
16,270,792
14,207,345 1
10,957,201
10,372,107 2
16.94
10.14
7.78
7.68
6.36
4.77
4.70
4.11
3.17
3.00
58,618,351
35,400,000
26,906,743
25,353,074
21,994,488
16,505,378
16,270,792
14,341,720 1
10,957,201
10,387,732 2
16.94
10.23
7.77
7.32
6.35
4.77
4.70
4.14
3.17
3.00
Nature of
holding
Direct
Indirect
Direct
Indirect
Indirect
Direct
Direct
Indirect
Direct and indirect
Indirect
1. This does not include shares held by Samir Desai’s father (which were included in his stated shareholding for the purposes of the Company’s prospectus in September 2018).
2. This does not include shares held by James Meekings’ father (which were included in his stated shareholding for the purposes of the Company’s prospectus in September 2018).
No disclosures have been made to the Company pursuant to DTR5 in the period between 28 February 2019 and 6 March 2019
(the latest practicable date prior to the date of this Report).
Research and development
The Group invests in the research and development of unique
technology and software products that enable the Group to
achieve its key performance objective of growing lending to
small businesses internationally whilst delivering attractive
risk-adjusted returns to investors.
Political donations
There were no political donations made during the year or the
previous year.
External branches
The Company has subsidiaries in the United States of America,
Germany, Spain and the Netherlands but the Group had no
registered external branches during the reporting period or
prior year.
Independent auditors
PricewaterhouseCoopers LLP (the “auditors”) have confirmed
their willingness to continue as independent auditors and will
retain appointment in accordance with Section 487 of the
Companies Act 2006.
Statement of disclosure of information to auditors
Each of the persons who is a Director at the date of approval
of this report confirms that:
- so far as the Director is aware, there is no relevant
audit information of which the Company’s auditors are
unaware; and
-
the Director has taken all the steps that he/she ought to have
taken as a Director in order to make himself/herself aware
of any relevant audit information and to establish that the
Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of s418 of the Companies
Act 2006.
2019 Annual General Meeting
The Company’s AGM will take place on 5 June 2019 at
65 Fleet Street, London, EC4Y 1HS. The Chairman, and the
Chairs of the Audit, Remuneration and Risk and Compliance
Committees, will be present to answer questions put to them
by shareholders. Electronic proxy voting will be available to
shareholders through both our Registrar’s website and the
CREST service. For shareholders who have not registered
for electronic communications, the website for voting is
www.shareview.co.uk. Voting at the AGM will be conducted
by way of a poll. The results will be posted on the Company’s
corporate website (www.corporate.fundingcircle.com) after
the meeting and notified to the UK Listing Authority.
82
Funding Circle Holdings plc
Corporate governance Statement of Directors’ responsibilities in respect of the financial statements
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law
and regulation.
The Directors, whose names and functions are listed in the
Corporate Governance Report, confirm that, to the best of
their knowledge:
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the Group and Company financial statements
in accordance with International Financial Reporting Standards
(“IFRSs”) as adopted by the European Union. 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:
-
-
the Group and Company financial statements, which
have been prepared in accordance with IFRSs as adopted by
the European Union, give a true and fair view of the assets,
liabilities, financial position and profit of the Group and
profit of the Company; and
the Directors’ 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.
In the case of each Director in office at the date the Directors’
Report is approved:
- so far as the Director is aware, there is no relevant audit
information of which the Group and Company’s auditors
are 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 Group
and Company’s auditors are aware of that information.
Approved by the Board and signed on its behalf.
Samir Desai
Chief Executive Officer
7 March 2019
- select suitable accounting policies and then apply
them consistently;
- state whether applicable IFRSs as adopted by the European
Union have been followed for the Group and Company
financial statements, subject to any material departures
disclosed and explained in the financial statements;
- make judgements and accounting estimates that are
reasonable and prudent; and
- prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the Group
and Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group 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 comply
with the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
The Directors are also 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 responsible for the maintenance and integrity
of the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts,
taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to
assess the Group and Company’s performance, business
model and strategy.
Annual Report and Accounts 2018
83
Corporate governance Independent auditors’ report
to the members of Funding Circle Holdings plc
Report on the audit of the Group financial statements
Opinion
In our opinion, Funding Circle Holdings plc’s Group financial statements (the “financial statements”):
- give a true and fair view of the state of the Group’s affairs as at 31 December 2018 and of its loss and cash flows for the year
then ended;
- have been properly prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the
European Union; and
- have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise:
the Consolidated balance sheet as at 31 December 2018; the Consolidated statement of comprehensive income, the Consolidated
statement of changes in equity, the Consolidated statement of cash flows for the year then ended; and the notes to the financial
statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements
section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the Group.
Other than those disclosed in note 5 to the financial statements, we have provided no non-audit services to the Group in the
period from 1 January 2018 to 31 December 2018.
Our audit approach
Overview
Materiality
Audit scope
- Overall Group materiality: £2.2 million (2017: £945,000), based on 5% of loss
before tax (adjusted for exceptional costs in respect of the IPO). We considered
it appropriate to reduce materiality through exclusion of IPO costs from our
calculation given that these are material and one-off in nature.
- We have changed the benchmark from our 2017 audit, for which materiality was
based on 1% of revenues. We consider loss before tax (adjusted for exceptional
costs in respect of the IPO) to be the most appropriate benchmark used in
assessing the performance of the Group now that the business is listed.
- Our audit included full scope audits of the UK and US components which
accounted for approximately 92% of the Group’s revenues and 71% of the
Group’s loss before tax (adjusted for exceptional costs in respect of the IPO).
- We performed specified procedures in respect of the Central Europe (“CE”)
component and at a Group level which together with the full scope audits
accounted for 100% of revenues and approximately 78% of the Group’s loss
before tax (adjusted for exceptional costs in respect of the IPO).
Key audit matters
- Valuation of the expected credit loss provision.
-
Impairment of goodwill.
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.
84
Funding Circle Holdings plc
Financial statements Report on the audit of the Group financial statements continued
Our audit approach continued
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and
regulations related to the Group’s provision of regulated products and services under its Financial Conduct Authority (“FCA”)
licence, and we considered the extent to which non-compliance might have a material effect on the financial statements.
We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as
the Companies Act 2006. 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 the posting of
inappropriate journals and the application of management bias in areas of estimation or judgement. 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:
- reading the Group’s FCA authorisations and permissions and verifying that regulatory submissions are up to date;
- conducting inquiries of 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 investigations
of such matters;
-
-
identifying and testing journal entries and period-end adjustments;
incorporated unpredictability into our testing; and
- challenging assumptions and judgements made by management in its accounting estimates, in particular in relation to the
expected credit loss provision and goodwill impairment assessments.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error,
as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement (whether
or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the
allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we
make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all
risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Valuation of the expected credit loss provision
Refer to note 1 (Accounting policy – Financial instruments);
and note 17 (Provisions)
- We assessed the appropriateness of the methodology
applied to determine the expected credit loss provision
with reference to the requirements of IFRS 9.
In certain circumstances, the Group has entered into
arrangements with institutional investors providing financial
guarantees whereby the Group is required to make payments
when the underlying borrower fails to meet its obligation under
the loan contract.
With the introduction of IFRS 9 from 1 January 2018, a number
of additional judgements and assumptions are introduced and
reflected in the financial statements, giving rise to a change in
the basis on which the credit risk for such arrangements is
determined and correspondingly the valuation.
The valuation of the expected credit loss requires estimation,
and the calculation has a number of inputs that consider past
experience as well as forward-looking information.
The key elements of estimation within the expected credit loss
calculation that have the greatest impact on the provision are
borrower defaults and historical loss trends.
- Given application from 1 January 2018, we tested the
opening credit loss provision and assessed the
appropriateness of the transitional disclosures.
- We tested the mathematical accuracy of the models and
corroborated the underlying data (i.e. key terms of the loan
book information including the loan amount and dates of
maturity, scheduled repayment and the latest repayment
date) back to supporting documentation.
- We have tested historical defaults on the loan book where
financial guarantees are in place and, where relevant, across
a similar portfolio of loans under management as this has
the greatest impact on estimations of the expected credit loss.
- We have compared the historical default rates experienced
to the loss rate applied within the credit loss provision models
and found them to be in agreement.
- We performed sensitivity analysis and determined the range
of credit loss rates within which no material misstatement
would result to be reasonable.
Annual Report and Accounts 2018
85
Financial statements Independent auditors’ report continued
to the members of Funding Circle Holdings plc
Report on the audit of the Group financial statements continued
Our audit approach continued
Key audit matters continued
Key audit matter
Impairment of Goodwill
Refer to Report of the Audit Committee – Significant issues
considered in relation to the financial statements; note 2
(Accounting policy); and note 11 (Goodwill).
The Group holds goodwill in respect of the previous
acquisitions of the Central Europe (£30.6 million) and
the US (£11.7 million) businesses.
IAS 36 ‘Impairment of Assets’ requires that goodwill is subject
to an impairment review at least annually, or more frequently
when there is evidence of a trigger event. Specific disclosures
in respect of the impairment assessment are also required.
The Directors’ annual impairment assessment concluded
that there was headroom over the varying value. The key
assumptions in this assessment included the forecast revenue
growth, the discount rate and the perpetuity growth rate.
We have focused on this area as the preparation of these
assessments involves a significant degree of estimation.
How our audit addressed the key audit matter
Our audit procedures comprised the following:
-
tested the methodology built into the model produced by
management to determine whether the Directors’ impairment
assessment addressed the requirements of the financial
reporting framework, and reperformed the calculations;
- evaluated the accuracy of prior years’ forecasts in light of past
performance and actual results achieved to assess the quality
and reliability of management’s forecasts for each CGU;
- challenged management over the reasonableness of the key
assumptions inherent in the model;
- agreed information, in particular forecast financial
information, to budgets and forecasts approved by
senior management; and
- assessed the appropriateness of the discount rate
assumptions by comparing them with that of comparable
businesses.
We also performed sensitivity analysis around the key drivers
of the cash flow forecasts, being:
-
-
-
the revenue growth rate for the first five years;
the perpetuity growth rate; and
the discount rate.
Having ascertained the extent of change in those assumptions
that either individually or collectively would be required for
the goodwill to be impaired for the CGU, we considered the
likelihood of such a movement in those key assumptions arising.
We did not identify any issues with management’s key
assumptions based on our evaluation of supporting
evidence, together with management’s and our own
sensitivity analysis performed.
We also considered the appropriateness of the related
disclosures in note 11 to the financial statements. We found
that the disclosures appropriately describe the key areas of
estimation and sensitivities in the Directors’ assessment.
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, the accounting processes and controls, and the industry in which it operates.
86
Funding Circle Holdings plc
Financial statements Report on the audit of the Group financial statements continued
Our audit approach continued
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 Group materiality
£2.2 million (2017: £945,000).
How we determined it
2018: 5% of loss before tax (adjusted for exceptional costs in respect of the IPO).
2017: 1% of total revenues.
Rationale for
benchmark applied
We determined materiality by applying 5% to consolidated loss before tax excluding exceptional
costs incurred (entirely in respect of the IPO). This represents a change in the benchmark from
2017 for which the benchmark used was revenue and materiality calculated applying 1% to
consolidated revenues.
We consider loss before tax (adjusted for exceptional costs in respect of the IPO) to be the most
appropriate benchmark used in assessing the performance of the Group now that the business is
listed. We believe that underlying loss before tax is the most appropriate measure as it eliminates
any disproportionate effects of the one-off in nature IPO-related costs. We highlight that this gives
rise to a lower materiality than would be derived if using the statutory measure of loss before tax.
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 £880,000 and £1,500,000. Certain components were
audited to a local statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £110,000
(2017: £47,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
We are required to report if we have anything material to add or draw attention
to in respect of the Directors’ statement in the financial statements about
whether the Directors considered it appropriate to adopt the going concern
basis of accounting in preparing the financial statements and the Directors’
identification of any material uncertainties to the Group’s ability to continue
as a going concern over a period of at least twelve months from the date of
approval of the financial statements.
We are required to report if the Directors’ statement relating to going concern
in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our
knowledge obtained in the audit.
Outcome
We have nothing material to add or to draw
attention to.
However, because not all future events or
conditions can be predicted, this statement is
not a guarantee as to the Group’s ability to
continue as a going concern. For example,
the terms on which the United Kingdom may
withdraw from the European Union, which is
currently due to occur on 29 March 2019, are
not clear, and it is difficult to evaluate
all of the potential implications on the
Group’s trade, customers, suppliers and
the wider economy.
We have nothing to report.
Annual Report and Accounts 2018
87
Financial statements Independent auditors’ report continued
to the members of Funding Circle Holdings plc
Report on the audit of the Group financial statements continued
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, Directors’ Report and Corporate Governance Statement, we also considered whether the
disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006
("CA06"), ISAs (UK) and the Listing Rules of the Financial Conduct Authority ("FCA") require us also to report certain opinions
and matters as described below (required by ISAs (UK) unless otherwise stated).
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 December 2018 is consistent with the financial statements and has been prepared
in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
Corporate Governance Statement
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance
Statement (on pages 46 to 83) about internal controls and risk management systems in relation to financial reporting processes
and about share capital structures in compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules
sourcebook of the FCA (“DTR”) is consistent with the financial statements and has been prepared in accordance with applicable
legal requirements. (CA06)
In light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we did not
identify any material misstatements in this information. (CA06)
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement
(on pages 46 to 83) with respect to the Company’s corporate governance code and practices and about its administrative,
management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06)
We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared
by the Company. (CA06)
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency
or liquidity of the Group
We have nothing material to add or draw attention to regarding:
- The Directors’ confirmation on page 39 of the Annual Report that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
- The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
- The Directors’ explanation on page 44 of the Annual Report as to how they have assessed the prospects of the Group, over
what period they have done so and why they consider that period to be appropriate, and their statement as to whether they
have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over
the period of their assessment, including any related disclosures drawing attention to any necessary qualifications
or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment
of the principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially
less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their
statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code
(the “Code”); and considering whether the statements are consistent with the knowledge and understanding of the Group and
its environment obtained in the course of the audit. (Listing Rules)
88
Funding Circle Holdings plc
Financial statements Report on the audit of the Group financial statements continued
Reporting on other information continued
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
-
-
-
the statement given by the Directors on page 61, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the Group’s position and performance, business
model and strategy is materially inconsistent with our knowledge of the Group obtained in the course of performing our audit;
the section of the Annual Report on page 60 describing the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee; or
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 Statement of Directors’ Responsibilities in respect of the financial statements set out on page 83,
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 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 to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditors’ Report.
Use of this report
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
- we have not received all the information and explanations we require for our audit; or
- certain disclosures of Directors’ remuneration specified by law are not made.
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 4 August 2015 to audit the
financial statements for the year ended 31 December 2015 and subsequent financial periods. The period of total uninterrupted
engagement is four years, covering the years ended 31 December 2015 to 31 December 2018.
Other matter
We have reported separately on the Company financial statements of Funding Circle Holdings plc for the year ended
31 December 2018 and on the information in the Directors’ Remuneration Report that is described as having been audited.
Brian Henderson (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
7 March 2019
Annual Report and Accounts 2018
89
Financial statements Consolidated statement of comprehensive income
for the year ended 31 December 2018
Revenue
Operating expenses
Operating loss
Finance income
Loss before taxation
Income tax
Loss for the year
Other comprehensive income/(loss)
Items that may be reclassified subsequently to profit and loss:
Exchange differences on translation of foreign operations
Total comprehensive loss for the year
Total comprehensive loss attributable to:
Owners of the parent
Loss per share
Basic and diluted loss per share
All amounts relate to continuing activities.
The notes on pages 94 to 126 form part of these financial statements.
