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9
BELIEVE IN THOSE
MADE TO
DO MORE
Funding Circle Holdings plc
Annual Report and Accounts 2019
IGNITING
OPPORTUNITIES
We ignite opportunities for businesses
and investors by providing a better
deal for everyone.
fundingcircle.com
Highlights
Operational
Leading SME lending platform
‐ Loans under management £3.73 billion (up 19%)
‐ Originations of £2.35 billion (up 3%)
‐ c.80,000 small businesses accessed finance since 2010, with
Net Promoter Score of 80–90 for borrowers in the UK and US
Deep and diverse investor base
‐
Investor returns expected to deliver 5.0–7.8% in the UK and
US for loans originated in 2019, 10-30% higher than returns
in 2018
‐ Successfully launched two new products, Funding Circle
sponsored ABS bonds and Private Funds
Completed initial build of instant decision
lending platform
‐ New platform will drive superior customer experience
and competitive advantage
‐
Initial pilots rolled out in Q4 2019 in the UK and first loans
took on average 6 minutes from application to approval
‐ On track to roll out to c.50% of borrowers by the end of 2020
Building a dynamic team
‐ Circlers are owners of the business through equity programme
‐ 83% CEO approval on Glassdoor
‐ 44% gender diversity at Global Leadership Team level
Financial
Statutory financial
KPIs
Revenue¹
£167.4m
2018: £141.9m
APM1
KPIs
Segment
adjusted EBITDA1,2
£11.2m
2018: £12.1m
Operational
KPIs
Loans under
management
£3.7bn
2018: £3.1bn
Loss before tax2
£84.2m
2018: £50.9m
Adjusted EBITDA1,2
£(27.5)m
2018: £(23.4)m
Originations
£2.4bn
2018: £2.3bn
1. Revenue refers to Net Income. For reconciliation of alternative
performance measures (“APM”) to statutory measures refer to page 34.
2. Restated for the impact of IFRS 16 (refer to page 102).
Contents
STRATEGIC REPORT
Chief Executive Officer’s statement
Chairman’s statement
Funding Circle at a glance
1 Highlights
2
4
6
10 Our market
12 Our business model
14 Strategic priorities
16 Value proposition for borrowers
18 Value proposition for investors
20 Technology and data
22 Our people
26 Sustainability
30 Key performance indicators
32 Finance review
38 Risk management
42 Principal risks and uncertainties
48 Viability statement
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
49 Chairman’s introduction
50 Board of Directors
52 Corporate governance report
61 Division of responsibilities
62 Composition, succession and evaluation
63 Audit, risk and internal control
64 Report of the Nomination Committee
66 Report of the Audit Committee
72
Report of the Risk and Compliance
Committee
75 Directors’ remuneration report
80 Annual report on remuneration
86 Report of the Directors
89
Statement of Directors’ responsibilities
in respect of the financial statements
90
96
Independent auditors’ report
Consolidated statement of
comprehensive income
97 Consolidated balance sheet
98
Consolidated statement of changes
in equity
99 Consolidated statement of cash flows
100 Notes forming part of the consolidated
financial statements
144 Company balance sheet
145 Company statement of changes in equity
146 Company statement of cash flows
147 Notes forming part of the Company
financial statements
155 Glossary
156 Shareholder and Company information
The Strategic Report was approved by the Board on 12 March 2020.
Samir Desai
Chief Executive Officer
Annual Report and Accounts 2019
1
Funding Circle at a glance
About Funding Circle
Funding Circle provides small businesses with fast, competitively priced access to finance,
whilst investors and lenders earn attractive returns. Today we are a leading global platform
for small business loans operating in the UK, the US, Germany and the Netherlands.
115,000
jobs contributed
by SME borrowers1
<2%
SME lending as a share of
bank balance sheets1
6.5 billion
GDP contribution1
£470 billion
current addressable market2
1. Source: “The Big Business of Small Business”, Oxford Economics, April 2019.
2. Source: OC&C analysis, 2018.
We have developed a highly efficient and
effective platform that enables small
businesses to access finance directly
from investors, creating opportunities for
both. We use cutting-edge technology,
proprietary credit models and sophisticated
data analytics to create an attractive
and convenient proposition for both
borrowers and investors.
We invest heavily in our technology,
data and analytics to drive a better
customer experience. Our value
proposition to both borrowers and
investors, supported by our credit
and risk management expertise
and single focus on helping small
businesses, has led to high
customer satisfaction rates.
We believe that as we get bigger and
help more small businesses access the
finance they need to grow, we will create
a stronger platform with increased
competitive advantage. This creates
a virtuous circle that will enable
us to continue to help thousands of
small businesses around the world
and drive market share.
2
Funding Circle Holdings plc
Strategic report WHAT MAKES FUNDING
CIRCLE UNIQUE
Leading
platform in
underserved
market
Illicon
Unlimited Lending Potential
Funding Circle operates in a
segment where SMEs have been
underserved and dissatisfied
with traditional lenders
Read more on page 10
Superior value
proposition
Superior value proposition for
both borrowers and investors
drives strong repeat rates
Read more on page 16
Virtuous
network effects
Virtuous network effects driven
by scale and an attractive
underlying business model
Read more on page 12
Sophisticated
technology
and data
Sophisticated technology,
data and analytics drive
superior customer experience
and competitive advantage
Read more on page 20
Strong growth
opportunities
Compelling growth
opportunities with an
improving financial profile
Read more on page 10
c.80,000
small businesses
helped
80–90
Net Promoter Score for
borrowers in the UK
and US
2
loans taken out
every 5 years by
UK borrowers
350
members of our
tech and data team
globally
18%
revenue growth
in 2019
Founder-led
entrepreneurial
culture
Founder-led and experienced
management team with
entrepreneurial culture
Read more on page 22
73%
employee satisfaction
globally
Annual Report and Accounts 2019
3
Chairman’s statement
Laying the foundations for
long-term success
On a personal level, I am proud of how
the Board and management team
worked together constructively in 2019
to take tough decisions which hurt our
short-term growth but which support
the business and position it for future
success. The Board has overseen a
subtle shift in emphasis from that of
being a private company with a dominant
focus on growth to being a public
company with a balanced focus on
profit and growth.