31 December
2018
£m
31 December
2017
£m
Note
4
5
8
9
20
141.9
(193.5)
(51.6)
0.9
(50.7)
1.4
(49.3)
94.5
(131.4)
(36.9)
0.6
(36.3)
1.0
(35.3)
2.4
(46.9)
(1.9)
(37.2)
(46.9)
(37.2)
10
(18.2p)
(14.0p)
90
Funding Circle Holdings plc
Financial statements Consolidated balance sheet
as at 31 December 2018
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Investments
Current assets
Investments
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Short-term provisions
Non-current liabilities
Long-term provisions
Total liabilities
Equity
Share capital
Share premium account
Foreign exchange reserve
Share options reserve
Retained earnings/(accumulated losses)
Total equity
Total equity and liabilities
31 December
2018
£m
31 December
2017
£m
Note
11
12
13
14
14
15
23
16
17
17
18
19
20
21
42.3
21.5
5.3
0.3
69.4
4.7
23.0
333.0
360.7
430.1
23.1
3.8
26.9
0.8
27.7
0.3
291.8
15.7
6.0
88.6
402.4
430.1
41.3
16.2
4.7
0.3
62.5
3.1
13.4
88.9
105.4
167.9
12.0
2.1
14.1
0.4
14.5
0.2
278.0
13.3
13.9
(152.0)
153.4
167.9
The financial statements on pages 90 to 126 were approved by the Board and authorised for issue on 7 March 2019. They were
signed on behalf of the Board by:
Sean Glithero
Director
Company registration number 07123934
The notes on pages 94 to 126 form part of these financial statements.
Annual Report and Accounts 2018
91
Financial statements Consolidated statement of changes in equity
for the year ended 31 December 2018
Note
21
20
19
1
21
20
21
19
18, 19
19
Balance at 1 January 2017
Loss for the year
Other comprehensive
(loss)/income
Exchange differences on
translation of foreign operations
Transactions with owners
Issue of share capital
Employee share schemes –
value of employee services
Balance at 31 December 2017
IFRS 9 expected credit
loss restatement
Balance at 1 January 2018
Loss for the year
Other comprehensive
income/(loss)
Exchange differences on
translation of foreign operations
Transactions with owners
Transfer of share option costs
Capital reduction
Issue of share capital
Equity issuance costs
Employee share schemes –
value of employee services
Balance at 31 December 2018
Share capital
£m
0.2
—
—
—
—
0.2
—
0.2
—
—
—
—
0.1
—
—
0.3
—
(1.9)
Share
premium
account
£m
196.0
—
82.0
—
278.0
—
278.0
—
—
—
(278.1)
301.0
(9.1)
—
291.8
Foreign
exchange
reserve
£m
Share options
reserve
£m
Retained earnings/
(accumulated
losses)
£m
15.2
—
—
—
13.3
—
13.3
—
9.5
—
—
—
4.4
13.9
—
13.9
—
(116.7)
(35.3)
—
—
—
(152.0)
(1.2)
(153.2)
(49.3)
2.4
—
—
—
—
—
—
—
15.7
(13.0)
—
—
—
5.1
6.0
13.0
278.1
—
—
—
88.6
Total equity
£m
104.2
(35.3)
(1.9)
82.0
4.4
153.4
(1.2)
152.2
(49.3)
2.4
—
—
301.1
(9.1)
5.1
402.4
The notes on pages 94 to 126 form part of these financial statements.
92
Funding Circle Holdings plc
Financial statements Consolidated statement of cash flows
for the year ended 31 December 2018
Note
23
Net cash outflow from operating activities
Investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Investment in loan securities
Interest received
Net cash outflow from investing activities
Financing activities
Proceeds on issue of preferred shares
18,19
Preferred share issue costs
Preferred dividend payment
Proceeds on the issue of ordinary shares on IPO
19
Payment of IPO costs
Proceeds from the exercise of share options
Net cash inflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of the year
The notes on pages 94 to 126 form part of these financial statements.
31 December 2018
31 December 2017
£m
(11.0)
(2.3)
(1.1)
0.9
—
—
(0.5)
300.0
(15.0)
1.1
£m
(28.5)
£m
(22.6)
£m
(10.7)
(1.3)
(1.3)
0.6
(13.5)
(12.7)
82.0
(0.1)
—
—
—
—
285.6
243.6
88.9
0.5
333.0
81.9
46.6
43.3
(1.0)
88.9
Annual Report and Accounts 2018
93
Financial statements Notes forming part of the consolidated financial statements
for the year ended 31 December 2018
1. Accounting policies
General information
Funding Circle Holdings plc (the “Company”), previously Funding Circle Holdings Limited, is a public limited company which is
listed on the London Stock Exchange and is domiciled and incorporated in the United Kingdom under the Companies Act 2006.
The address of its registered office is given on page 141. The consolidated financial statements of the Company for the year
ended 31 December 2018 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as
“Group entities”).
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have
been consistently applied to all the years presented, unless otherwise stated.
Going concern
The Group’s business activities together with the factors likely to affect its future development and position are set out in the
Strategic Report.
The Group made a total comprehensive loss of £46.9 million during the year ended 31 December 2018 (2017: loss of £37.2 million),
as a result of significant ongoing investment in staff, technology and marketing, which is expected to continue in 2019. The cash
balance of the Group as at 31 December 2018 was £333.0 million (2017: £88.9 million).
The financial statements are prepared on a going concern basis as the Directors are satisfied that the Group has the resources
to continue in business for the foreseeable future (which has been taken as 12 months from the date of approval of the
financial statements).
The Group has prepared detailed cash flow forecasts for the next 12 months. The Directors have made enquiries with management
and considered budgets and cash flow forecasts for the Group and have, at the time of approving these financial statements, a
reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the
foreseeable future. Further detail is contained in the Strategic Report on page 45.
Basis of preparation
The Group presents its annual financial statements in conformity with United Kingdom laws and regulations.
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and
IFRS Interpretations Committee (“IFRS IC”) interpretations as adopted by the European Union and the Companies Act 2006
applicable to companies reporting under IFRS.
The financial statements have been prepared on the historical cost basis except for certain financial instruments that are carried
at fair value through profit and loss.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of applying the Group’s accounting policies. Changes in assumptions
may have a significant impact on the financial statements in the year the assumptions changed. Management believes that the
underlying assumptions are appropriate. The areas involving a higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the financial statements, are disclosed in note 3.
Changes in accounting policy and disclosures
The Group has adopted the following new IFRSs from 1 January 2018 prospectively in the financial statements. There has not
been a material impact to the Group when adopting these new IFRSs:
Standard/interpretation
Content
Applicable for financial years beginning on/after
IFRS 9
IFRS 15
Financial Instruments
Revenue from Contracts with Customers
1 January 2018
1 January 2018
IFRS 9 Financial Instruments
The Group adopted IFRS 9 Financial Instruments as issued by the IASB in July 2014 with a date of transition of 1 January 2018,
which resulted in changes in the accounting policies and certain disclosures in the financial statements. The Group did not early
adopt any of IFRS 9 in previous periods and, as permitted by the transitional provisions of IFRS 9, the Group elected not to restate
comparative figures.
There have been no adjustments to the carrying value of financial assets and liabilities at the date of transition that have been
recognised in the opening retained earnings, save the expected credit loss provision ("ECL") relating to financial guarantee contracts:
Expected credit loss provision at 31 December 2017
Amounts restated through opening retained earnings
Expected credit loss provision at 1 January 2018
Performing:
12-month ECL
£m
Underperforming:
lifetime ECL
£m
Non-performing:
lifetime ECL
£m
0.4
1.2
1.6
0.3
—
0.3
0.6
—
0.6
Total
£m
1.3
1.2
2.5
Set out below are disclosures relating to the impact of the adoption of IFRS 9 on the Group.
94
Funding Circle Holdings plc
Financial statements 1. Accounting policies continued
Changes in accounting policy and disclosures continued
IFRS 9 Financial Instruments continued
(a) Classification and measurement of financial instruments
The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS 39 and IFRS 9 at
1 January 2018 are compared as follows:
1 January 2018
Financial assets
Investment in loan securities under cure period
Investment in loan securities
Trade and other receivables
Cash and cash equivalents
Financial liabilities
Trade and other payables
Provisions
IAS 39
IFRS 9
Measurement category
£m
Carrying amount
£m
Measurement category
£m
Carrying amount
£m
Fair value through profit
and loss (“FVTPL”)
Amortised cost (loans
and receivables)
Amortised cost (loans
and receivables)
Amortised cost (loans
and receivables)
Amortised cost
Amortised cost
3.1
0.3
13.4
88.9
12.0
2.5
FVTPL
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
3.1
0.3
13.4
88.9
12.0
3.7
As shown in the table above, investment in loan securities, trade and other receivables and cash and cash equivalents were
shown under IAS 39 as “loans and receivables”. Under IFRS 9 these are now categorised as “amortised cost”.
The categorisation of all financial liabilities recognised on the balance sheet has remained the same between IAS 39 and IFRS 9.
The amounts expected to be recovered or settled for assets and liabilities in the financial statements are due no more than
12 months after the reporting period unless specifically stated.
(b) Impairment
The credit loss provision relating to financial guarantee contracts is impacted by the expected credit loss model. An opening
balance adjustment has been made to retained earnings under IFRS 9 (refer to note 17).
IFRS 15 Revenue from Contracts with Customers
IFRS 15 Revenue from Contracts with Customers was issued in 2014 and was endorsed by the EU in 2016. IFRS 15 establishes
a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue
recognition guidance, including IAS 18 Revenue.
IFRS 15 provides a single, principles-based five-step model to be applied to all contracts with customers:
1) identify the contract with the customer;
2) identify the performance obligations in the contract, introducing the new concept of “distinct”;
3) determine the transaction price;
4) allocate the transaction price to the performance obligations in the contracts, on a relative stand-alone selling price basis; and
5) recognise revenue when (or as) the entity satisfies its performance obligation.
IFRS 15 also introduces new guidance on, amongst other areas, combining contracts, discounts, variable consideration and
contract modifications. It requires that certain costs incurred in obtaining and fulfilling customer contracts be deferred on the
balance sheet and amortised over the period an entity expects to benefit from the customer relationship.
Management has conducted a detailed analysis of the impact of IFRS 15 on the Group which has shown that the recognition of
revenue will be consistent with the transfer of risks and rewards to the customer under IAS 18. We have concluded following this
assessment that the implementation of IFRS 15 has not resulted in any impact to revenue in the Group’s financial statements.
Transaction fees, servicing fees and other revenue are recognised when the Group satisfies the respective performance obligations
which remain consistent with the treatment of these revenue streams prior to IFRS 15 (refer to revenue recognition policy).
Annual Report and Accounts 2018
95
Financial statements 1. Accounting policies continued
New standards and interpretations not yet adopted
The following standards and interpretations were issued by the IASB and IFRS IC but have not been adopted because they are
not yet mandatory and the Group has not chosen to early adopt.
Standard/interpretation
IFRS 16
Content
Leases
Applicable for financial years beginning on/after
1 January 2019
IFRS 16 replaces IAS 17 Leases and will primarily change lease accounting, with lessor accounting under IFRS 16 similar to
lessor accounting under IAS 17. Lessee accounting under IFRS 16 will be similar in many respects to IAS 17 accounting for
finance leases, but is substantively different to existing accounting for operating leases.
Where a contract meets IFRS 16’s definition of a lease and the Group acts as a lessee, lease agreements will give rise to the
recognition of a non-current asset representing the right to use the leased item, and a liability for future lease payments on the
Group’s balance sheet.
Lease costs will be recognised in the form of depreciation of the right-of-use asset and interest on the lease liability, which will
impact the phasing of operating profit and profit before tax, compared to existing cost profiles and presentation in the income
statement. The application of IFRS 16 will also impact the classification of associated cash flows.
The Group intends to apply the full retrospective approach in the application of IFRS 16 on the transition date.
Total costs incurred remain unchanged over the life of the lease but the timing of when those costs are recognised within the
consolidated income statement will be impacted. Based on analysis of lease commitments held by the Group at 31 December 2018,
and using estimated discount rates, the net impact on profit is expected to be immaterial to the Group. This does not impact
the timing of the Group’s cash flows.
Below is a summary of the impact of the new standard on the balance sheet and statement of comprehensive income for the
year ended 31 December 2018:
Balance sheet
Total assets
Total liabilities
Total equity
Statement of comprehensive income
Operating loss
Finance income
Loss before tax
Prior to
implementation
of IFRS 16
£m
Impact of
IFRS 16
£m
Post
implementation
of IFRS 16
£m
430.1
(27.7)
402.4
19.9
(21.3)
(1.4)
450.0
(49.0)
401.0
Prior to
implementation
of IFRS 16
£m
Impact of
IFRS 16
£m
Post
implementation
of IFRS 16
£m
(51.6)
0.9
(50.7)
0.8
(1.0)
(0.2)
(50.8)
(0.1)
(50.9)
The impact from the implementation of IFRS 16 would result in a favourable increase in the Group adjusted EBITDA by
£5.1 million and an increase in depreciation of £4.3 million.
Basis of consolidation
Where the Group has control over an investee, it is classified as a subsidiary. The Group controls an investee if all three of the
following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the
investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that
there may be a change in any of these elements of control.
The consolidated financial statements present the results of the Company and its subsidiaries as if they formed a single entity.
Intercompany transactions and balances between Group companies are therefore eliminated in full.
The Group applies the acquisition method to account for business combinations. In the consolidated statement of financial
position, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the
acquisition date. Acquisition-related costs are recognised in profit or loss as incurred. The results of acquired operations are
included in the consolidated statement of comprehensive income from the date on which control is obtained. They are
deconsolidated from the date on which control ceases.
96
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 1. Accounting policies continued
Foreign currency translation
Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which
they operate (their “functional currency”) are recorded at the rates ruling when the transactions occur. Foreign currency monetary
assets and liabilities are translated at the prevailing rate at the reporting date. Exchange differences arising on the retranslation
of unsettled monetary assets and liabilities are recognised immediately in profit or loss.
On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to
that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the
profit or loss on disposal.
Functional and presentation currency
These consolidated financial statements are presented in GBP sterling, which is the Group’s functional currency.
All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated
at the prevailing rate at the reporting date. Income and expense items are translated at the average exchange rates for the year,
unless exchange rates fluctuate significantly during that year, in which case the exchange rates at the date of transactions are
used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign
entity and translated at the prevailing rate at the reporting date.
Segment reporting
Operating segments are reported in the manner consistent with the internal reporting provided to the chief operating decision
maker. The chief operating decision maker, which is responsible for allocating resources and assessing performance of the
operating segments, has been identified as the Global Leadership Team that makes strategic decisions. For each identified
operating segment, the Group has disclosed information for the key performance indicators that are assessed internally to
review and steer performance in the Strategic Report section of this report.
Transfer prices between segments are on an arm’s length basis in a manner similar to transactions with third parties.
Exceptional items
Exceptional items are the items of income or expense that the Group considers are material, one-off in nature and of
such significance that they merit separate presentation in order to aid the reader’s understanding of the Group’s financial
performance. Such items would include profits or losses on disposal of businesses; transaction costs (including those
associated with an IPO); acquisitions and disposals; major restructuring programmes; significant goodwill or other asset
impairments; and other particularly significant or unusual items.
Revenue recognition
Revenue represents fees receivable from lenders and borrowers for the arranging of finance.
Revenue earned for the arrangement of finance is classified as transaction revenue. It is recognised immediately once loans are
fully funded on the marketplace and after the loans are accepted by the borrowers. Such fees are automatically deducted from
the amount borrowed and recognised at that point as the Group has the right to consideration.
Revenue earned from servicing of finance is classified as servicing revenue. It comprises an annualised fee representing a percentage
of outstanding principal and is recognised on a monthly basis upon repayment of loan parts by borrowers. Due to the conditions
of the trade, there are no partially completed contracts at the balance sheet date and no advance payments from customers.
Revenue included within other revenue includes referral fees, excess premium or fees earned from providing a financial
guarantee on loans held by certain institutional investors and any income earned on investments in loan securities and is
recognised as services are performed on an accruals basis.
Revenue comprises the fair value of the consideration received or receivable in the ordinary course of the Group’s activities.
Revenue recorded in the financial statements is generated in the UK, the USA, Germany and the Netherlands. All fees are
calculated based on the above revenue recognition policy.
Administrative expenses
Administrative expenses are recognised as an expense in the statement of comprehensive income in the period in which they are
incurred on an accruals basis.
Annual Report and Accounts 2018
97
Financial statements 1. Accounting policies continued
Leases
Leases are classified as operating leases where the lessor retains substantially all the risks and benefits of ownership of the asset.
Rentals payable under operating leases are charged to the statement of comprehensive income on a straight-line basis over
the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which
economic benefits from the lease asset are consumed.
In the event that lease incentives are received to enter into operating leases, such incentives are initially recognised as a liability.
The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the lease term.
Share-based payments
The Group operates a number of equity-settled, share-based compensation plans, under which the Group receives services from
employees as consideration for equity instruments (options and shares) of the Company. The fair value of the employee services
received in exchange for the grant of the options and shares is recognised as an expense. The total amount to be expensed is
determined by reference to the fair value of the options and shares granted:
-
including any market performance conditions (for example, an entity’s share price);
- excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth
targets and remaining an employee of the Group over a specified time period); and
-
including the impact of any non-vesting conditions (for example, the requirement for employees to save).
Non-market vesting conditions are included in assumptions about the number of options and shares that are expected to vest.
The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are
to be satisfied. At the end of each reporting period, the Group revises its estimate of the number of options and shares that are
expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any,
in the income statement, with a corresponding adjustment to equity.
When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable
transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.
The grant by the Company of options and shares over its equity instruments to the employees of subsidiary undertakings in the
Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date
fair value, is recognised over the vesting period as an increase in investment in subsidiary undertakings, with a corresponding
credit to equity in the Parent entity (the Company) accounts.
Pension obligations
The Group operates a defined contribution pension scheme for employees in the UK. A defined contribution scheme is a pension
plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to
pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee
service in the current and prior years. Contributions payable to the Group’s pension scheme are charged to the statement of
comprehensive income in the year to which they relate. The Group has no further payment obligations once the contributions
have been paid.
Current and deferred tax
The tax expense for the year comprises current and deferred tax. Current tax is provided at amounts expected to be paid
(or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date in the
countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates
positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes
provisions, where appropriate, based on amounts expected to be paid to the tax authorities.
Deferred tax assets for unused tax losses, tax credits and deductible temporary differences are recognised to the extent that
it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred tax assets are recognised on deductible temporary differences arising from investments in subsidiaries, associates and
joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient
taxable profit available against which the temporary difference can be utilised.
Deferred tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries, associates and
joint arrangements, except for any deferred tax liability where the timing of the reversal of the temporary difference is controlled
by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current
tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on
either the same taxable entity or different taxable entities and there is an intention to settle the balances on a net basis.
98
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 1. Accounting policies continued
Current and deferred tax continued
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the financial statements. However, deferred tax is not accounted for if it arises
from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction
affect neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates and laws that have been enacted
or substantively enacted at the year-end date and are expected to apply when the related deferred tax asset is realised or the
deferred tax liability is settled. Deferred tax balances are not discounted.
Dividends
Dividends are recognised when they become legally payable, in accordance with the Companies Act 2006.
Goodwill
Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date).
Goodwill is measured as the excess of the sum of the fair value of consideration transferred, the amount of any non-controlling
interest in the acquiree and the fair value of the acquirer’s previously held equity interest (if any) in the entity over the net of the
acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is
allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating
units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that
the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the
impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets
of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is
not reversed in a subsequent period.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Intangible assets
Intangible assets with finite useful lives are amortised on a straight-line basis over their estimated useful lives. Useful lives and
amortisation methods are reviewed at the end of each annual reporting period, or more frequently when there is an indication
that the intangible asset may be impaired, with the effect of any changes accounted for on a prospective basis. Amortisation
commences when the intangible asset is available for use. The residual value of intangible assets is assumed to be zero.
Computer software licences
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific
software. These costs are amortised over the licence period.
Capitalised development costs
Costs associated with maintaining computer software programs are recognised as an expense as incurred. Development costs
that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are
recognised as intangible assets when the following criteria are met:
-
it is technically feasible to complete the software product so that it will be available for use;
- management intends to complete the software product and use or sell it;
-
-
there is an ability to use or sell the software product;
it can be demonstrated how the software product will generate probable future economic benefits;
- adequate technical, financial and other resources to complete the development and to use or sell the software product are
available; and
-
the expenditure attributable to the software product during its development can be reliably measured.
Directly attributable costs that are capitalised as part of the software product include the software development employee costs.
Other development expenditure that does not meet these criteria is recognised as an expense as incurred. Development costs
previously recognised as an expense are not recognised as an asset in a subsequent period.
Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for
use over their estimated useful lives, ranging from three to five years. Items that are amortised over the longer period relate to
the development of the Group’s global technology platform.
Other intangibles
Other intangibles relate to the technology platform and customer relationship (representing fees due on contracted loans
expected to be realised in the foreseeable future) acquired on a business combination. These costs are amortised over their
estimated useful lives, which do not exceed three years.
Annual Report and Accounts 2018
99
Financial statements 1. Accounting policies continued
Tangible fixed assets
Tangible fixed assets are stated at cost less depreciation and any provision for impairment. Depreciation is provided on all
tangible fixed assets, at rates calculated to write off the cost less estimated residual value of each asset on a straight-line basis
over its expected useful life, as follows:
Computer equipment
1–3 years
Furniture and fixtures
3–5 years
Leasehold improvements that qualify for recognition as an asset are measured at cost and are presented as part of property,
plant and equipment in the non-current assets section on the balance sheet. Depreciation on leasehold improvements is
calculated using the straight-line method over the lease term.
Impairment of tangible and intangible assets
Intangible assets that have an indefinite useful life or intangible assets not ready to use are not subject to amortisation and are
tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by
which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs to
sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset
for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying
amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised
immediately in profit or loss.
A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was recognised. If this was the case, the carrying amount of the asset (or
cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount
does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset
(or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.
Financial instruments
Financial assets
The Group determines the classification of its financial assets at initial recognition. From 1 January 2018 the requirements of
IFRS 9 for classification and subsequent measurement have been applied which require financial assets to be classified based
on the Group’s business model for managing the asset and the contractual cash flow characteristics of the asset:
- Financial assets are measured at amortised cost if they are held within a business model, the objective of which is to hold
financial assets in order to collect contractual cash flows, and their contractual cash flows represent solely payments of
principal and interest.
- Financial assets are measured at fair value through profit and loss if they are held within a business model, the objective of
which is achieved by both collecting contractual cash flows and selling financial assets, and their contractual cash flows
represent solely payments of principal and interest.
- Financial assets that do not meet the criteria to be amortised cost or fair value through other comprehensive income are
measured at fair value through profit or loss. In addition, the Group may, at initial recognition, designate a financial asset as
measured at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch.
When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value
through profit or loss, directly attributable transaction costs. The purchase of any credit impaired assets is also at fair value after
any impairment.
Except for certain investments in loan securities as described below, the Group does not recognise on its balance sheet loans
arranged between borrowers and investors as it is not a principal party to the contracts and is not exposed to the risks and
rewards of these loans.
With the exception of investments in loan securities under cure period, all financial assets are held to collect contractual cash flows.
100
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 1. Accounting policies continued
Financial instruments continued
Financial assets continued
However, under certain circumstances the Group does hold investments in loan securities. The two types of investment in loan
securities held are as follows:
i) Investment in loan securities under cure period
In the US, investors commit to providing loans to Funding Circle Marketplace LLC (the originator of the borrower loans) in
advance of the physical transfer of monies. Funding Circle USA Inc initially funds these committed loans to the borrowers and
recovers the monies from the investors after the two to three-day cure period and therefore retains the credit risk during this
short period.
Investments in loan securities under cure period have been classified as financial assets at fair value through profit or loss under
IAS 39 and under IFRS 9.
The above classification is mainly because all such loans are acquired principally for selling in the short term. They are initially
recognised at fair value on the balance sheet with the subsequent measurement at fair value with all gains and losses being
recognised in profit or loss.
ii) Investment in other loan securities
The Group holds investments in certain business loans as a result of a commercial arrangement with institutional investors in the
marketplace (see note 14). These investments in other loan securities are classified as loans and receivables (from 1 January 2018:
amortised cost) and are initially recognised at fair value and subsequently measured at amortised cost less provision for impairment.
Other financial assets
Financial assets recognised in the balance sheet as trade and other receivables were classified as loans and receivables (from
1 January 2018: amortised cost). They are recognised at fair value and subsequently measured at amortised cost less provision
for impairment.
Cash and cash equivalents are classified as amortised cost (2017: loans and receivables) with the exception of money market
funds that are classified as FVTPL. Cash and cash equivalents include cash in hand, deposits held at call with banks, money
market funds and other short-term highly liquid investments with original maturities of three months or less. The carrying
amount of these assets approximates to their fair value.
Impairment of financial assets
For periods before the year ended 31 December 2018 the Group applied the impairment requirements of IAS 39.
Under the requirements of IAS 39, at each reporting date, the Group assesses whether there is objective evidence that a financial
asset or group of financial assets is impaired. If there is objective evidence (such as significant financial difficulty of the obligor,
breach of contract, or it becomes probable that the debtor will enter bankruptcy), the asset is tested for impairment. The amount
of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash
flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset’s original effective
interest rate (that is, the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced
through use of an allowance account. The amount of the loss is recognised in the statement of comprehensive income.
The Group reviews its investments in loan securities to assess impairment at least on a quarterly basis. In determining whether
an impairment loss should be recorded in the statement of comprehensive income, the Group makes judgement as to whether
there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio
of loans before the decrease can be identified within an individual loan in that portfolio.
This evidence may include observable data indicating that there is an adverse change in the payment status of borrowers, or
national or economic conditions that correlate with defaults on assets. Management uses estimates based on historical loss
experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when
scheduling in future cash flows. The methodology and assumptions used for estimating both the amount and timings of future
cash flows are reviewed regularly to reduce any variances between loss estimates and actual loss experience.
Annual Report and Accounts 2018
101
Financial statements 1. Accounting policies continued
Financial instruments continued
Financial assets continued
Impairment of financial assets continued
From 1 January 2018 the Group applied the impairment requirements of IFRS 9. The IFRS 9 impairment model introduces a
three-stage approach:
- Stage 1 includes financial instruments that have not had a significant increase in credit risk since initial recognition or that
have low credit risk at the reporting date. For these assets, 12-month expected credit losses (that is, expected losses arising
from the risk of default in the next 12 months) are recognised and interest income is calculated on the gross carrying amount
of the asset (that is, without deduction for credit allowance).
- Stage 2 includes financial instruments that have had a significant increase in credit risk since initial recognition (unless they
have low credit risk at the reporting date) but are not credit impaired. For these assets, lifetime ECL (that is, expected losses
arising from the risk of default over the life of the financial instrument) are recognised, and interest income is still calculated
on the gross carrying amount of the asset.
- Stage 3 consists of financial assets that are credit impaired, which is when one or more events that have a detrimental impact
on the estimated future cash flows of the financial asset have occurred. For these assets, lifetime ECL are also recognised, but
interest revenue is calculated on the net carrying amount (that is, net of the ECL allowance).
The Group assesses on a forward-looking basis the expected credit losses (“ECL”) associated with its financial assets carried
at amortised cost and recognises a loss allowance for such losses at each reporting date. The measurement of ECL reflects:
- an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
-
the time value of money; and
- reasonable and supportable information that is available without undue cost or effort at the reporting date about past events,
current conditions and forecasts of future economic conditions.
If in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously recognised impairment loss is reversed, to the extent that the
carrying value of the asset does not exceed its amortised cost at the reversal date. Any subsequent reversal of an impairment
loss is recognised in the statement of comprehensive income.
Derecognition of financial assets
Financial assets are derecognised only when the contractual rights to the cash flows from the financial assets expire or the
Group has either transferred the contractual right to receive the cash flows from that asset, or has assumed an obligation to pay
those cash flows to one or more recipients.
The Group derecognises a transferred financial asset if it transfers substantially all the risks and rewards of ownership.
Financial liabilities
Financial liabilities included in trade and other payables are recognised initially at fair value and subsequently at amortised cost.
The fair value of a non interest-bearing liability is its discounted repayment amount. If the due date of the liability is less than one
year, discounting is omitted.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable
that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
Financial guarantee contracts
Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the
holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt
instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are
directly attributable to the issuance of the guarantee. The liability is measured at the higher of the best estimate of the expenditure
required to settle the present obligation at the reporting date and the amount recognised less cumulative amortisation. Under
IFRS 9, applicable from 1 January 2018, the expected credit loss model is being used to measure and recognise the financial
liability (as further detailed in note 17).
102
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 1. Accounting policies continued
Share capital
Ordinary shares are classified as equity where their terms include no contractual obligation to transfer cash or another financial
asset to another entity.
Preferred share capital
Up until the IPO, preferred share capital was classified as equity if it was non-redeemable, or redeemable only at the Company’s
option, and any dividends were discretionary. Dividends thereon were recognised as distributions within equity upon approval by
the Company’s shareholders.
Preferred share capital was classified as a liability if it was redeemable on a specific date or at the option of the shareholders, or
if dividend payments were not discretionary. Dividends thereon were recognised as interest expense in profit or loss as accrued.
The preference shares were converted into ordinary shares on a one-to-one basis on IPO.
Loss per share
The Group presents basic and diluted losses per share (“LPS”) for its ordinary shares. Basic and diluted LPS are calculated by
dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during
the period.
Shares held by the employee benefit trust
The Company has established an offshore employee benefit trust (“EBT”).
The employee share benefit trust (“EBT”) provides for the issue of shares to Group employees principally under share option
schemes. The Group has control of the EBT and therefore consolidates the EBT in the Group financial statements.
Reserves
Foreign exchange reserve
The foreign exchange reserves represent the cumulative foreign currency translation movement on the assets and liabilities
of the Group’s international operations at year-end exchange rates.
Share options reserve
The share options reserve represents the cumulative charges to income under IFRS 2 Share-based Payments on all share
options and schemes granted, net of share option exercises.
2. Financial risk management
The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.
The risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits
and controls and to monitor risks and ensure any limits are adhered to. The Group’s activities are reviewed regularly and potential
risks are considered.
Risk factors
The Group has exposure to the following risks from its use of financial instruments:
- credit risk;
-
liquidity risk;
- market risk (including currency risk, interest rate risk and other price risk); and
-
foreign exchange risk.
Principal financial instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:
-
-
investments;
trade and other receivables;
- cash and cash equivalents; and
-
trade and other payables.