The year ahead
A year ago, just days ahead of Britain’s
expected exit from the EU, I wrote that
if economic conditions were to turn
adverse, we would do all we can to ensure
that Funding Circle continued to find
funds for SMEs. A year on and I write
again at a time of potentially volatile
social and economic consequences,
this time created by the coronavirus.
The message remains the same – much
has changed since the founders launched
Funding Circle nearly ten years ago, but
what has not changed is the importance
of channelling capital through to small
businesses which are the lifeblood of
economies. Whatever the economic
headwinds that we face, we will continue
to seek to be the go-to destination for
SMEs looking for capital.
A significant portion of 2019 was spent
working on innovative new product
improvements and I want to congratulate
the team on completing the initial build
of the new instant decision lending
platform. We know small businesses
prefer the online experience when it
comes to accessing finance. It is a clear
demonstration that while we mature as
a listed company, we have lost none of
the creative entrepreneurialism which
underpins our market leadership. We
hope to see even more evidence of this
in the months ahead.
I am proud of how the
Board and management
team worked together
constructively in 2019
to support the business
and position it for
future success.
2019 in review
2019 was a year of challenge,
economically and politically, for the
country – and we were not immune
from those prevailing headwinds – but
I am pleased to say we start 2020 as
a sharper and more resilient business.
In response to a deteriorating economic
outlook, we took proactive action to
tighten lending in higher risk band loans.
Clearly this impacted overall origination
volumes in the second half of the year,
and in turn our financial performance
for 2019. These were not decisions
taken lightly by the Board, but in times
of uncertainty and challenge, it is
important we take decisions that are in
the interests of the long-term success
of the business – and for the benefit of
customers on our platform.
4
Funding Circle Holdings plc
Strategic report Our team and our governance
As your Company evolves, so too does
its Board. In January 2020 Sean Glithero,
Chief Financial Officer, informed the
Board that he would step down during
the course of the year. We would like to
thank him for his significant contribution
since joining us in 2017. He has been an
integral member of the team and we wish
him all the best for the future. We look
forward to welcoming Oliver White, who
will bring vast experience growing an
international loan provider.
We are moving to a new delivery model
in Germany and the Netherlands, which
will involve a smaller, dedicated team in
London. I would personally like to thank
all those who played a part helping to
establish a market-leading position in
both markets.
The Board is acutely aware that success
will only be achieved by continuing to
promote the kind of values and culture
that has made Funding Circle a magnet
for talented people over the last nine years,
and a company everyone is proud to
work for.
The team places great importance on
listening to people across the Company
and taking their opinions into account
when formulating strategy. We were
particularly pleased to see the voice of
our Circlers brought into the boardroom
through a structured programme of
employee engagement with Non-
Executive Board members in 2019.
I am enormously proud to be Chairman
of a business which has such strong
values. As we enter the tenth year of
Funding Circle’s short history, it will be
more important than ever to balance
our obligations as a publicly listed
company with the entrepreneurial spirit
that courses through this Company and
so many of the small businesses we
serve. This is no easy feat in a complex
and fast-moving environment and the
Board has risen to the task so far.
At the same time, 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 are also
committed to maintaining open lines of
communication with our shareholders
and to proactively addressing any
issues in a timely manner.
I wish to thank our investors who have
continued to support the Company
during its first year as a PLC. They
understand the potential of Funding
Circle and their long-term support is
hugely appreciated. I would also like to
warmly welcome all our new shareholders
as we enter the next stage of our
Company’s journey.
Finally, I’d like to thank everyone at
Funding Circle for their hard work and
dedication throughout the past year. A
huge amount has been achieved in the
year with strategic developments while
our core business has emerged leaner
and fitter than before. Whatever
short-term turbulence is caused to
the global economy by the threat of
the coronavirus, the Board has great
confidence in the future of the Group.
Andrew Learoyd
Chairman
12 March 2020
Annual Report and Accounts 2019
5
Chief Executive Officer’s statement
A year of evolution
and progress
operating profit of £3.0 million in H2
2019 (H2 2018: negative £5.4 million).
Profitable growth is our focus as a
business and the UK represents c.65%
of the Group. With our US business
following a similar trajectory to the UK,
we are well positioned for 2020.
Operational overview
As we highlighted in the 2019 half-year
results, last year we saw higher risk band
loans showing lower returns due to the
macro environment. In response to this
trend, we proactively tightened lending
in these higher risk bands. This affected
the overall conversion of borrower
applications and our revenue growth
expectations for the year, but protected
net returns to investors. The early signs
have been positive. Investor returns are
expected to deliver 5.0–7.8% in the UK
and US for loans originated in 2019,
20–30% higher than 2018. This prudent
step was the right course of action for
the long-term growth and development
of our business.
Enhancing our leadership
position in the UK
Despite a challenging political and
economic environment in the UK, we
continued to build on our leadership
position in the UK in 2019. Net lending
to SMEs through our platform was
regularly higher than many of the major
banks during the course of 2019, further
highlighting the impact investors have
when they use Funding Circle. We also
launched a number of new investor
products, including our asset-backed
bond programme and UK Private Fund.
By deepening and diversifying our
investor base, we are growing the
universe of investors on the platform
and ultimately helping more SMEs.
Over the past decade,
we have seen first hand
the huge societal and
economic impact
SMEs can have.
I’m incredibly proud of how far we have
come as a company since we launched
Funding Circle. Through our platform,
investors have helped tens of thousands
of businesses globally to access the
finance they need, which has in turn
created hundreds of thousands of jobs.
Over the past decade, we have seen first
hand the huge societal and economic
impact SMEs can have. However, too often
SMEs are ignored or forgotten about
when it comes to finance. At Funding
Circle we are determined to champion
these business owners who are made to
do more. It is our mission to be the place
where these small business owners can
access the finance they need to win.