Annual Report and Accounts 2018
103
Financial statements 2. Financial risk management continued
Principal financial instruments continued
Categorisation of financial assets and financial liabilities
The tables show the carrying amounts of financial assets and financial liabilities by category of financial instrument as at
31 December 2018:
Assets
Investments
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Provisions
Assets at fair
value through
profit and loss
£m
Amortised cost
£m
4.7
—
150.0
154.7
0.3
23.0
183.0
206.3
Liabilities at fair
value through
profit and loss
£m
Liabilities at
amortised cost
£m
—
—
—
(23.1)
(4.6)
(27.7)
The tables show the carrying amounts and fair values of financial assets and financial liabilities by category of financial
instrument as at 31 December 2017:
Total
£m
5.0
23.0
333.0
361.0
Total
£m
(23.1)
(4.6)
(27.7)
Total
£m
3.4
13.4
88.9
Assets at fair
value through
profit and loss
£m
3.1
—
—
3.1
Loans and
receivables
£m
0.3
13.4
88.9
102.6
105.7
Liabilities at fair
value through
profit and loss
£m
Other financial
liabilities at
amortised cost
£m
—
—
—
(12.0)
(2.5)
(14.5)
Total
£m
(12.0)
(2.5)
(14.5)
Assets
Investments
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Provisions
Financial instruments measured at amortised cost
Financial instruments measured at amortised cost, rather than fair value, include cash and cash equivalents, trade and other
receivables, investments in loan securities (excluding those held under cure period) and trade and other payables. Due to their
short-term nature, the carrying value of each of the above financial instruments approximates to their fair value.
104
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 2. Financial risk management continued
Financial instruments measured at fair value
IFRS 13 requires certain disclosures which require the classification of financial assets and financial liabilities measured at
fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement.
Disclosure of fair value measurements by level is according to the following fair value measurement hierarchy:
-
-
-
level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the
measurement date;
level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the asset or liabilities, either
directly or indirectly; and
level 3 inputs are unobservable inputs for the asset or liability.
The fair value of financial instruments that are not traded in an active market (for example, investments in loan securities) is
determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is
available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are
observable, the instrument is included in level 2. The investments categorised as level 2 all relate to investments in loan securities
under loan curing. These are typically held for two to three days before being transferred to independent investors at the
principal amount.
If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.
31 December 2018
Financial assets
Investments (in loan securities under cure period)
Cash and cash equivalents
31 December 2017
Financial assets
Investments (in loan securities under cure period)
Fair value measurement using
Quoted prices
in active
markets
(level 1)
£m
Significant
observable
inputs
(level 2)
£m
Significant
unobservable
inputs
(level 3)
£m
—
150.0
150.0
4.7
—
4.7
—
—
—
Fair value measurement using
Quoted prices
in active
markets
(level 1)
£m
Significant
observable
inputs
(level 2)
£m
Significant
unobservable
inputs
(level 3)
£m
—
—
3.1
3.1
—
—
Total
£m
4.7
150.0
154.7
Total
£m
3.1
3.1
Loan investments held under cure period were originated during the last week of December 2018. As a result fair value is
assumed to be equal to the outstanding principal amount.
Annual Report and Accounts 2018
105
Financial statements 2. Financial risk management continued
Financial risk factors
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Group’s receivables from customers and cash and cash equivalents held at banks.
The Group’s maximum exposure to credit risk by class of financial asset is as follows:
Non-current
Investments in loan securities
Current
Investments in loan securities
Trade and other receivables
– Trade receivables
– Other receivables
– Prepayments
– Accrued income
– Rent and other deposits
Cash and cash equivalents
31 December
2018
£m
31 December
2017
£m
0.3
4.7
1.2
6.5
6.0
3.6
5.7
0.3
3.1
1.7
2.6
3.7
0.9
4.5
333.0
88.9
Investments in loan securities in current assets are held on average for two days before the physical transfer of monies from
investors. The risk of financial loss is deemed minimal.
Trade receivables represent the invoiced amounts in respect of servicing fees due from institutional investors. The risk of
financial loss is deemed minimal because the counterparties are well established financial institutions.
Ongoing credit evaluation is performed on the financial condition of other receivables and, where appropriate, a provision for
impairment is recorded in the financial statements.
Other receivables include amounts receivable in respect of credit impaired debts acquired by the Group. The carrying amount of
these loans is stated net of impairment charges and represents the Group’s maximum exposure to credit risk as no collateral or
other credit enhancements are held.
Individual risk limits for banks and financial institutions are set by external rating agencies. The Group’s treasury policy has set
limits and quantities that the Group must remain within. No credit or counterparty limits were exceeded during the year. The
Group’s cash and cash equivalents split by S&P counterparty rating were A rated: £30.1 million and A+ or better: £299.9 million.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to
managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under
both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s position.
The Group’s liquidity position is monitored and reviewed on an ongoing basis by the Directors.
The amounts disclosed in the following tables are the contractual undiscounted cash flows.
106
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 2. Financial risk management continued
Financial risk factors continued
Liquidity risk continued
The maturity analysis of financial instruments at 31 December 2018 and 31 December 2017 is as follows:
At 31 December 2018
Financial assets
Investments in loan securities
Trade and other receivables
Cash and cash equivalents
Financial liabilities
Trade and other payables
Provisions
At 31 December 2017
Financial assets
Investments in loan securities
Trade and other receivables
Cash and cash equivalents
Financial liabilities
Trade and other payables
Provisions
Market risk
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
4.7
11.9
333.0
349.6
(7.0)
—
(7.0)
—
8.2
—
8.2
(15.8)
(3.8)
(19.6)
0.3
2.9
—
3.2
—
—
—
—
—
—
—
—
(0.8)
(0.8)
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
3.1
4.4
88.9
96.4
(3.0)
—
(3.0)
—
6.2
—
6.2
(9.0)
(2.1)
(11.1)
0.3
2.8
—
3.1
—
—
—
—
—
—
—
—
(0.4)
(0.4)
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market
prices. The Group’s market risk arises from open position in interest-bearing assets and liabilities, to the extent that these are
exposed to general and specific market movements.
(a) Price risk
The Group is not exposed to market risk with respect to financial instruments as it does not hold any marketable securities.
(b) Cash flow and fair value interest rate risk
The Group is not exposed to interest rate risk in relation to financial liabilities because it does not have any external borrowings.
Non-trading interest rate risk
The Group’s interest risk on financial assets is limited to interest receivable on loan note investments and cash and cash
equivalent balances.
At 31 December
Fixed rate
Investments in loan securities
Floating rate
Cash and cash equivalents
Less than 3 months
Between 3 months and 1 year
Between 1 and 5 years
2018
£m
4.7
333.0
337.7
2017
£m
3.1
88.9
92.0
2018
£m
2017
£m
—
—
—
—
—
—
2018
£m
0.3
—
0.3
2017
£m
0.3
—
0.3
There are no financial assets which are held for a period of over five years.
Annual Report and Accounts 2018
107
Financial statements 2. Financial risk management continued
Financial risk factors continued
Market risk continued
(b) Cash flow and fair value interest rate risk continued
Interest rate risk sensitivity analysis – non-trading interest (fixed rate)
Interest on loan note investments is fixed until the maturity of the investment. The level of future interest rate receivable would be
similar to that received in the year and is considered immaterial to the Group’s overall performance for the year.
Interest rate risk sensitivity analysis – non-trading interest (floating rate)
Interest on cash and cash equivalent balances is subject to movements in Libor. The Directors monitor interest rate risk and note
that interest rates remain at a historical low. With the increased cash and cash equivalents following the IPO, a 0.5% increase in
Libor could increase the annual interest earned by c.£1.5 million.
(c) Sensitivity analysis
IFRS 7 requires disclosure of sensitivity analysis for each type of market risk to which the entity is exposed at the report date
showing how profit or loss and equity would have been affected by changing the relevant risk variables that were reasonably
possible at that date.
As discussed above, the Group does not have significant exposure to liquidity or cash flow risk and therefore no sensitivity
analysis for those risks has been disclosed.
(d) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily
with respect to the US dollar, the UK pound and the euro. Foreign exchange risk arises from future commercial transactions,
recognised assets and liabilities and net investments in foreign operations.
The Group’s policy is, where possible, to allow Group entities to settle liabilities denominated in their functional currency with the
cash generated from their own operations in that currency. Where Group entities have liabilities denominated in a currency other
than their functional currency (and have insufficient reserves of that currency to settle them), cash already denominated in that
currency will, where possible, be transferred from elsewhere within the Group.
Apart from these particular cash flows the Group aims to fund expenses and investments in the respective currency and to
manage foreign exchange risk at a local level by matching the currency in which revenue is generated and expenses are incurred.
The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.
The Group is primarily exposed to the US dollar and euro currencies.
The following table details the Group’s sensitivity to a 5% depreciation and 5% appreciation in pound sterling against the relevant
foreign currencies. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel
and represents management’s assessment of a reasonably possible change in foreign exchange rates. The sensitivity analysis
includes only outstanding foreign currency-denominated monetary items and adjusts their translation at the period end for a 5%
change in foreign currency rates. The sensitivity analysis excludes quasi-equity loans to foreign operations within the Group.
At 31 December
US dollars
Appreciation in pound sterling
Depreciation in pound sterling
Income
statement
2018
£m
—
—
Equity
2018
£m
—
—
Income
statement
2017
£m
(0.4)
(0.4)
Equity
2017
£m
—
—
Income
statement
2018
£m
—
—
Equity
2018
£m
—
—
Income
statement
2017
£m
0.4
0.4
Equity
2017
£m
—
—
The Group’s sensitivity to fluctuations in foreign currencies is related to the US dollar amount held in the Parent Company.
Capital management
The Group considers its capital to comprise its ordinary share capital, share premium, foreign exchange reserve, share options
reserve and retained earnings. Quantitative detail is shown in the consolidated statement of changes in equity.
The Directors’ objective when managing capital is to safeguard the Group’s ability to continue as a going concern in order to
provide returns for the shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce
the cost of capital.
The Directors monitor a number of KPIs at both the Group and individual subsidiary level on a monthly basis. As part of the
budgetary process, targets are set with respect to operating expenses in order to effectively manage the activities of the Group.
Performance is reviewed on a regular basis and appropriate actions are taken as required. These internal measures indicate the
performance of the business against budget/forecast and confirm that the Group has adequate resources to meet its working
capital requirements.
There are no current key assumptions or sources of estimation that may result in a material adjustment in future periods.
108
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 3. Critical accounting judgements and key sources of estimation uncertainty
Estimates and judgements are continually evaluated and are based on experience and other factors, including expectations of
future events that are believed to be reasonable under the circumstances.
The following are the key sources of estimation uncertainty that the Directors have made in the process of applying the Group’s
accounting policies and have the most significant effect on the amounts recognised in the historical financial information. There
are no further critical accounting judgements.
Estimated impairment of assets (note 11)
The Group tests annually whether goodwill has suffered any impairment. All other assets are tested for impairment where there
are indicators of impairment. The recoverable amount of cash-generating units has been determined based on value in use
calculations. The use of this method requires the estimate of future cash flows expected to arise from the continuing operation
of the cash-generating unit and the choice of a suitable discount rate in order to calculate the present value. Actual outcomes
could vary significantly from these estimates.
Expected credit losses (note 17)
The Group must make its best estimate for the expected credit loss (“ECL”) provision at each reporting date. This is of
particular relevance where the Group has entered into agreements with institutional investors to guarantee the credit risk
on their loan investments.
Significant estimate is required in assessing individual loans and when applying statistical models for collective assessments,
using historical trends from past performance as well as forward-looking information. The most significant estimation is with
delinquencies and default rates on performing loans. If the rates were to change by 50%, the provision would change by £1.1 million.
4. Segmental information
IFRS 8 Operating Segments requires the Group to determine its operating segments based on information which is provided
internally. Based on the internal reporting information and management structures within the Group, it has been determined that
there are three geographic operating segments supported by two centralised cost segments. Reporting on this basis is reviewed
by the Global Leadership Team (“GLT”), which is the chief operating decision maker (“CODM”). The GLT is made up of the
Executive Directors and key management and is responsible for the strategic decision making of the Group.
The five reportable segments consist of the three geographic segments: the United Kingdom, the United States and Developing
Markets, plus the two centralised cost segments: global product development and corporate costs. The Developing Markets
segment includes the Group’s less mature marketplaces in Germany and the Netherlands.
The GLT measures the performance of each segment by reference to a non-GAAP measure, adjusted EBITDA, which is defined
as profit/loss before finance income and costs, taxation, depreciation and amortisation (“EBITDA”) and additionally excludes
share-based payment charges and associated social security costs, foreign exchange and exceptional items (comprising IPO
costs). Together with operating profit/loss, adjusted EBITDA is a key measure of Group performance as it allows better
interpretation of the underlying performance of the business.
Capital expenditure is predominantly managed centrally and depreciation and amortisation are not allocated to individual
segments for decision making and accordingly have not been allocated to segments.
Revenue from continuing operations
United Kingdom
United States
Developing Markets
Total revenue
31 December
2018
£m
31 December
2017
£m
93.6
37.1
11.2
141.9
68.4
22.3
3.8
94.5
During 2017 management took the decision to cease originating loans to property developers. This activity only took place in the
United Kingdom and to aid interpretation of revenue trends the following analysis is provided:
Supplementary analysis
Other business loans
Property loans
United Kingdom revenue
31 December
2018
£m
31 December
2017
£m
93.2
0.4
93.6
65.3
3.1
68.4
Annual Report and Accounts 2018
109
Financial statements 4. Segmental information continued
Adjusted EBITDA and operating loss
United Kingdom
United States
Developing Markets
Segment adjusted EBITDA
Product development
Corporate costs
Adjusted EBITDA
Depreciation and amortisation
Share-based payments and social security costs
Foreign exchange loss
Exceptional items
Operating loss
Revenue by type
In addition to the segmental reporting of revenue, the table below sets out revenue by its type:
Transaction revenue
Servicing revenue
Other revenue
5. Operating expenses
Depreciation
Amortisation
Impairment of intangible assets
Rental income and other recharges
Operating lease rentals:
– Other assets
– Land and buildings
Employment costs (including contractors)
Marketing costs (excluding employment costs)
Data and technology
Expected credit losses
Foreign exchange loss
Exceptional items
Other expenses
Total operating expenses
31 December
2018
£m
31 December
2017
£m
21.8
(7.4)
(7.4)
7.0
(24.5)
(11.0)
(28.5)
(8.2)
(8.6)
(0.4)
(5.9)
(51.6)
16.9
(10.9)
(9.9)
(3.9)
(13.6)
(7.6)
(25.1)
(6.8)
(4.4)
(0.6)
—
(36.9)
31 December
2018
£m
31 December
2017
£m
112.9
24.9
4.1
141.9
76.5
17.1
0.9
94.5
31 December
2018
£m
31 December
2017
£m
2.1
6.1
—
(0.8)
0.1
5.2
79.2
57.8
9.2
2.6
0.4
5.9
25.7
193.5
1.6
5.2
0.5
(1.2)
0.1
4.8
52.3
38.7
6.5
—
0.6
—
22.3
131.4
Exceptional items relate to adviser costs associated with the IPO. IPO costs of £5.9 million recognised in the profit and loss
represent the portion of directly attributable costs relating to the secondary shares traded on admission and other costs
attributable to the listing. Further IPO costs of £9.1 million have been deducted from share premium.
110
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 5. Operating expenses continued
Auditors’ remuneration
Audit fees
– Fees payable to the Company’s auditors for the audit of the Parent Company
and consolidated financial statements
– Fees payable to the Company’s auditors and its associates for the statutory audit
of the accounts of subsidiaries of the Company
Total audit fees
Audit-related fees
– Audit-related assurance services
Total audit-related fees
Non-audit fees
– Tax compliance services
– Reporting accountant fees in connection with the IPO
Total non-audit fees
6. Remuneration of key management personnel
Wages and salaries
Share-based payments
31 December
2018
£m
31 December
2017
£m
0.2
0.2
0.4
0.1
0.1
0.1
2.0
2.1
0.1
0.3
0.4
0.1
0.1
0.1
—
0.1
31 December
2018
£m
31 December
2017
£m
0.9
1.6
0.3
1.1
The Directors of the Company are also the key management personnel of the Group. Further details on Directors’ remuneration
are shown in the Directors’ Remuneration Report in the Corporate Governance section of the Annual Report and Accounts.
7. Employees
The average monthly number of employees (including Directors) during the year were:
Product and technology
Operations, support and administrative
2018
Number
2017
Number
232
722
954
185
534
719
In addition to the employees above, the average monthly number of contractors during the year was 50 (2017: 20).
Employment costs (including Directors’ emoluments) during the year were:
Wages and salaries
Social security costs
Pension costs
Share-based payments
Contractor costs
Less: capitalised development costs
Employment costs net of capitalised development costs
31 December
2018
£m
31 December
2017
£m
68.7
7.0
0.5
8.6
84.8
5.2
(10.8)
79.2
50.6
5.3
0.2
4.4
60.5
1.9
(10.1)
52.3
Annual Report and Accounts 2018
111
Financial statements 8. Finance income
Interest receivable
31 December
2018
£m
31 December
2017
£m
0.9
0.6
9. Income tax
The Group is subject to all taxes applicable to a commercial company in its countries of operation. The UK profits of the
Company are subject to UK income tax at the standard corporation tax rate of 19.00% (2017: 19.25%).
Current tax
Research and development tax credit
Total current tax
Total tax credit
31 December
2018
£m
31 December
2017
£m
(1.4)
(1.4)
(1.4)
(1.0)
(1.0)
(1.0)
The Group credit for the year can be reconciled to the loss before tax shown per the consolidated statement of comprehensive
income as follows.
Factors affecting the tax credit for the year
Loss before taxation
Taxation on loss at 19.00% (2017: 19.25%)
Effects of:
Research and development tax credit
Non-deductible expenses
Temporary differences not recognised
Tax credit
31 December
2018
£m
31 December
2017
£m
(50.7)
(9.6)
(1.4)
1.5
8.1
(1.4)
(36.3)
(7.0)
(1.0)
0.2
6.8
(1.0)
The Group’s profits are taxed at different rates depending on the country in which the profits arise. The key applicable tax rates
include the UK (19%), the US (27%), Germany (40.5%) and the Netherlands (25%). The effective tax rate for the year was 2.8%
(2017: 2.8%).
The statutory UK corporation tax rate is currently 19%, effective from 1 April 2017 (reduced from 20% previously). Note, this rate
will be further reduced in future periods to 17% (effective from 1 April 2020 and was substantively enacted on 6 December 2016).
In addition, the US federal tax rate has been revised from 35% to 21%. On 22 December 2017, legislation was enacted that the
reduced federal rate would be effective from 1 January 2018. Deferred tax has been determined using the applicable effective
future tax rate that will apply in the expected period of utilisation of the deferred tax asset or liability.
Recognition of deferred tax assets and liabilities
Property, plant and equipment
Carry forward losses
Deferred stock options
Unrecognised deferred tax asset at 31 December 2018
31 December
2018
£m
31 December
2017
£m
(3.0)
45.9
0.1
43.0
(4.5)
44.9
—
40.4
The Group has unrelieved tax losses of £182.3 million (2017: £130.0 million) that are available for offset against future taxable
profits. The Group has not recognised a deferred tax asset in respect of these losses as there is not sufficient visibility of suitable
profits being generated to utilise these losses.
Factors affecting the tax charge in future years
Factors that may affect the Group’s future tax charge include the geographic location of the Group’s earnings, the tax rates in
those locations, changes in tax legislation and the use of brought forward tax losses. The calculation of the Group’s total tax
charge involves a degree of estimation and judgement with respect to the recognition of any deferred tax asset.
112
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 10. Loss per share
Basic loss per share amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of the
Company by the weighted average number of ordinary shares outstanding during the year.
There is no difference in the weighted average number of shares used in the calculation of basic and diluted loss per share as the
effect of all potentially dilutive shares outstanding was anti-dilutive.
The following table reflects the income and share data used in the basic and diluted loss per share computations:
Loss for the year
Weighted average number of ordinary shares in issue (million)
Basic and diluted loss per share
31 December
2018
£m
31 December
2017
£m
(restated)
(49.3)
271.3
(18.2p)
(35.3)
251.9
(14.0p)
The comparative basic and diluted loss per share have been restated as the previous calculation had incorrectly used total
comprehensive loss for the year rather than loss for the year.
11. Goodwill
Cost and carrying amount
At 1 January 2017
Exchange differences
At 31 December 2017
At 1 January 2018
Exchange differences
At 31 December 2018
Total
£m
41.4
(0.1)
41.3
41.3
1.0
42.3
Goodwill is reviewed annually for impairment, or more frequently when there are indications that impairment may have occurred.
Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units (“CGUs”) that are expected
to benefit from that business combination. At the balance sheet date, the Group had two CGUs, being Funding Circle USA (“FCUSA”)
and its subsidiaries and Funding Circle Continental Europe (“FCCE”) and its subsidiaries to which goodwill is attached. The
goodwill associated with each CGU is shown below.
FCUSA
FCCE
Total
31 December
2018
£m
31 December
2017
£m
11.7
30.6
42.3
11.0
30.3
41.3
Annual Report and Accounts 2018
113
Financial statements 11. Goodwill continued
The Group performed its annual impairment test on the goodwill arising on the acquisition of FCUSA and FCCE. The impairment
test involved comparing the carrying value of the assets held for use to their recoverable amount. The recoverable amount
represents the higher of the entity’s fair value net of selling costs and its value in use.
The impairment was assessed under both the fair value net of selling costs and value in use calculations. The fair value review
took into account the current market value of the Group segmented against each CGU.
The Group prepares a five-year management plan for its operations, which is used in the value in use calculations. The cash flow
projections are based on the following key assumptions:
- revenue growth at a compound annual growth rate of 45% and 73% for FCUSA and FCCE respectively;
- pre-tax discount rate of 11.8% and 13.3% for FCUSA and FCCE respectively; and
- revenues beyond the five-year period are extrapolated using an estimated growth rate of 2.0% for both CGUs.
The above assumptions are based on historical trends and future market expectations.
The review did not identify any impairment to the goodwill due to adequate headroom of expected recoverable amount over
carrying amount. There are no CGUs for which management considers a reasonably possible change in a key assumption would
give rise to an impairment. However, as the FCCE CGU is less established further sensitivity analysis was performed. The
forecast EBITDA was reduced by 50% in each year from 2022 and reduced the long-term growth rate to zero. The resultant value
in use would still exceed the carrying value of the FCCE CGU by over 25%.
12. Intangible assets
Cost
At 1 January 2017
Exchange differences
Additions
Impairment
At 31 December 2017
At 1 January 2018
Exchange differences
Reclassification
Additions
Disposals
At 31 December 2018
Accumulated amortisation
At 1 January 2017
Exchange differences
Charge for the year
At 31 December 2017
At 1 January 2018
Exchange differences
Reclassification
Charge for the year
Disposals
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Capitalised
development
costs
£m
Computer
software
£m
Other
intangibles
£m
13.8
(0.4)
10.1
(0.5)
23.0
23.0
0.8
0.5
10.8
(0.9)
34.2
2.8
(0.1)
4.6
7.3
7.3
0.4
0.5
6.1
(0.9)
13.4
20.8
15.7
0.2
—
0.4
—
0.6
0.6
—
—
0.2
—
0.8
0.2
—
0.1
0.3
0.3
—
—
—
—
0.3
0.5
0.3
1.3
—
—
—
1.3
1.3
—
—
—
—
1.3
0.6
—
0.5
1.1
1.1
—
—
—
—
1.1
0.2
0.2
Total
£m
15.3
(0.4)
10.5
(0.5)
24.9
24.9
0.8
0.5
11.0
(0.9)
36.3
3.6
(0.1)
5.2
8.7
8.7
0.4
0.5
6.1
(0.9)
14.8
21.5
16.2
114
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 13. Property, plant and equipment
Leasehold
improvements
£m
Computer
equipment
£m
Furniture
and fixtures
£m
Cost
At 1 January 2017
Reclassifications
Additions
At 31 December 2017
At 1 January 2018
Additions
At 31 December 2018
Accumulated depreciation
At 1 January 2017
Charge for the year
At 31 December 2017
At 1 January 2018
Charge for the year
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
The Group does not have any fixed assets under finance lease.
14. Investments
Investment in loan securities
Investment in loan securities under cure period
Investment in loan securities
15. Trade and other receivables
Trade receivables
Other receivables
Prepayments
Accrued income
Rent and other deposits
4.1
—
0.2
4.3
4.3
1.0
5.3
0.5
0.5
1.0
1.0
0.7
1.7
3.6
3.3
2.0
0.1
0.8
2.9
2.9
1.1
4.0
1.3
0.7
2.0
2.0
1.0
3.0
1.0
0.9
1.5
(0.1)
0.2
1.6
1.6
0.6
2.2
0.7
0.4
1.1
1.1
0.4
1.5
0.7
0.5
Total
£m
7.6
—
1.2
8.8
8.8
2.7
11.5
2.5
1.6
4.1
4.1
2.1
6.2
5.3
4.7
31 December
2018
£m
31 December
2017
£m
4.7
0.3
5.0
3.1
0.3
3.4
31 December
2018
£m
31 December
2017
£m
1.2
6.5
6.0
3.6
5.7
1.7
2.6
3.7
0.9
4.5
23.0
13.4
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables described earlier.
No trade receivables were overdue or impaired.
Included in rent and other deposits are £2.9 million of rental deposits (2017: £2.8 million) in respect of the Group’s property
leases which expire over the next five years.
Annual Report and Accounts 2018
115
Financial statements The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
16. Trade and other payables
Trade payables
Other taxes and social security costs
Other creditors
Accruals
Preferred dividends payable
17. Provisions
At 1 January 2017
Additional provision
Amount utilised
At 31 December 2017
IFRS 9 opening balance restatement
Additional provision
Amount utilised
At 31 December 2018
Current
Non-current
31 December
2018
£m
31 December
2017
£m
2.8
5.5
1.2
13.6
—
23.1
2.4
0.2
0.6
8.3
0.5
12.0
Total
£m
1.1
2.6
(1.2)
2.5
1.2
4.0
(3.1)
4.6
At
31 December
2018
£m
At
31 December
2017
£m
3.8
0.8
4.6
2.1
0.4
2.5
Dilapidation
£m
Credit loss
provision
£m
Other
provisions
£m
0.4
—
—
0.4
—
0.4
—
0.8
0.1
2.4
(1.2)
1.3
1.2
2.6
(2.0)
3.1
0.6
0.2
—
0.8
—
1.0
(1.1)
0.7
The dilapidation provision represents an estimated cost for dismantling the customisation of offices and restoring the leasehold
premises to its original state at the end of the tenancy period. The provision is expected to be utilised by 2025.
Credit loss provision
In certain circumstances, in the less mature markets, Funding Circle has entered into arrangements with institutional investors
to guarantee the credit risk on the loan investments made by the institutional investors. Under the terms of the agreements, the
Group is required either to make payments when the underlying borrower fails to meet its obligation under the loan contract or
buy the defaulted loan from the investors at its carrying value. In return for these financial guarantees, the Group is entitled to the
excess returns or additional income which is recorded as other revenue. Since the commencement of these agreements, other
income has exceeded the costs of providing these financial guarantees and the expectation is that in the majority of scenarios
modelled by Funding Circle the income from these arrangements will exceed the investor incentive costs of buying back
defaulted loans, which are treated as an operating expense.
Under IAS 37, a credit loss provision was recognised to cover the credit risk the Group is exposed to under such financial guarantees,
measured using the incurred loss model as the best estimate of expenditure required to settle any financial obligation.
116
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 17. Provisions continued
Credit loss provision continued
Under IFRS 9, which the Group adopted from 1 January 2018, the credit loss provision is measured and recognised in accordance
with the expected credit loss (“ECL”) model. This has resulted in an opening balance restatement, as well as a higher charge to
comprehensive income for 2018 than would have occurred under IAS 37.
The provision related to each loan arranged is based on the ECLs associated with the probability of default of that loan in the
next 12 months unless there has been a significant increase in credit risk of that loan since origination. The Group assumes
there has been a significant increase in credit risk if outstanding amounts on the loan investment exceed 30 days, in line with
the rebuttable presumption per IFRS 9.
The Group defines a default, classified within non-performing, as a loan investment with any outstanding amounts exceeding
a 90-day due date. Under the financial guarantee contracts, this is the point at which there is an obligation for the Group to make
a payment under the contract or buy back the loan. If the loan is bought back by the Group, at the point of buy back, the financial
asset associated with the purchase meets the definition of purchased or originated credit impaired (“POCI”); this element of the
reserve is therefore based on lifetime ECLs.
The Group bands each loan investment using an internal risk rating and assesses credit losses on a collective basis.
Opening credit loss provisions at 1 January 2018
Provision against new loans originated
Provision against loans transferred from performing
Amounts utilised
Loans repaid
Change in probability of default
Closing credit loss provisions at 31 December 2018
At 1 January 2018
Performing
Underperforming
Non-performing
At 31 December 2018
Performing
Underperforming
Non-performing
Performing:
12-month ECL
£m
Underperforming:
lifetime ECL
£m
Non-performing:
lifetime ECL
£m
1.6
1.8
(0.1)
—
(0.4)
(0.8)
2.1
0.3
0.3
0.1
—
—
0.1
0.8
0.6
—
1.6
(2.0)
—
—
0.2
Total
£m
2.5
2.1
1.6
(2.0)
(0.4)
(0.7)
3.1
Expected credit
loss rate
%
Basis for
recognition of
expected credit
loss provision
Credit loss
provision
£m
4 12-month ECL
59
Lifetime ECL
100
Lifetime ECL
Total
1.6
0.3
0.6
2.5
Expected credit
loss rate
%
Basis for
recognition of
expected credit
loss provision
Credit loss
provision
£m
1 12-month ECL
67
Lifetime ECL
100
Lifetime ECL
Total
2.1
0.8
0.2
3.1
The percentages applied above are based on the Group’s past experience as well as forward-looking information, namely:
macroeconomic forecasts such as changes in interest rates, GDP and inflation; delinquencies; and loss trends.
The items that the model is most sensitive to are delinquencies and loss trends.
Annual Report and Accounts 2018
117
Financial statements 18. Share capital
Called up, allotted and fully paid
Ordinary shares of £0.001
A ordinary shares of £0.00001
B ordinary shares of £0.00001
C ordinary shares of £0.00001
D ordinary shares of £0.00001
E ordinary shares of £0.00001
Series A preferred shares of £0.001
Series B preferred shares of £0.001
Series C preferred shares of £0.001
Series D preferred shares of £0.001
Series E preferred shares of £0.001
Series F preferred shares of £0.001
Deferred shares of £0.00001
31 December
2018
Number
31 December
2018
£
31 December
2017
Number
31 December
2017
£
346,033,078
346,034
83,186,146
83,186
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,439,625
650,000
5,857,600
1,068,850
6,063,840
27,392,200
31,492,900
32,520,500
25,595,700
31,432,400
23,672,990
2,664,461
14
7
59
10
61
27,392
31,493
32,521
25,596
31,432
23,672
27
346,033,078
346,034
273,037,212
255,470
On 19 September 2018, the Company was re-registered as a public company limited by shares in England and Wales and
accordingly the Articles of Association of the Company were amended to the extent required to give effect to the re-registration.
As part of the re-alignment of the share capital, the following steps took place:
-
for each A, B, C, D and E ordinary share held, the Company issued 99 bonus shares of the relevant class with a nominal value
of £0.00001 to each of the existing holders of the those shares; and
- each 100 A, B, C, D and E ordinary shares with a nominal value of £0.00001 were then consolidated into 1 A, B, C, D or E
ordinary share (as appropriate) with a nominal value of £0.001.
Immediately prior to the IPO the following transactions occurred:
- each of the A, B, C, D and E ordinary shares was converted into ordinary shares on a one-to-one basis;
- each series of preferred shares was converted into ordinary shares on a one-to-one basis;
-
-
the Company redeemed all outstanding deferred shares; and
the Company paid the accrued Series A preferred shares dividend of £0.5 million.