Financial overview
In 2019, we grew revenue to £167.4 million
(2018: £141.9 million), up 18%, with loans
under management up 19% to £3.73 billion
(2018: £3.15 billion). It was pleasing to
see our UK business deliver an
6
Funding Circle Holdings plc
Strategic report One of my biggest highlights in 2019 was the
completion of the initial build of our new instant
decision lending platform. This new platform is
revolutionary in small business lending.
We rely on them for so much, yet they
continue to be underserved by the
traditional players when it comes to
accessing finance. As a business we are
committed to solving this problem and
helping small businesses win. This was
our simple aim when we first launched the
business nearly 10 years ago and it
remains so today.
We look ahead to the rest of 2020 with
optimism. 2019 was a year where we
completed a lot of work on new ways
to improve the experience for small
businesses, and this year people will
start to see the results of this hard work.
I look forward to updating you on our
progress in 2020.
Samir Desai
Chief Executive Officer
12 March 2020
One of the biggest SME loan
portfolios in the United States
In the US, we continued to invest with a
long-term perspective, taking market
share and establishing ourselves as one
of the biggest SME loan portfolios in the
country. Funding Circle would be one of
the 50 largest SME loan portfolios, if we
were a bank. Throughout the year, we
expanded our partnerships programme,
deepening relationships with other lenders
like Lending Club, as well as Intuit and
Stripe. We also launched our inaugural
asset-backed bond programme in 2019,
securitising $210 million (£172 million)
of SME loans in August 2019 with a
further securitisation of $252 million
(£192 million) occurring in January 2020.
Refining the business model in our
Developing Markets
We have recently taken the decision to
refine our business model in our German
and Dutch markets. We will focus on
originating loans for local lenders that
we have partnered with in each market,
as opposed to for institutional and retail
investors. This will enable us to move to
a more efficient model that better serves
small businesses in these markets, and
will help to accelerate our overall business
on the path to profitability. We anticipate
that, going forward, adjusted EBITDA
losses will fall in Germany and the
Netherlands from £16.4 million to low
single digit millions.
As part of this move we will operate with
a smaller team going forward based in
London. Saying goodbye to members of
the team is never easy and I want to express
my sincere thanks to the teams in
both countries for their hard work and
dedication. We continue to be excited by
the German and Dutch markets, but it is
important that we have the right long-term
model to best service businesses in
each of these geographies.
Building the next generation
technology platform for
small businesses
One of my biggest highlights in 2019
was the completion of the initial build of
our new instant decision lending platform.
This new platform is revolutionary in small
business lending. We began rolling out
initial pilots for instant decision loans
in the last quarter of 2019, with the first
loans taking an average of 6 minutes
from application to approval. We remain
on track to roll out this market-leading
functionality to c.50% of borrowers in
the UK and US by the end of 2020.
Our people
The exceptional group of people we
have at Funding Circle are central to the
successes we experience as a business.
I would like to thank every member of
our talented team, for all their hard work
and commitment over the past 12 months.
I am proud of the open and transparent
organisation we have built together.
The culture we have at Funding Circle is
special and continuing to foster this will
ensure we achieve long-term success.
Looking ahead
Over the past 12 months we have shown
we will always be prepared to do the right
thing for the long-term future of the
business. Funding Circle was founded in
a harsh economic climate, against the
backdrop of the global financial crisis.
Our growth and resilience over the last
ten years prove we are prepared for
similarly tough conditions whenever
they arise.
The opportunity in front of us remains
huge. The current addressable market we
operate in today is £470 billion, yet we
remain only c.1% of the market. SMEs are
woven into the fabric of our lives.
Annual Report and Accounts 2019
7
IGNITING OPPORTUNITIES
Just Jan’s
GOING
FURTHER
8
Funding Circle Holdings plc
Strategic report Just Jan’s is a full line
of gourmet fruit
spreads and foods,
made from recipes
created by Jan, and
without artificial
ingredients or
preservatives.
Just Jan’s produces gourmet fruit spreads
and marmalades which are all natural and
preservative-free, made by hand in Jan’s
Kitchen in California, US. Not just for toast,
the spreads and marmalades are for use in
everything from cocktail recipes to baked
goods. To meet growing demand, Jan returned
to Funding Circle this year to access finance
to help cover inventory and production costs.
Annual Report and Accounts 2019
9
Our market
Leading lending platform in
underserved market
SME market overview
SMEs play a vital role in
society, driving economic
growth, employment and
innovation. Each year these
businesses are responsible
for 50–60% of economic value
creation in the OECD region.
Despite their importance,
SMEs are often overlooked,
underserved and undersupported.
The competitive landscape
Globally, 53% of SMEs say it is difficult
to gain access to capital. In the years
since the global financial crisis, bank
lending to SMEs has become more
restricted. In the UK alone, total outstanding
lending to small businesses by banks
has fallen by 11%, from £189 billion in 2011
to £168 billion in 2019. Structural issues
mean banks now tend to focus on lending
to consumers or larger corporates.
Across the same period, technology has
made direct lending possible. Much akin
to platforms in the transport sector,
lending platforms are able to match
supply directly with demand, giving a
wide range of investors the opportunity
to lend directly to SMEs. This model is
proving to be a more efficient mechanism
to channel funds to the real economy,
without the systemic risk inherent in
the banking system.
Governments recognise the social good
lending platforms are providing and have
introduced initiatives to support the growth
of this innovative new model, which in
turn improves choice and competition
in the market and stimulates SME lending.
In the UK, the Government-owned British
Business Bank is lending through
platforms like ours.
Four major groups of competitors in SME space
Borrower proposition:
Traditional
banks
Lending
platforms
Specialist
lenders
Captive
networks
50+
25+
75+
100 100
75+
50+
25+
50+ 50+ 50+
For high credit risk
Network only
Awareness
Speed and
convenience
Access to finance
Low interest rate
25+
100
75+
100
100
25+
50+
100
10
Funding Circle Holdings plc
Strategic report As a result there is now more choice
and competition in the SME finance
market than ever before, which means
the competitive landscape in which we
operate is now made up of:
i) Traditional banks
Despite the landscape changing
significantly, banks continue to be the
dominant players in terms of overall
SME lending volume in each of our
markets. High concentration exists in
the UK and the Netherlands, and high
fragmentation in the US and Germany.
The outcome for SMEs, however, is
largely the same; creditworthy businesses
are turned away or are simply put off by
the often long processes involved.
ii) Lending platforms
Lending platforms have emerged across
the world particularly in the last decade
and are now competing with banks.
Operating completely online, with lower
overheads than traditional lenders,
platforms allow a wide range of
investors to lend directly to SMEs. This
has opened up pools of capital not
previously available to small businesses
including retail investment and financial
institutions such as pension and insurance
funds. Governments are also able to use
lending platforms as a macroeconomic
tool to stimulate the real economy.
SMEs are increasingly choosing lending
platforms over a bank, due to the speed,
flexibility and service offered. Today, a
wide variety of 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.
iii) Specialist lenders
Specialist lenders serve a smaller portion
of the overall market. They differentiate
themselves by focusing on specific
segments by product, such as asset
finance or invoice finance.
iv) 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 by only
focusing mainly on lending products to
SMEs which use their services, their
borrower base remains relatively small.
SME lending is a massive global market
Funding Circle currently has c.1% market share
~£1.2trn
Current geographies’
total SME debt
~£470bn
Current geographies’
addressable market1
~£3.7bn
Funding Circle
outstanding loans as
at 31 December 2019
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%.
Annual Report and Accounts 2019
11
Our business model
How we create value
Building the place where small businesses can get the funding they need to win.
Platform
B u siness loan
Amazing
borrower
experience
Sophisticated
data analytics
Platform
Cutting-edge
technology
Superior
investor
returns
Monthly paym e n t s
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. This results
in high repeat rates, helping us to grow alongside our customers.
Through our platform, we are 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.
Borrowers
Core 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.
Our typical borrowers have:
‐ 10 years’ trading history
‐ 7 employees
‐ ~£1m revenue
‐ ~£80k loan size
‐ 48 months average term
‐ 10 minute application;
24-hour turnaround
How we make money
Transaction fee
Marketplace borrowers
We are also trialling opening up
our marketplace, offering a range
of products beyond our core
term loan product. By connecting
borrowers with other lenders in
the market, we are able to offer
larger loans, asset finance and
invoice finance.
12
Funding Circle Holdings plc
Strategic report
Investors
Value created
Core investors
Our original innovation ten years
ago means a wide range of
investors are now investing in
SME loans. The platform model
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.
‐ 50% of funding from
institutional investors
‐ 23% retail
‐ 16% bonds (see below)
‐ 7% funds
‐ 4% government
How we make money
Servicing fee
Funding Circle ABS
Funding Circle sponsored ABS
bonds containing a pool of
whole loans.
How we make money
Net investment income
Marketplace lenders
20+ lenders on our
marketplace panel.
How we make money
Transaction fee
For borrowers
Access to fast, flexible, affordable finance,
coupled with excellent customer service, allowing
SMEs to get on with what they do best; growing
their business whilst contributing to the local
community and economy.
£8.5 billion
lent to businesses
For investors
Access to a stable and attractive asset class,
previously only ever held on bank balance sheets.
5.0–7.8%
expected investor returns for loans
originated in 2019 in the UK and US
For employees
The opportunity to build the incredible, to make
a positive lasting impact on a huge societal
issue, fast-tracking career experience in an
accelerator environment and working in a way
unlike any other public company.
83%
approval of CEO on Glassdoor
Annual Report and Accounts 2019
13
Strategic priorities
Delivering our strategy
At Funding Circle our mission is to build the place where small businesses can get the funding they
need to win. Underpinning this mission is our three-year strategic plan, FC2020, which we launched
at the start of 2018 and acts as the foundation to achieving our long-term goals. The FC2020 plan
is based on four key pillars that focus on how we service and delight our customers:
1
2
Drive a better
borrower experience
Invest in data, tech
and analytics
We believe SMEs deserve a faster, easier and all-round
better experience when it comes to accessing finance;
by improving the borrower experience and increasing
brand awareness, we attract more SMEs to our
platform and expand our presence in key markets.
Technology, data and analytics are central to our strategy
and underpin our success as a business. Through
continued investment and innovation in this area, we
leverage our data to enhance our risk and credit models,
while developing cutting-edge, customer-centric
technology to improve the user experience.
Our strategy in action
We consistently achieve strong customer satisfaction
scores and repeat business. By focusing on price, access
and engagement, and by investing in technology and data,
we’re improving convenience and efficiency to enhance
the overall user 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 datasets and
invest in analytical tools to create more personalised
processes, while increasing automation by rolling out
our new global technology platform.
Progress in 2019
‐
Integrated a third party engine to support decisions on
risk and price.
‐ Created a data lake repository for all Funding Circle data,
which underpinned the build of our new instant decision
lending platform.
Link to KPIs:
‐ Loans under management
‐ Originations
‐ Revenue
Link to risks:
‐ Portfolio risk management
‐
‐ Technology risk
Information security
Progress in 2019
‐ Completed the initial build of the new instant decision
lending platform and rolled out initial pilots for
instant decision loans.
‐ Maintained strong customer satisfaction scores of 80-90
(Net Promoter Score).
‐ Opened up our marketplace to allow other lenders to
serve borrowers who are better suited to a non-core
loan product.
‐ Started work on a new creative campaign – “Your Business,
Your Baby” – which launched in January 2020.
Link to KPIs:
‐ Loans under management
‐ Originations
‐ Marketing as a % of revenue
‐ Revenue
Link to risks:
‐ Economic risk
‐ Portfolio risk management
‐ Reputational risk
‐ Client detriment
‐ Financial crime
14
Funding Circle Holdings plc
Strategic report By delivering against these strategic priorities, we’re evolving our business and preparing for
the future. Since 2018 we have made good progress, and we will continue to invest in these areas
this year as we build on our leadership position in each of the geographies where we operate.
We also look forward to rolling out our next three-year plan at the end of 2020.