On 29 September 2018 the Company’s shares were admitted to the Premium Listing segment of the Official List of the UK Listing
Authority and to trading on the Main Market of the London Stock Exchange (the “Listing”). In conjunction 68,193,863 new £0.001
ordinary shares at a price of £4.40 per ordinary share were issued as part of the IPO.
During 2018, the Company issued a further 7,494,589 ordinary shares of £0.001 ranking pari passu with ordinary shares in issue
(2017: 1,221,173) on the exercise of employee share options, giving rise to total share premium of £1.0 million (2017: £0.2 million).
During the same period, 28,125 C ordinary shares were redesignated as deferred shares.
Included in the total number of ordinary shares outstanding above are 5,043,359 (2017: nil) shares held by the Group’s employee
benefit trust.
118
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 19. Share premium account
Balance at 1 January
Premium arising on issue of Series F preferred shares
Transaction costs – Series F preferred share issue
Capital reduction
Premium arising on IPO
Transaction costs associated with the issue of new shares
Exercise of options – proceeds received
31 December
2018
£m
31 December
2017
£m
278.0
—
—
(278.1)
300.0
(9.1)
1.0
196.0
81.9
(0.1)
—
—
—
0.2
291.8
278.0
On 28 August 2018, the Company undertook a capital reduction using the solvency statement procedure to reduce its share
premium account by £278.1 million, in order to eliminate its deficit on distributable reserves.
Costs of £9.1 million related to the issue of new shares have been deducted from the share premium account.
20. Foreign exchange reserve
Balance at 1 January 2017
Exchange difference on translating the net assets of foreign operations
Balance at 31 December 2017
Exchange difference on translating the net assets of foreign operations
Balance at 31 December 2018
£m
15.2
(1.9)
13.3
2.4
15.7
Exchange differences relating to the translation of the net assets of the Group’s subsidiaries from their functional currency into
the Company’s functional currency are recognised directly in the foreign exchange reserves within equity.
21. Retained earnings/(accumulated losses)
Balance at 1 January 2017
Loss for the year
Balance at 31 December 2017
Adjustment on adoption of IFRS 9 at 1 January 2018
Capital reduction
Transfer of share option costs
Loss for the year
Balance at 31 December 2018
£m
(116.7)
(35.3)
(152.0)
(1.2)
278.1
13.0
(49.3)
88.6
The transfer of share option costs is in relation to the exercise of share options during the year and their associated costs in the
share options reserve which are transferred to retained earnings.
Annual Report and Accounts 2018
119
Financial statements 22. Share-based payment
The Company operates share schemes for all employees of the Group. The terms of the main current schemes from which the
Group’s employees benefit are set out below.
Participants who hold vested Pre-IPO Options may exercise their Pre-IPO Options following admission. Unvested Pre-IPO Options
will continue to vest according to their current service condition schedule.
Post-IPO Employee Share Plan
Since the Company’s admission on the London Stock Exchange, the Company operates a single discretionary share-based
long-term incentive plan (“LTIP”). The main features of the LTIP are set out below.
Form of LTIP Awards
The Board grants awards in the form of: restricted stock units at no cost; or options to acquire shares at no cost (a nil-cost option).
Performance conditions
LTIP Awards are not currently subject to performance conditions. The vesting of LTIP Awards granted in the future to Executive
Directors will be subject to performance conditions. Refer to the Remuneration Report for further details.
Any performance condition may be amended or substituted if one or more events occur which cause the Board to reasonably
consider that an amended or substituted performance condition would be more appropriate and would not be materially less
difficult to satisfy than originally intended.
Vesting and release of LTIP Awards
LTIP Awards currently vest subject to continued service only (“Time Based Vesting”) in accordance with a vesting schedule set
at grant.
The Board may determine at grant that an LTIP Award is subject to an additional holding period following vesting (a “Holding Period”).
LTIP Options will be exercisable from the date of vest or, if applicable, the end of the Holding Period until the tenth anniversary
of the grant date, or such earlier date as the Board determines.
Cessation of employment
LTIP Options may normally be exercised to the extent vested for a period of six months after ceasing employment or 12 months
after death (or such other period as the Board may determine).
Pre-IPO Employee Share Plans
EMI Options
Prior to June 2014, the Company issued options to UK subsidiary undertakings’ employees under the EMI Options scheme.
Since then, the Company is not eligible to issue under the scheme.
Unapproved Options
The Company has an unapproved option scheme for all employees of the Group. In accordance with standard vesting terms, the
full award will vest four years after the vesting start date, with 25% vesting on the first anniversary of the vesting date and 6.25%
every three months thereafter. If the options remain unexercised after a period of ten years from the date of grant, the options
expire. Options are forfeited if the employee leaves the Group before the options vest.
US Options Scheme 2
Options granted under the “US Options Scheme 2” are unapproved options granted to US employees as either non-qualifying options
or incentive stock options. The US Options Scheme 2 has the same vesting period as Unapproved Options. If the options remain
unexercised after a period of ten years from the date of grant, the options expire. Unvested options are forfeited if the employee
leaves the Group before the options vest.
120
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 22. Share-based payment continued
Pre-IPO Employee Share Plans continued
ESS Shares with “shadow” Unapproved Options
To subscribe for the ESS Shares, employees had to give up certain employment rights. ESS shares are an upfront award of A or C
ordinary shares with a nominal value of £0.00001 per share where the ability to receive dividends and a capital return from the
shares is conditional on the achievement of a performance target (namely, the growth of the enterprise value of the business
beyond a hurdle). According to the terms and conditions, the performance target differs depending on the underlying share.
If this performance target is met, the participants will profit from the whole of the value of the business, not just the growth from
the date of the award, on the same basis as the ordinary shares.
The ESS Shares also have a right of redemption – the employee has the option to redeem those shares for a fixed cash amount
in the first three months post grant date. Note that the cash amount received depends on the number of ESS Shares granted.
The ESS Shares are each issued in conjunction with a “shadow” Unapproved Option. The Unapproved Option can be exercised
if the relevant enterprise value hurdle is not met upon an exit event. Both the ESS Shares and the “shadow” Unapproved Options
vest according to the Company’s standard vesting terms, as discussed in the description of Unapproved Options above. ESS
shares have not been available for issue since 1 December 2017.
Growth Shares with “shadow” Unapproved Options
Growth Shares are an upfront award of B, D or E ordinary shares with a nominal value of £0.00001 per share where the ability
to receive dividends and a capital return from the shares is conditional on the achievement of a performance target (namely, the
growth of the enterprise value of the business beyond a hurdle). According to the terms and conditions, the performance target
differs depending on the underlying share.
If this performance target is met, the participants will profit from the whole of the value of the business, not just the growth from
the date of the award, on the same basis as the ordinary shares.
The Growth Shares are each issued in conjunction with a “shadow” Unapproved Option. The Unapproved Option can be exercised
if the applicable enterprise value hurdle is not met upon an exit event. Both the Growth Shares and the “shadow” Unapproved
Options vest according to the Company’s standard vesting terms, as discussed in the description of Unapproved Options above.
All share-based incentives are subject to service conditions. Such conditions are not taken into account in the fair value of the
service received. The fair value of services received in return for share-based incentives is measured by reference to the fair
value of share-based incentives granted. The estimate of the fair value of the share-based incentives is measured using either
the Monte Carlo or Black-Scholes pricing model as is most appropriate for each scheme.
Charge for the year
Included in operating expenses of the Group is a charge for share-based payments and associated social security costs of
£8.6 million (2017: £4.4 million) that arises from transactions accounted for as equity-settled share-based payment transactions.
Annual Report and Accounts 2018
121
Financial statements 22. Share-based payment continued
Movements in share plans
Details of movements in the share schemes during the year are as follows:
EMI Options
Unapproved Options
ESS and
Growth Shares
US Options Scheme
Total
Number and WAEP1
Number and WAEP
Number and WAEP
Number and WAEP
Number and WAEP
Number
£
Number
£
Number
£
Number
£
Number
£
Outstanding at 1 January 2017
3,648,537
0.027
6,973,509
0.222
9,016,075
0.333
5,895,451
0.247
25,533,572
Granted during the period
Exercised during the period
Forfeited during the period
—
—
2,489,508
0.404
6,063,840
0.400
2,013,993
0.400
10,567,341
(399,411)
(9,376)
0.027
0.027
(122,112)
0.300
(527,634)
(0.381)
—
—
—
—
(974,668)
0.296
(1,496,191)
(551,756)
0.506
(1,088,766)
0.239
0.401
0.224
0.441
Outstanding at 31 December 2017
3,239,750
0.027
8,813,271
0.262
15,079,915
0.360
6,383,020
0.265
33,515,956
0.284
EMI Options
Unapproved Options
ESS and
Growth Shares
LTIP Awards
US Options Scheme
Total
Number and WAEP
Number and WAEP
Number and WAEP
Number and WAEP
Number and WAEP
Number and WAEP
Number
£
Number
£
Number
£
Number
£
Number
£
Number
£
Outstanding
at 1 January
2018
Granted during
the period
Exercised
during the
period
Forfeited
during the
period
Converted on
IPO
Outstanding at
31 December
2018
3,239,750
0.027
8,813,271
0.262
15,079,915
0.360
—
—
—
4,716,312
0.362
(2,605,831)
0.027
(3,490,423)
0.180
—
—
—
—
1,418,196
(3,007)
0.027
(945,320)
0.443
(28,125)
0.390
—
—
—
—
(15,051,790)
0.360
—
—
6,383,020
0.265
33,515,956
0.284
2,137,787
0.857
8,272,295
0.428
—
—
—
— (1,398,335)
0.373
(7,494,589)
0.163
—
—
(742,361)
0.554
(1,718,813)
0.489
—
— (15,051,790)
0.360
630,912
0.027
9,093,840
0.327
—
—
1,418,196
—
6,380,111
0.406
17,523,059
0.319
1. Weighted average exercise price.
The following table summarises information about the share awards outstanding at 31 December 2018:
Range of exercise
prices
£0–£0.008
£0.009–£0.176
£0.177–£0.471
£0.472–£1.75
EMI Options
Unapproved Options
LTIP Awards
US Options
Total
Number and WARCL2
Number and WARCL
Number and WARCL
Number and WARCL
Number and WARCL
Number
Years
Number
Years
Number
Years
Number
Years
Number
Years
—
630,912
—
—
—
4.7
—
—
2,836,209
811,983
4,916,338
529,310
9.4
3.1
9.0
9.5
1,418,196
9.9
874,545
—
—
—
—
—
—
84,262
4,176,287
1,245,017
9.9
2.6
7.4
7.8
5,128,950
1,527,157
9,092,625
1,774,327
630,912
4.7
9,093,840
8.6
1,418,196
9.9
6,380,111
7.7
17,523,059
9.5
3.7
8.3
8.3
8.3
The following table summarises information about the share awards outstanding at 31 December 2017:
Range of exercise
prices
£0.001–£0.008
£0.008–£0.043
£0.043–£0.279
£0.279-£0.390
EMI Options
Unapproved Options
ESS and
Growth Shares
US Options
Total
Number and WARCL
Number and WARCL
Number and WARCL
Number and WARCL
Number and WARCL
Number
Years
Number
Years
Number
Years
Number
Years
Number
Years
—
3,239,750
—
—
—
5.0
—
—
672,336
2,025,500
438,185
5,677,250
7.8
6.3
7.0
8.8
7,297,225
2,568,850
5,213,840
—
7.7
8.4
9.6
—
—
247,528
2,719,890
3,415,602
—
6.0
7.1
9.0
7,969,561
8,081,628
8,371,915
9,092,852
3,239,750
5.0
8,813,271
8.0
15,079,915
8.4
6,383,020
8.1
33,515,956
7.7
6.4
8.7
8.9
7.9
2. Weighted average remaining contractual life.
122
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 22. Share-based payment continued
Unapproved Options Scheme
The weighted average fair values of options granted under the Unapproved Options Scheme and the US Options Scheme range
between £0.73 and £1.80 (2017: £0.23 and £0.25) per option respectively. These values were determined using the Black-Scholes
valuation model. The significant inputs into the model are as follows:
Unapproved Options Scheme
Share price (various times during the year)
Exercise price
Expected life
Expected volatility
Risk-free interest rate (between)
Dividend yield
Forward exchange rate – US Options (between)
LTIP Awards
31 December
2018
31 December
2017
£1.89
£0.520 and £0.55
£nil–£0.44
4 years
48%
£0.40
4 years
45%
0.93% and 1.02%
0.28% and 0.68%
Nil
0.769
Nil
0.746 and 0.751
Since all LTIP awards were made post-IPO, the Company has used its share price as the fair value of the LTIP Awards granted
during the year.
ESS Shares and Growth Shares with “shadow” Unapproved Options
There were no ESS Shares or Growth Shares with “shadow” Unapproved Options granted during the period. The IPO valuation
exceeded the valuation thresholds pertaining to in issue ESS Shares and Growth Shares and therefore, immediately prior to the
IPO, the ESS Shares and Growth Shares were converted into ordinary shares as part of the reorganisation (see note 18) and the
attached shadow options were lapsed.
In determining the fair value of such shadow options granted in the prior period, the Monte Carlo simulation model was used with
the following inputs:
ESS and Growth
Exercise price
Expected life
Expected volatility
Risk-free interest rate (between)
Dividend yield
23. Notes to the consolidated statement of cash flows
Cash outflow from operations
Loss before taxation
Adjustments for
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment of intangible assets
Interest receivable
Non-cash employee benefits expense – share-based payments and associated social security costs
IPO costs presented in financing activities
Tax credit received
Movement in provisions
Changes in working capital
Movement in trade and other receivables
Movement in trade and other payables
Net cash outflow from operating activities
31 December
2017
£0.40
1 year
45%
0.38% and 0.62%
Nil
31 December
2018
£m
31 December
2017
£m
(50.7)
(36.3)
2.1
6.1
—
(0.9)
8.1
5.9
1.4
0.2
(9.3)
8.6
1.6
5.2
0.5
(0.6)
4.4
—
1.0
—
(2.9)
4.5
(28.5)
(22.6)
Annual Report and Accounts 2018
123
Financial statements 23. Notes to the consolidated statement of cash flows continued
Cash and cash equivalents
Cash and cash equivalents
31 December
2018
£m
31 December
2017
£m
333.0
88.9
The cash and cash equivalents balance is made up of cash, money market funds and bank deposits. The carrying amount of these
assets is approximately equal to their fair value. Included within cash and cash equivalents above is restricted cash of £0.4 million
(2017: £0.4 million). At 31 December 2018, money market funds totalled £150.0 million (2017: £nil).
Analysis of changes in net funds
1 January
2018
£m
Cash flow
£m
Exchange
movements
£m
31 December
2018
£m
Cash and cash equivalents
88.9
243.6
0.5
333.0
24. Operating lease arrangements
Lease payments under operating leases recognised as an expense in the year
31 December
2018
£m
31 December
2017
£m
5.3
4.9
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Within one year
In the second to fifth year inclusive
After five years
31 December
2018
£m
31 December
2017
£m
6.2
19.6
3.5
29.3
5.0
16.6
6.3
27.9
Operating lease payments represent rentals payable by the Group for its office properties and plant and machinery rental.
25. Dividends per share
The Company paid the outstanding cumulative Series A preferred dividends of £0.5 million prior to the 3 October 2018 IPO.
No other dividends were declared or paid in the current or previous financial periods.
124
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements 26. Related party transactions
Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note.
During the year, the Group entered into, and successfully won, a competition run by Nesta, a charitable organisation, with a prize
of £100,000 to develop a finance modelling template that can be used by small businesses. Ed Wray is currently a trustee of Nesta.