3
Diversify
funding sources
4
Build a highly scalable
global business
Diversifying our funding base helps to ensure the
sustainability of our business. We work to attract
long-term commitments from investors, and will take
prudent steps to protect their investments and enhance
the predictability and stability of returns.
Our aim is to continue growing as a leader in the platform
lending industry. We believe there is an opportunity to
build an even larger base of SMEs and investors in our
existing countries.
Our strategy in action
Since day one our strategy has been to create an investor
base with breadth and depth. Today we have retail investors,
government entities and institutional investors all lending
through the platform in various different ways. In 2019 we
built on this by offering new fund and bond products,
providing investors with further choice around how
to access this important asset class.
Progress in 2019
‐ Launched new Funding Circle sponsored products: ABS
Bonds in the US and UK, and Private Funds in the UK and
Continental Europe.
‐ Welcomed new investors to the platform, including the
European Investment Bank, Merseyside Pension Fund
and AVIDA.
‐ Positive action taken to improve net returns for investors.
Investor returns are expected to deliver 5.0–7.8% in the UK
and US for loans originated in 2019.
Our strategy in action
We have a strong track record of identifying and grasping
expansion. We continue to explore new ways to build on our
leadership position and help more underserved SMEs.
Progress in 2019
‐ Continued our efforts to unify all geographies onto a
single money and loan platform.
‐ Continued to build an operations hub in Denver to serve
large US market.
‐ Centralised functions such as risk and finance to create
efficiencies and better ways of working.
Link to KPIs:
‐ Loans under management
‐ Originations
‐ Revenue
‐ Loss before tax
‐ EPS
‐ Segment adjusted EBITDA
‐ Adjusted EBITDA
‐ Free cash flow
Link to risks:
‐ Economic risk
‐ Funding risk
‐ Liquidity risk
‐ Regulatory risk
‐ Client money risk
‐ Reputational risk
Link to risks:
‐ Economic risk
‐ Reputational risk
‐ Technology risk
‐ Regulatory risk
Link to KPIs:
‐ Loans under management
‐ Originations
‐ Revenue
‐ Loss before tax
‐ EPS
‐ Segment adjusted EBITDA
‐ Adjusted EBITDA
‐ Free cash flow
‐ Marketing as a % of revenue
Annual Report and Accounts 2019
15
Value proposition for borrowers
Flexible fast finance
We combine sophisticated technology with a human touch. In addition to our
cutting-edge lending software and programmes, our account managers ensure
the smooth running of customer applications and relationships.
A revolution in SME lending
By combining cutting-edge technology
with exceptional customer service,
we provide a borrower experience
that’s second to none. Characterised by
convenience and speed, our unique offer
is underpinned by expert risk management
and analytics, enabling us to make our loan
application and decision-making process
as quick, easy and secure as possible.
Our aim is to simplify the borrower
experience, removing the hassle,
complication and uncertainty that has
traditionally surrounded SME funding.
Through a simple online application, we
deliver a fast, flexible and competitively
priced loan, while our dedicated account
managers build smooth-running and
long-lasting customer relationships.
ten years, and generate approximately
c.£1 million of revenue per annum. They
are often small family businesses which,
historically, have been overlooked and
underserved by bank lending.
The borrower base is also highly
diversified across geographies and
industries, which helps to ensure stable
investor returns and protect against
the effects of economic downturns
and market volatility.
The average size of loans originated
through the Funding Circle platform is
approximately £80,000. The loans are
fully amortising, with an average lending
term of 48 months but ranging from
6 to 60 months. Interest rates on
Funding Circle loans have averaged
approximately 11%.
Focused exclusively on small
business borrowers
At Funding Circle, we focus exclusively on
SME lending. Borrowers have, on average,
seven employees and a trading history of
Committed to helping SMEs fulfil
their ambitions, we focus on enhancing
the user experience and making the
application and funding process as
efficient as possible.
By opening up our marketplace, we
enable access to a diverse range of
partner lenders to help expand SME
funding options.
The appeal of our value proposition
for borrowers is reflected in our high
customer satisfaction scores. In 2019,
we achieved a Net Promoter Score
between 80–90 in the UK and US.
Key developments in 2019
During 2019, we introduced two major
platform innovations to further enhance
the borrower experience:
Serving more businesses
In 2019 we began the development
of our new instant decision lending
platform that will streamline the borrower
user experience through automation,
enabling greater speed and ease of
access for borrowers. At the end of the
year, we began to pilot this new technology
for a small number of borrowers in the
UK. The results have been encouraging.
Profile of average borrower
48
term of loan (months)
~£80k
loan size
10 years
trading history
~£1m
revenue
7
number of employees
16
Funding Circle Holdings plc
Strategic report c.80,000
borrowers globally
80–90 NPS
Net Promoter Score in UK
and US in 2019
82%
of borrowers would choose
Funding Circle again in future
rather than their bank
70%
of borrowers would choose
Funding Circle first because
the process is too long or
inconvenient at a bank
The first borrower to use our new
technology platform received an instant
loan decision with zero physical
documentation required in just six minutes.
Ten years of development and expertise
in product, technology and risk management
has enabled us to get to this stage. In
2020 we will continue to improve this
experience and roll it out to a larger
number of borrowers, both in the UK
and US.
Opening up our marketplace
Also in 2019, we began a pilot which
opened up our marketplace to a panel of
carefully selected, specialist SME lenders
– both traditional and other FinTechs.
This allows us to serve more borrowers,
a key metric of ours, by referring customers
who have come to Funding Circle in
search of finance but are not suited to
our core loan product.
By guiding SMEs to alternatives,
we’re able to help more customers and
supplement our existing product offer,
catering for a broader range of SME
finance needs. We are also capitalising
on the strong brand we have built in
the SME finance market, furthering our
reputation as a major player and enabler
in the SME online lending market.
In 2020, we will continue this pilot,
onboarding more partner lenders as
part of our commitment to saying “yes”
to more and more SME customers globally.
IGNITING OPPORTUNITIES
Supakart
GET UP
AND GROW
Supakart are an indoor karting centre based in Newport,
Wales. Managed by a family of petrolheads who have
been racing for years, they know how to make seriously
exciting karting tracks.
Supakart experienced somewhat of a lull after
20 years of trading. Something needed to change.
I applied to Funding Circle for a loan to help with
a whole raft of changes, including a new section
of track, karts and balcony spectator area.
These changes have brought the most significant
increase in turnover since we started trading in 1995.
Funding Circle were a breath of fresh air. The process
was refreshingly simple and swift, the complete opposite
of my dealings with the high street banks. I would
happily recommend Funding Circle.
Darren Evans
Owner, Supakart
Annual Report and Accounts 2019
17
Value proposition for investors
Stability, protection and choice
We are committed to providing investors with attractive and stable returns,
which is why we will take prudent steps to protect returns when needed.
Launching new investor products
Private Funds
We were pleased to launch new investor
products in 2019: ABS bonds and Private
Funds. These products are designed to
widen the universe of lenders that can
access the platform by providing
investors with more choice around how
they access the asset class.
ABS bonds
Our new Funding Circle sponsored ABS
bonds give investors more choice as to
how they access the SME loan asset
class. By strategically using our balance
sheet to launch these new products,
we’re able to bring a wider range of
investors on board. This diversification
encompasses banks, asset managers
and government institutions, which will
help us maintain funding over a full
credit cycle.
Projected annualised return ranges1
5.0–
7.0%
5.7–
7.8%
5.0–
6.3%
4.1–
5.1%
We also launched two Private Funds
which provide access to investors who
cannot hold individual loans, but who
can invest in private funds.
In January, we launched the Funding
Circle European SME Direct Lending
Fund I. Alongside Funding Circle, third
party investors have committed in
excess of €40 million in lending to
German and Dutch SMEs.
This was followed by the launch of the
Funding Circle UK SME Direct Lending
Fund I in June, which intends to raise
more than £200 million from UK
institutional investors. Merseyside
Pension Fund has invested £30 million
alongside Funding Circle, initially
supporting approximately 600 small
businesses across the UK.
Making retail liquidity more equitable
We are always looking at ways to
improve the lending experience. Following
a review in 2019, we introduced changes
to how the secondary market for retail
investors works.
UK
2018
UK
2019
US
2018
US
2019
1. The projected annualised return is calculated by
combining the actual annualised return received to
date, and our latest return estimates for the remaining
term of loans that have not yet been fully repaid.
5.0-7.8%
projected annual returns for
loans originated in 2019 in the
UK and US
In August, in the US we announced a
$210 million asset-backed securitisation
of US small business loans, adding
18 new institutional investors to the
platform. This initiative was followed
in November by our announcement of
a £250 million securitisation of UK
small business loans together
with Waterfall Asset Management.
Our value proposition for investors aligns
with one of the key pillars of our FC2020
strategy which we set out at IPO:
diversifying funding sources.
Our model has provided investors with
access to an asset class previously only
held on bank balance sheets, thereby
opening up a whole new asset class
to the investor community. This has
attracted a diverse range of investors,
including retail investors, asset
management companies, insurance
companies, government-backed entities
and funds – both public and private.
To give investors greater flexibility in how
they access the SME asset class, we are
committed to creating new products
and diversifying investment options.
Key developments in 2019
During the year, we introduced a
number of new programmes designed
to further strengthen our value
proposition for investors:
Protecting investor returns
As a result of the challenging macro
environment, we proactively tightened
our credit criteria for higher risk loans to
protect returns for investors. This was
the right decision for investors and for
the long-term success of the platform
and we’re pleased that the early signs
show the decisions we took are working.
For loans originated in 2019, investor
returns are expected to deliver 5.0–7.8%
in our core markets of the UK and US,
20–30% higher than 2018. Annual
returns in Germany and the Netherlands
are expected to deliver 4.7–8.0% for
loans originated in 2019.
18
Funding Circle Holdings plc
Strategic report How we 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’re able to react and implement changes quickly.
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.
Random allocation
All investors, both retail and institutional, are randomly
allocated loans. Retail investors purchase fractional loan
parts and institutional investors purchase whole loans.
Regular stress tests
We regularly stress test our loans to assess the potential
impact of adverse economic conditions on our loan book.
Covering various recessionary scenarios, our tests
suggest that, even in a major economic downturn, our
investors would still make positive returns.
Passive investment
All institutional and retail investors, with the exception
of accredited investors in the US, invest passively through
our platform.
Being able to sell loans on the secondary
market has always been reliant on there
being buyers, but the changes we made
provide all retail investors wishing to sell
with equitable access to the available
liquidity at the time.
Specifically, we launched a new selling
tool which cycles through all investors
wishing to sell loan parts as many times
as possible within a 120-day period.
As a result, investors receive money
back more regularly from the loan
parts that have been sold.
Implementing new FCA regulations in
the UK
We have always welcomed regulation of
the platform lending industry and we are
supportive of the Financial Conduct
Authority’s (“FCA”) desire to raise
standards across the sector.
Following a ‘post-implementation’ review
of industry regulations initiated in 2016,
the FCA announced in June new regulations
for lending platforms that accept retail
investments under Article 36H, which
came into force in December 2019. The
key changes include:
‐ New retail investors on lending
platforms now need to take an
‘appropriateness assessment’ to help
ensure customers understand how
the platform they are joining works,
the risks involved, and the nature of
the investment offered.
‐
Investors will also have to classify
themselves as ‘everyday’,
‘sophisticated’ or ‘high net worth’
investors. Investors who classify
themselves as ‘everyday’ can only
lend up to 10% of their investable
assets in their first year using a
lending platform.
Enhancing collections and recoveries
Across all our geographies, our specialist
Collections, Recoveries and Litigation team
works closely with borrowers who run
into difficulty, providing an industry-leading
collections service. In 2019, we challenged
ourselves to work more effectively
on behalf of investors including:
‐ building a strong compliance culture
and continuing to operate in a fair
and transparent way with customers;
‐
leveraging learnings about
human behaviour; and
‐ working with an external debt
collection agency to improve our
alignment with best practice.