In previous years, the Group identified Funding Circle SME Income Fund Limited (“FCIF”) as a related party by way of common
directorship for Samir Desai. Samir Desai resigned as a Director of FCIF on 18 May 2017 and therefore from 2018 FCIF has
ceased to be classified as a related party of the Group. The transaction amounts incurred for the periods covered in the
consolidated financial statements and amounts receivable from FCIF are disclosed below:
Receivable at 31 December
Servicing fee
Income during the year ended 31 December
Servicing fee
Corporate services fee
Reimbursement of expenses
31 December
2018
£m
31 December
2017
£m
—
—
—
—
—
0.1
1.3
0.2
0.2
1.8
27. Ultimate controlling party
In the opinion of the Directors, the Group does not have a single ultimate controlling party.
28. Contingent liabilities
There are currently no contingent liabilities expected to have a material adverse financial impact on the Group’s consolidated
financial statements.
29. Investment in subsidiaries
The Group had the following subsidiaries, all of which have been included in these consolidated financial statements. The proportion
of the voting rights in subsidiary undertakings held directly by the Company does not differ from the proportion of ordinary shares held.
Place of
incorporation
Proportion of
ownership
interest
Subsidiary undertakings
Funding Circle Ltd
Funding Circle Asset Finance Limited
Funding Circle Trustee Limited
Funding Circle Property Finance Limited
Funding Circle Global Partners Limited
Made To Do More Limited
Funding Circle USA, Inc.
Funding Circle Notes Program, LLC
Funding Circle Marketplace, LLC
FC Partners, LLC
Funding Circle Securities, LLC
Funding Circle Investor Funds, LLC
Funding Circle CE GmbH
Funding Circle Deutschland GmbH
Funding Circle Connect GmbH
FC Forderungsmanagement GmbH
Juwel 182 VV UG
Funding Circle Espana S.L.
UK
UK
UK
UK
UK
UK
USA
USA
USA
USA
USA
USA
Germany
Germany
Germany
Germany
Germany
Spain
Funding Circle Nederland B.V.
Netherlands
Directly/
indirectly
held
Directly
Indirectly
Indirectly
Indirectly
Directly
Indirectly
Registered office address
71 Queen Victoria Street, London EC4V 4AY
71 Queen Victoria Street, London EC4V 4AY
71 Queen Victoria Street, London EC4V 4AY
71 Queen Victoria Street, London EC4V 4AY
71 Queen Victoria Street, London EC4V 4AY
71 Queen Victoria Street, London EC4V 4AY
Directly 747 Front Street, Floor 4, San Francisco, CA 94111
Indirectly 747 Front Street, Floor 4, San Francisco, CA 94111
Indirectly 747 Front Street, Floor 4, San Francisco, CA 94111
Indirectly 747 Front Street, Floor 4, San Francisco, CA 94111
Indirectly 747 Front Street, Floor 4, San Francisco, CA 94111
Indirectly 747 Front Street, Floor 4, San Francisco, CA 94111
Directly
Indirectly
Indirectly
Indirectly
Directly
Indirectly
Indirectly
Bergmannstraße 72, 10961 Berlin
Bergmannstraße 72, 10961 Berlin
Bergmannstraße 72, 10961 Berlin
Bergmannstraße 72, 10961 Berlin
Johannlsstratse 20, 10117 Berlin
Calle Claudio Coello 124, 28006 Madrid
Gustav Mahlerplein 64b, ITO Toren, 1082 MA
Amsterdam
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Annual Report and Accounts 2018
125
Financial statements 29. Investment in subsidiaries continued
Interest in other entities
Stichting Derdengelden Funding Circle is not a direct or indirect subsidiary of Funding Circle Holdings plc but is an independent
special purpose foundation which is required in the Netherlands to safeguard borrower and investor funds and is consolidated as
it is controlled by the Group.
Funding Circle Holdings Employee Benefit Trust was established on 14 September 2018. The purpose of the Trust is to facilitate
the acquisition of shares in the Company by, or for the benefit of, existing and future employees of the Company and Group
subsidiaries and is consolidated as it is controlled by the Group.
The principal activities of the Group’s most significant subsidiary undertakings are set out below. These are considered
significant in the context of Group’s business, results and financial position.
Subsidiary undertakings
Principal activity
Funding Circle Ltd
Funding Circle USA, Inc.
Funding Circle Marketplace, LLC
Funding Circle Notes Program, LLC
Acts as facilitator and performs intermediary services in respect of all loans made through the
Funding Circle platform in the UK.
The US operating subsidiary of Funding Circle. Acts as the administrator of the Funding Circle
platform in the US.
Acts as originator and servicer of all loans made through the Funding Circle platform in the US.
Funding Circle Marketplace LLC sells each loan it originates, on a servicing retained basis, to
third-party institutional investors or to affiliates (e.g. Funding Circle Notes Program) on an
arm’s length basis. Funding Circle Marketplace LLC initially holds loans for a two to three days'
cure period before selling the loan onto the investor or affiliate.
A special purpose bankruptcy remote entity which issues loan payment dependent debt
securities to accredited investors. It uses the proceeds to purchase a specific corresponding
loan made through the Funding Circle platform from Funding Circle Marketplace LLC. The entity
retains the contractual rights to receive the cash flows from the loan assets it has purchased,
but has assumed a contractual obligation to pay those cash flows to the holders of the debt
securities. The eligibility criteria have been met to derecognise the loan assets and associated
issued debt securities as a pass-through arrangement under IAS 39/IFRS 9.
Funding Circle CE GmbH
The Continental Europe operating subsidiary of Funding Circle. Facilitates development,
marketing and provision of internet services to affiliated companies of FCCE Group
(e-commerce concerning different goods).
Funding Circle Deutschland GmbH
Operates the Funding Circle platform in Germany and services loans.
Funding Circle Netherlands B.V.
Operates the Funding Circle platform in the Netherlands and services loans.
126
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2018Financial statements Independent auditors’ report
to the members of Funding Circle Holdings plc
Report on the audit of the Company financial statements
Opinion
In our opinion, Funding Circle Holdings plc’s Company financial statements (the “financial statements”):
- give a true and fair view of the state of the Company’s affairs as at 31 December 2018 and of its cash flows for the year then ended;
- have been properly prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the
European Union and as applied in accordance with the provisions of the Companies Act 2006; and
- have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise:
the Company balance sheet as at 31 December 2018; the Company statement of changes in equity; and the Company statement
of cash flows for the year then ended; and the notes to the financial statements, which include a description of the significant
accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the Group or the Company.
Other than those disclosed in note 5 to the financial statements, we have provided no non-audit services to the Group and its
subsidiaries in the period from 1 January 2018 to 31 December 2018.
Our audit approach
Overview
Materiality
- Overall materiality: £5.7 million (2017: £2.8 million), based on 1% of total assets.
Audit scope
- We have audited the complete financial information of the Company.
Key audit matters
- We have no key audit matters to report.
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the company and industry, we identified that the principal risks of non-compliance with laws and
regulations related to the Listing Rules, and we considered the extent to which non-compliance might have a material effect on the
financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial
statements such as the Companies Act 2006. 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 the posting
of inappropriate journals. Audit procedures performed by the engagement team included review of the Annual Report and Accounts
with consideration to the Listing Rules and identifying and testing journal entries and period-end adjustments.
Annual Report and Accounts 2018
127
Financial statements
Independent auditors’ report continued
to the members of Funding Circle Holdings plc
Report on the audit of the Company financial statements continued
Our audit approach continued
Capability of the audit in detecting irregularities, including fraud continued
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from
error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement (whether
or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the
allocation of resources in the audit; and directing the efforts of the engagement team. We determined that there were no key
audit matters applicable to the company to communicate in our report.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as
a whole, taking into account the structure of the Company, the accounting processes and controls, and the industry in which it operates.
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
£5.7 million (2017: £2.8 million).
How we determined it
1% of total assets.
Rationale for
benchmark applied
We consider total assets to be the most appropriate benchmark to apply on the basis that the Company
is a non-trading investment company that holds investment in the Group’s trading businesses.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £280,000
(2017: £140,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add
or draw attention to in respect of the Directors’ statement
in the financial statements about whether the Directors
considered it appropriate to adopt the going concern basis
of accounting in preparing the financial statements and the
Directors’ identification of any material uncertainties to the
Company’s ability to continue as a going concern over a
period of at least twelve months from the date of approval
of the financial statements.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can
be predicted, this statement is not a guarantee as to the
Company’s ability to continue as a going concern. For
example, the terms on which the United Kingdom may
withdraw from the European Union, which is currently due
to occur on 29 March 2019, are not clear, and it is difficult to
evaluate all of the potential implications on the Company’s
trade, customers, suppliers and the wider economy.
We are required to report if the Directors’ statement relating to
going concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our Auditors’
Report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover
the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in
this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
128
Funding Circle Holdings plc
Financial statements Report on the audit of the Company financial statements continued
Reporting on other information continued
With respect to the Strategic Report, Directors’ Report and Corporate Governance Statement, we also considered whether the
disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006
("CA06"), ISAs (UK) and the Listing Rules of the Financial Conduct Authority ("FCA") require us also to report certain opinions
and matters as described below (required by ISAs (UK) unless otherwise stated).
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 December 2018 is consistent with the financial statements and has been prepared in
accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
Corporate Governance Statement
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement
(on pages 46 to 83) about internal controls and risk management systems in relation to financial reporting processes and about share
capital structures in compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules sourcebook of the FCA
(“DTR”) is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we did not
identify any material misstatements in this information. (CA06)
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement
(on pages 46 to 83) with respect to the Company’s corporate governance code and practices and about its administrative,
management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06)
We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by
the Company. (CA06)
The Directors’ assessment of the prospects of the Company and of the principal risks that would threaten the solvency or
liquidity of the Company
We have nothing material to add or draw attention to regarding:
The Directors’ confirmation on page 39 of the Annual Report that they have carried out a robust assessment of the principal risks
facing the company, including those that would threaten its business model, future performance, solvency or liquidity.
The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
The Directors’ explanation on page 44 of the Annual Report as to how they have assessed the prospects of the company, over
what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have
a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment
of the principal risks facing the Company and statement in relation to the longer-term viability of the Company. Our review was
substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting
their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance
Code (the “Code”); and considering whether the statements are consistent with the knowledge and understanding of the
Company and its environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
The statement given by the Directors on page 61 that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the Company’s position and performance, business
model and strategy is materially inconsistent with our knowledge of the Company obtained in the course of performing our audit;
The section of the Annual Report on page 60 describing the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee; or
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.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Annual Report and Accounts 2018
129
Financial statements Independent auditors’ report continued
to the members of Funding Circle Holdings plc
Report on the audit of the Company financial statements continued
Responsibilities for the financial statements and the audit
Responsibilities of the Directors for the financial statements
As explained more fully in the Statement of Directors’ responsibilities in respect of the financial statements set out on page 83,
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 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 Company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditors’ Report.
Use of this report
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
- we have not received all the information and explanations we require for our audit; or
- adequate accounting records have not been kept by the 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 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 4 August 2015 to audit the
financial statements for the year ended 31 December 2015 and subsequent financial periods. The period of total uninterrupted
engagement is four years, covering the years ended 31 December 2015 to 31 December 2018.
Other matter
We have reported separately on the Group financial statements of Funding Circle Holdings plc for the year ended 31 December 2018.
Brian Henderson (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
7 March 2019
130
Funding Circle Holdings plc
Financial statements Company balance sheet
as at 31 December 2018
Non-current assets
Investments in subsidiary undertakings
Loans due from subsidiary undertakings
Current assets
Loans due from subsidiary undertakings
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Total liabilities
Equity
Share capital
Share premium account
Share options reserve
Retained earning/(accumulated losses)
Total equity
Total equity and liabilities
31 December
2018
£m
31 December
2017
£m
Note
4
6
6
5
10
7
8
8
9
264.6
1.7
266.3
0.1
0.3
303.7
304.1
570.4
2.0
2.0
0.3
291.8
6.0
270.3
568.4
570.4
201.8
14.4
216.2
0.1
0.5
63.1
63.7
279.9
0.8
0.8
0.2
278.0
13.9
(13.0)
279.1
279.9
The Company's loss for the year was £7.8 million (2017: profit £0.2 million).
The financial statements on pages 131 to 140 were approved by the Board and authorised for issue on 7 March 2019. They were
signed on behalf of the Board by:
Sean Glithero
Director
Company registration number 07123934
The notes on pages 134 to 140 form part of these financial statements.
Annual Report and Accounts 2018
131
Financial statements Company statement of changes in equity
for the year ended 31 December 2018
Balance at 1 January 2017
Profit for the year
Transactions with owners
Issue of share capital
Employee share schemes –
value of employee services
Balance at 31 December 2017
Loss for the year
Transactions with owners
Transfer of share option costs
Capital reduction
Issue of share capital
Equity issuance costs
Employee share schemes –
value of employee services
Balance at 31 December 2018
Note
Share capital
£m
9
9
8
0.2
—
—
—
0.2
—
—
—
0.1
—
—
0.3
Share
premium
account
£m
196.0
—
82.0
—
278.0
—
—
(278.1)
301.0
(9.1)
—
291.8
Share options
reserve
£m
Retained earnings/
(accumulated
losses)
£m
Total equity
£m
9.5
—
—
4.4
13.9
—
(13.0)
—
—
—
5.1
6.0
(13.2)
0.2
—
—
(13.0)
(7.8)
13.0
278.1
—
—
—
270.3
192.5
0.2
82.0
4.4
279.1
(7.8)
—
—
301.1
(9.1)
5.1
568.4
The notes on pages 134 to 140 form part of these financial statements.
132
Funding Circle Holdings plc
Financial statements Company statement of cash flows
for the year ended 31 December 2018
Net cash outflow from operating activities
Investing activities
Loans advanced to subsidiary undertakings
Loan repayment from subsidiary undertaking
Capital contribution to subsidiary undertakings
Interest received
Net cash outflow from investing activities
Financing activities
Proceeds on issue of preferred shares
Preferred share issue costs
Preferred dividend payment
Proceeds on the issue of ordinary shares on IPO
Payment of IPO costs
Proceeds on the issue of shares from the
exercise of share options
Net cash inflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
31 December 2018
31 December 2017
Note
10
6
4
8
8
£m
(1.7)
14.6
(58.3)
0.5
—
—
(0.5)
300.0
(15.0)
1.1
£m
(0.1)
£m
(1.6)
£m
(0.1)
—
(32.0)
0.1
(44.9)
(32.0)
82.0
(0.1)
—
—
—
—
285.6
240.6
63.1
303.7
81.9
48.3
14.8
63.1
The notes on pages 134 to 140 form part of these financial statements.
Annual Report and Accounts 2018
133
Financial statements Notes forming part of the Company financial statements
for the year ended 31 December 2018
1. Significant accounting policies
The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by
that Act, the separate financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) and IFRS Interpretations Committee (“IFRS IC”) interpretations as adopted by the European Union and the Companies
Act 2006 applicable to companies reporting under IFRS.
The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are the
same as those set out in note 1 to the consolidated financial statements except as noted below. These policies have been
consistently applied to all the years presented, unless otherwise stated.
Investments in subsidiaries
Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment (see note 4 for further details).
2. Financial risk management
The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework.
The risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk
limits and controls, and to monitor risks and ensure any limits are adhered to. The Company’s activities are reviewed regularly
and potential risks are considered.
Risk factors
The Company has exposure to the following risks from its use of financial instruments:
- credit risk;
-
liquidity risk;
- market risk (including currency risk, interest rate risk and other price risk); and
-
foreign exchange risk.
Principal financial instruments
The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows:
-
-
loans due from related undertakings;
trade and other receivables;
- cash and cash equivalents; and
-
trade and other payables.