As a result of these efforts, in 2019
we improved our recovery rate and
reached our overall collections targets
in the UK.
Annual Report and Accounts 2019
19
Technology and data
Transformational innovations
Technology, data and analytics flow through everything we do and underpin
our success as a business.
Over the last decade, we have built up
a huge SME knowledge base and
aggregated vast amounts of information.
This has enabled us to develop rich
proprietary datasets on borrowers and
borrower performance, from which we
build highly accurate risk and pricing
models. At the same time, through the
development of bespoke, customer-
centric technology, we have created an
agile, responsive and unified money and
loan management platform. Combined,
these assets help to ensure that speed,
accuracy and ease of access lie at the
heart of our user experience.
The scale and sophistication of our
technology attracts exceptional talent
to our business, creating a virtuous
circle that drives continuous improvement,
refinement and competitive advantage.
Our software and data engineers are
among the best in the industry, and as at
31 December 2019 our technology team
accounted for 30% of our global workforce.
In our approach to technology, we
embrace agile ways of working, promoting
collaboration and innovation across the
Company. We use cutting-edge
technology and coding languages,
such as Kafka and Clojure, to deliver
world-class solutions for our customers.
The scale and sophistication
of our technology attracts
exceptional talent to our
business, creating a virtuous
circle that drives continuous
improvement, refinement and
competitive advantage.
20
Funding Circle Holdings plc
Strategic report During 2019, we invested significantly
in technology and data, with a number
of major initiatives launched or
in development.
more than 1 million loan applications
and our own proprietary data lake
containing data on 26 million
businesses and 2 billion data points.
Money and loan platform
unification (or controlling
client money)
In 2018, we began the first stage
of unifying all of our geographies onto
a single money and loan management
platform globally, which will bring
synergies and cost efficiencies. The
benefits of our new global platform are
highly auditable money movements and
the ability to scale as we grow our
customer base and product offerings.
After deploying new reconciliation
systems in the US in 2018, we completed
the implementation of those systems
as well as enhanced loan servicing in
Germany and the Netherlands in 2019. In
2020, we plan to begin implementation
of these global systems in the UK, which
will continue to strengthen our position
with regulatory bodies and investors.
The new era of instant
decisioning
In December, we completed the initial
build of our instant decision lending
platform. This will drive superior customer
experience and competitive advantage,
providing instant loan decisions in just
a few minutes, streamlining the user
experience and providing swift access
to funds.
Illicon
Access anywhere, anytime
The platform includes historical data
built up over the last ten years, including
It is powered by Funding Circle’s eighth
generation of artificial intelligence enabled
credit models, and the new architecture
is decision orientated, meaning questions
can change depending on the answers
borrowers give. This allows us to customise
our application forms in real time to the
size, risk and channel a borrower comes
to us from. We have not seen this level
of customisation deployed in SME
lending before.
This ground-breaking technology is a
major development for Funding Circle.
We’re on track to automate 50% of all
loan applications by the end of 2020,
making the lending experience simple
and seamless for hard working
small businesses.
Data developments
It was a big year for strengthening
our data foundations and tools.
A key development here was the
implementation of new technology that
channels lead data into our Customer
Relationship Management system.
This allows our sales teams to receive
data in real time, which means they
can respond more quickly and better
serve businesses.
To enhance internal processes, we
integrated a third party decision engine
into our system infrastructure. The
aim here was to give more power and
autonomy to our risk and analytics
teams, who are now able to test and
deploy statistical models largely
independently, with minimal support
from our engineers. This integration
therefore not only supports decisions on
risk and pricing, but frees up engineering
resource for other developments within
the business.
We also launched the Funding Circle
data lake, which brings data from our
customers, third parties and internal
systems into a single storage repository.
This process enables us to configure
the data we hold using cloud analytics,
equipping our teams with powerful and
accurate modelling tools and ensures
we always have a single source of truth.
In addition, in the UK, the US, Germany
and the Netherlands, we consolidated
our regional data hosting centres into a
single distributed infrastructure platform.
This new platform ensures better data
security and enhances our ability to
monitor, scale and improve site and
system performance. We have
continued to enhance the tooling we
provide to our technology teams in
terms of testing and continuous code
deployment, allowing those teams to
test and deliver new products with agility.
Across all our work in this area, the
security of customer information is
of paramount importance. Through our
new data repository and other security
technology, we aim to ensure that
personal data is protected against theft,
loss, deletion, damage and corruption.
We are also committed to investing in
our accounting and security controls,
providing additional reassurance for our
customers and regulators.
Annual Report and Accounts 2019
21
Strategic report
Our people
Made to do more
Our success would not be possible without the talent and commitment of our people. Quite simply,
our people are our business. Strongly aligned to our mission and values, sharing our customers’
passion and drive, every single one of our employees is “made to do more”.
We strongly believe that our unique
culture, underpinned by our values, is
key to our long-term success. Attracting,
developing and retaining the best and
most diverse talent will help us to achieve
our mission of building the place where
small businesses can get the funding
they need to win. We work hard to
create an environment where Circlers
can thrive and feel connected to this
mission. Circlers have always been
owners in the business, through our
employee equity scheme, and will
continue to be as we grow.
Be Open
Open communication and keeping
Circlers informed about our strategy
and how we are tracking against it is
fundamental to our culture.
We continue to find opportunities to
communicate and engage with Circlers
even as we grow. In 2019 we revamped
our weekly Global and Local Gatherings,
where everyone comes together across
all office locations. We believe in the
value of face-to-face communication,
and the gatherings allow us to provide
the opportunity for Circlers to
communicate, share information and
interact with each other, our founders
and senior management.
Twice a year we also meet after the
publication of our full and half-year
results – the Full and Half Circle events
– where we reflect on progress made
and look ahead to the coming months.
It is important to us that everyone has
the opportunity to hear and understand
the strategic direction of the business.
We also took the voice of our people
into the boardroom, with a new global
initiative designed to enable employee
engagement with Board members.
In line with new requirements of
the UK Corporate Governance Code,
this programme facilitates open and
transparent discussion between our
Board and Circlers, reinforcing the
Company culture and ensuring Circlers
can provide feedback directly to
the Board.