Categorisation of financial assets and financial liabilities
The table shows the carrying amounts and fair values of financial assets and financial liabilities by category of financial
instrument as at 31 December 2018:
Assets
Loans due from related undertakings
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Carried at amortised cost –
assets/(liabilities)
Carrying
amount
£m
1.8
0.3
153.7
155.8
(2.0)
(2.0)
Fair value
£m
1.8
0.3
153.7
155.8
(2.0)
(2.0)
Carried at fair value
Based on
market
derived data
£m
Based on
individual
valuation
parameters
£m
—
—
150.0
150.0
—
—
—
—
—
—
—
—
134
Funding Circle Holdings plc
Financial statements 2. Financial risk management continued
Categorisation of financial assets and financial liabilities continued
The table shows the carrying amounts and fair values of financial assets and financial liabilities by category of financial
instrument as at 31 December 2017:
Assets
Loans due from related undertakings
Trade and other receivables
Cash and cash equivalents
Receivables from related undertakings
Liabilities
Trade and other payables
Carried at amortised cost –
assets/(liabilities)
Carrying
amount
£m
Fair value
£m
Carried at fair value
Based on
market
derived data
£m
Based on
individual
valuation
parameters
£m
14.5
0.2
63.1
0.3
78.1
(0.8)
(0.8)
14.5
0.2
63.1
0.3
78.1
(0.8)
(0.8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Financial instruments measured at amortised cost
Financial instruments measured at amortised cost, rather than fair value, include loans due from subsidiary undertakings, cash
and cash equivalents, trade and other receivables and trade and other payables. Due to their short-term nature, the carrying
value of the above items approximates their fair value.
Financial risk factors
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its
contractual obligations, and arises principally from the Company’s receivables from related undertakings and cash and cash
equivalents held at banks.
The Company’s maximum exposure to credit risk by class of financial asset is as follows:
Non-current
Loans due from related undertakings
Current
Loans due from related undertakings
Trade and other receivables
– Prepayments
– Accrued income
– Amounts due from related undertakings
Cash and cash equivalents
31 December
2018
£m
31 December
2017
£m
1.7
0.1
0.2
0.1
—
303.7
14.4
0.1
0.2
—
0.3
63.1
The fair value of cash and cash equivalents at 31 December 2018 and 31 December 2017 approximates the carrying value. Cash
risk is mitigated as cash and cash equivalents are held with reputable institutions.
Annual Report and Accounts 2018
135
Financial statements 2. Financial risk management continued
Financial risk factors continued
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s
approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities
when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the
Company’s position.
The Company’s liquidity position is monitored and reviewed on an ongoing basis by the Directors.
The amounts disclosed in the below tables are the contractual undiscounted cash flows.
The maturity analysis of financial instruments at 31 December 2018 and 31 December 2017 is as follows:
At 31 December 2018
Financial assets
Trade and other receivables
Cash and cash equivalents
Loans due from related undertakings
Financial liabilities
Trade and other payables
At 31 December 2017
Financial assets
Trade and other receivables
Cash and cash equivalents
Amounts due from related undertakings
Loans due from related undertakings
Financial liabilities
Trade and other payables
Market risk
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
0.2
303.7
—
303.9
(0.5)
(0.5)
0.1
—
0.1
0.2
(1.5)
(1.5)
—
—
1.7
1.7
—
—
—
—
—
—
—
—
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
—
63.1
—
—
63.1
—
—
0.2
—
0.3
0.1
0.6
(0.8)
(0.8)
—
—
—
14.4
14.4
—
—
—
—
—
—
—
—
—
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market
prices. The Company’s market risk arises from open position in interest-bearing assets and liabilities, to the extent that these are
exposed to general and specific market movements.
(a) Price risk
The Company is not exposed to market risk with respect to financial instruments as it does not hold any marketable equity securities.
(b) Cash flow and fair value interest rate risk
Interest on cash and cash equivalent balances is subject to movements in Libor. The Directors monitor interest rate risk and note
that interest rates remain at a historical low. With the increased cash and cash equivalents following the IPO, a 0.5% increase in
Libor could increase the annual interest earned by c.£1.5 million.
(c) Sensitivity analysis
IFRS 7 requires disclosure of sensitivity analysis for each type of market risk to which the entity is exposed at the report date
showing how profit or loss and equity would have been affected by changing the relevant risk variables that were reasonably
possible at that date.
As discussed above, the Company does not have significant exposure to liquidity or cash flow risk and therefore no sensitivity
analysis for those risks has been disclosed.
136
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2018Financial statements 2. Financial risk management continued
Financial risk factors continued
Market risk continued
(d) Foreign exchange risk
The Company has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.
Foreign exchange risk is disclosed in note 2 to the consolidated financial statements.
Capital management
The Company considers its capital to comprise of equity share capital, share premium, share options reserve and retained
earnings.
The Directors’ objective when managing capital is to safeguard the Company’s ability to continue as a going concern in order
to provide returns for the shareholders and benefits for other stakeholders.
The Company is not subject to any externally imposed capital requirements.
3. Company profit/(loss) for the year
As permitted by the exemption in Section 408 of the Companies Act 2006, the profit and loss account of the Company is not presented
as part of these financial statements. The Company has comprehensive loss for the year of £7.8 million (2017: comprehensive
income of £0.2 million).
4. Investments in subsidiary undertakings
Balance at 1 January
Capital contribution regarding employee services in subsidiaries
Additions
Capitalisation of intercompany loans
31 December
2018
£m
31 December
2017
£m
201.8
4.5
58.3
—
264.6
151.8
4.4
32.0
13.6
201.8
Investments in subsidiary undertakings, which are listed in note 29 of the Group financial statements, are all stated at cost less
any provision for impairment.
During the financial year the Company made capital contributions in the form of cash investments of £31.5 million (2017: £21.8 million),
£12.2 million (2017: £10.2 million) and £14.6 million (2017: £nil) to Funding Circle USA Inc., Funding Circle Continental Europe GmbH
and Funding Circle Ltd respectively. During the prior year, the Company capitalised the intercompany loan of £13.6 million due
from FC Continental Europe group entities. These amounts have increased the value of “Investments in subsidiary undertakings”,
carried at cost less impairments as per IAS 27, in the Company-only accounts.
In addition to the above, the Company recognised a capital contribution of £4.5 million (2017: £4.4 million) representing the
service cost for the employees of its subsidiaries, under the Company’s share option schemes.
5. Trade and other receivables
Amounts due from related undertakings
Prepayments
Accrued income
31 December
2018
£m
31 December
2017
£m
—
0.2
0.1
0.3
0.3
0.2
—
0.5
The Directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value.
Annual Report and Accounts 2018
137
Financial statements 6. Loans due from subsidiary undertakings
Funding Circle Ltd
Stichting Derdengelden Funding Circle
Funding Circle Global Partners Limited
Less: non-current portion
Current portion
Amount due from Group undertakings
31 December
2018
£m
31 December
2017
£m
1.5
0.1
0.2
1.8
(1.7)
0.1
14.3
0.1
0.1
14.5
(14.4)
0.1
During 2018, the Company continued to operate a loan facility agreement with Funding Circle Ltd (subsidiary company). Under
the terms of the agreement, the Company will provide an unsecured sterling term loan facility of a total principal amount not
exceeding £20 million (2017: £20 million) to Funding Circle Ltd. Any drawn amount under the facility bears an interest of 3.5%
above the base rate of the Bank of England and is repayable with the principal amount at the end of the facility term of five years
on 23 November 2020.
During the year the Company has provided £1.5 million (2017: £nil) of additional funding under the facility agreement. Total
interest income of £0.3 million (2017: £0.5 million) has been recognised in the Company statement of comprehensive income.
The carrying amount of this receivable approximates to its fair value.
In the current period, Funding Circle Ltd settled certain amounts due under the intercompany loan obligations cumulative of
interest of £14.6 million (2017: £nil) with Funding Circle Holdings plc.
During the year, certain FC Continental Europe group entities settled their intercompany loan obligations including interest of £nil
(2017: £13.6 million) with Funding Circle Holdings plc.
During 2018, the Company continued to operate an unsecured sterling term loan facility for £1 million with its subsidiary
(Funding Circle Global Partners Limited (“FCGPL”)). Under the term of the loan agreement, any drawn amount under the facility
bears an interest of 3.5% above the base rate of the Bank of England and is repayable with the principal amount at the end of the
facility term of five years on 30 June 2022.
During the year the Company has provided £0.2 million (2017: £0.1 million) of funding under the facility agreement. The carrying
amount of this receivable approximates to its fair value.
7. Trade and other payables
Accruals
Preferred dividends payable
Taxes and social security costs
Other creditors
Amounts due to related undertakings
31 December
2018
£m
31 December
2017
£m
0.5
—
0.6
0.2
0.7
2.0
0.3
0.5
—
—
—
0.8
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
8. Share capital and share premium
The movement on these items is disclosed in notes 18 and 19 to the consolidated financial statements.
138
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2018Financial statements 9. Retained earnings/(accumulated losses)
Balance at 1 January 2017
Profit for the year
Balance at 31 December 2017
Capital reduction
Transfer of share option costs
Loss for the year
Balance at 31 December 2018
10. Notes to the Company statement of cash flows
Cash outflow from operating activities
(Loss)/profit before taxation
Adjustments for
Foreign exchange gain
Interest receivable
Non-cash employee benefits expense – share-based payments
IPO costs presented in financing activities
Changes in working capital
Movement in trade and other receivables
Movement in trade and other payables
Net cash outflow from operations
Cash and cash equivalents
Cash and bank balances
£m
(13.2)
0.2
(13.0)
278.1
13.0
(7.8)
270.3
31 December
2018
£m
31 December
2017
£m
(7.8)
—
(0.8)
1.1
5.9
0.2
1.3
(0.1)
0.2
(0.3)
(1.1)
—
—
(0.5)
0.1
(1.6)
1 January
2018
£m
Cash flow
£m
31 December
2018
£m
63.1
240.6
303.7
These comprise cash held by the Company, short-term bank deposits with an original maturity of three months or less and
money market funds. The carrying amount of cash balances approximates their fair value. As at 31 December 2018, money
market funds totalled £150.0 million (2017: £nil).
Annual Report and Accounts 2018
139
Financial statements 11. Related parties
Short-term payables/receivables:
Funding Circle Ltd
Intercompany loans:
Funding Circle Ltd
Stichting Derdengelden Funding Circle
Funding Circle Global Partners Limited
Amounts owed by related parties
Amounts owed to related parties
2018
£m
—
1.5
0.1
0.2
1.8
2017
£m
0.3
14.3
0.1
0.1
14.8
2018
£m
0.8
—
—
—
0.8
2017
£m
—
—
—
—
—
During the year, the Company received payment of expenses for amounts of £1.1 million (2017: paid expenses for amounts of
£0.1 million) from Funding Circle Ltd.
As at the year end, the Company was owed a cumulative amount of £1.5 million (2017: £14.3 million) and £0.1 million
(2017: £0.1 million) from loans with Funding Circle Ltd and Stichting Derdengelden Funding Circle.
12. Parent Company guarantee – exemption from audit for subsidiary companies
The following UK entities, all of which are 100% owned by the Group, are not subject to an audit by virtue of s479A of the
Companies Act 2006 relating to subsidiary companies:
Company
Funding Circle Asset Finance Limited
Funding Circle Global Partners Limited
Registration number
7832868
10554628
The following UK entity, which is 100% owned by the Group, is exempt from the requirement to prepare accounts by virtue of
s394A of the Companies Act 2006 relating to the individual accounts of dormant subsidiaries:
Company
Made to Do More Limited
Registration number
10575978
13. Remuneration of key management personnel
The remuneration of key personnel is disclosed in note 6 to the consolidated financial statements.
14. Ultimate controlling party
In the opinion of the Directors, the Group does not have a single ultimate controlling party.
140
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2018Financial statements Shareholder and Company information
Shareholder information
Receiving shareholder information by email:
You can opt to receive shareholder information from us by
email rather than by post. We will then email you whenever we
add shareholder communications to the Company website. To
set this up, please visit www.shareview.co.uk and register for
electronic communications (e-comms).
If you subsequently wish to change this instruction or revert to
receiving documents or information by post, you can do so by
contacting the Company’s registrars at the address shown in
the Company Information opposite. You can also change your
communication method back to post by logging in to your
Shareview account and going to "update my communication
preferences" within the "Quick links" section.
The Registrar can also be contacted by telephone on
+44 (0)371 384 2030 (non-UK callers +44 (0)121 415 7047)
or +44 (0)371 384 2255 (text phone). Calls to this number cost
no more than a national rate call from any type of phone or
provider. These prices are for indication purposes only; if in
doubt, please check the cost of calling this number with your
phone line provider. Lines are open 8.30am–5.30pm, Mon-Fri
excluding public holidays in England and Wales.
Shareholder enquiries
If you have any queries relating to your shareholding, dividend
payments or lost share certificates, or if any of your details
change, please contact the Company’s registrars by visiting
www.shareview.co.uk or by using the contact details above.
Annual shareholder calendar
Final results announced
Annual Report published
Annual General Meeting
7 March 2019
9 April 2019
5 June 2019
Interim report
As part of our e-comms programme, we have decided not to
produce a printed copy of our Interim Report. We will instead
publish the report on our website, where it will be available
around mid-August each year.
Cautionary statement
Certain statements included in our 2018 Annual Report, or
incorporated by reference to it, may constitute "forward-looking
statements" in respect of the Group’s operations, performance,
prospects and/or financial condition.
Forward-looking statements involve known and unknown risks
and uncertainties because they are beyond the Group’s
control and are based on current beliefs and expectations
about future events about the Group and the industry in which
the Group operates.
No assurance can be given that such future results will
be achieved; actual events or results may differ materially
as a result of risks and uncertainties facing the Group.
Solicitors
Freshfields Bruckhaus
Deringer LLP
65 Fleet Street
London EC4Y 1HS
Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Brokers
Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB
Numis Securities Limited
The London Stock Exchange
Building
10 Paternoster Square
London EC4M 7LT
Registered office
71 Queen Victoria Street
London EC4V 4AY
Registered number
07123934
Company information
Directors
Executive Directors
S Desai CBE (Co-founder,
Chief Executive Officer)
S R Glithero (Chief
Financial Officer)
Non-Executive Directors
A D Learoyd (Chairman)
J E Daniels
G Gopalan
C J Keers
H W Nelis
N A Rimer
R K Steel (Senior
Independent Director)
E J Wray
Company Secretary
L K Vernall
Independent Auditors
PricewaterhouseCoopers LLP
1 Embankment Place
London WC2N 6RH
Bankers
Barclays Bank UK plc
1 Churchill Place
London E14 5HP
Santander UK plc
2 Triton Square
Regent’s Place
London NW1 3AN
Lloyds Banking Group plc
25 Gresham Street
London EC2V 7AE
If the assumptions on which the Group bases its forward-
looking statements change, actual results may differ from
those expressed in such statements. The forward-looking
statements contained in this report reflect knowledge and
information available at the date of this Annual Report and
the Group undertakes no obligation to update these
forward-looking statements except as required by law.
This report does not constitute or form part of any offer or
invitation to sell, or any solicitation of any offer to purchase,
any shares or other securities in the Company, and nothing
in this report should be construed as a profit forecast.
Funding Circle’s commitment to environmental issues is reflected in this Annual Report
which has been printed on Galerie Satin, an FSC® certified material.
This document was printed by Park Communications using their environmental print
technology, which minimises the impact of printing on the environment with 99 per cent
of dry waste is diverted from landfill and vegetable inks were used throughout. Both
manufacturing mill and the printer are registered to the Environmental Management
System ISO14001, Quality management ISO9001 and are Forest Stewardship Council®
(FSC) chain-of-custody certified.
Annual Report and Accounts 2018
141
Financial statements F
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Funding Circle Holdings plc
71 Queen Victoria Street
London
EC4V 4AY
corporate.fundingcircle.com