Similarly, responsible conduct is
an integral part of our culture. We
encourage our Circlers to speak up if
they see any issues of concern, and
regularly remind them of the channels
open to them to report any potential
instances of wrongdoing, or anything
not in keeping with our values or policies.
83%
CEO approval on Glassdoor
as at 31 December 2019
22
22
Funding Circle Holdings plc
Funding Circle Holdings plc
Strategic report Our values
Each office location has a
unique culture but all are united
by our shared values, passion
and purpose, which run through
everything we do.
THINK SMART
Challenge assumptions, seek
insights and make informed
decisions. Everyone has a voice,
so be ambitious.
MAKE IT HAPPEN
Be courageous and take
ownership. Take small steps fast
and commit to seeing it through.
BE OPEN
Treat everybody with respect
and be honest with each other.
Transparency and integrity
build trust.
STAND TOGETHER
Listen, understand and support
each other. Win or lose as one.
LIVE THE
ADVENTURE
Bring your passion with you
every morning and have fun.
Think Smart and Make
It Happen
As a leading FinTech firm, we want to
ensure we have the talent and teams we
need for the future, while also supporting
innovation across the business. To this
end, we are firmly committed to helping
our people develop the skills and
knowledge they need to progress.
FC Academy, a peer-to-peer learning
network launched in 2017, continued to
offer a range of courses to help Circlers
develop. To date more than 230 courses
have been delivered. This was supported
by Learning Circle, our global online
learning platform, where Circlers can
access an extensive library to support
development. In addition, each Circler
receives Money2DoMore (“M2DM”), an
annual allowance to take an external skills
enhancement course. This development
allowance can be accessed individually
or collectively.
In 2019 we evolved our performance
and development approach, introducing
quarterly “check-ins” for a Circler with
their manager, alongside a new 360 tool
where individuals can exchange feedback
with their peers. These check-ins are
then underpinned by a more in-depth
annual reflection and development
conversation in Q1. We believe in creating
an environment of continuous feedback
in order for Circlers to grow and develop.
As of 9 December 2019, all FCA
solo-regulated firms authorised under
the Financial Services and Markets Act
(2000) became subject to the Senior
Manager and Certification Regime
(“SMCR”). At its heart, SMCR is designed
to improve culture and embed appropriate
accountability and responsibility across
financial services organisations. To ensure
readiness for the new regime, we
undertook a multi-year review of our
internal operating model and structure,
including delivering a comprehensive
training programme to all our Senior
Managers and Certified Persons. Plans
are also in place to implement the
conduct rules over the course of 2020
for all Circlers.
1,055
global headcount at
31 December 2019
75%
would recommend
Funding Circle
as a place to work
Annual Report and Accounts 2019
Annual Report and Accounts 2019
23
23
Strategic report
Our people continued
Gender breakdown
As at 31 December 2019
Overall
38+
Female
Male
Group Board
20+
Female
Male
396 / 37.5%
659 / 62.5%
2 / 20%
8 / 80%
Global Leadership Team
44+
Female
Male
4 / 44%
5 / 56%
Read the UK’s gender pay
gap report on our
corporate website:
corporate.fundingcircle.com.
24
24
Funding Circle Holdings plc
Funding Circle Holdings plc
Stand Together
At Funding Circle, we know that diversity
and difference are key strengths. We
want to build a global team where people’s
skills and experiences complement
each other and reflect the customers
we serve. We therefore work to create
an environment that welcomes, supports
and provides equal opportunities to
everyone, irrespective of age, disability,
gender, marriage or civil partnership,
pregnancy or maternity, race, religion
or belief or 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
ensures all applications, including those
from disabled persons, are treated
equally and fairly.
In 2019, we continued to train Circlers
on the importance of diversity including
anti-harassment and unconscious bias,
with a focus on how to build and maintain
diverse teams. This includes training for
our recruitment team, focused on how
to source and interview for diversity.
Historically gender diversity has been
challenging in the financial services and
technology sectors. Overcoming this will
require sustained focus and effort over
multiple years in order to bring about the
required change. We are excited for this
challenge and believe Funding Circle will
play a lead role in driving a sustainable
long-term shift in gender diversity for the
FinTech industry.
44%
females on Global Leadership
Team as at 31 December 2019
Live the Adventure
Creating a great place to work has been
a critical component of our evolution
since 2010. We remain firmly focused
on creating an environment where
Circlers grow in their careers whilst
having fun and enjoying the journey.
There is a wide range of activities and
groups for Circlers to get involved with,
including Circler-led groups such as
Women@FC and FC Impact (more
detail in the Sustainability section) as
well as social networks and interest
groups. We believe all of this helps to
enrich the employee experience.
Women@FC is our women’s network
established in 2018 to generate an
environment for women to succeed
professionally and personally across all
levels at Funding Circle. The group
works across the business to deliver an
activity programme in support of this.
Funding Circle also drives building an
active and supportive community within
the FinTech industry, in which women
can connect, share and encourage one
another to reach their goals. This includes
hosting a range of meetups, hack-nights
and thought leadership events.
We firmly believe that creating and
maintaining a strong culture is key to
being happy in the workplace. Twice a
year, we run a global culture survey to
track employee engagement and
satisfaction. In 2019, our satisfaction
score held steady at 73%. Results from
the survey also showed that a large
majority of Circlers would recommend
Funding Circle as a great place to work,
and they believe they have the opportunity
to develop the skills they want to grow.
We are proud of the unique culture we
have built, and actively encourage Circlers
to suggest ways to continue to improve
working life at the Company. Towards
the end of 2019 we began redefining
our employee value proposition, which
included in-depth sessions with the
team across all levels and at each office
location. This gave us a deep level of
insight into and understanding of what
is important to Circlers and what makes
Funding Circle a great place to work.
The output of this initiative will form the
basis of our focus in 2020, and we look
forward to updating on this in due course.
Strategic report56
+
Q
62
+
Q
80
+
Q
Board–Circler engagement
In 2019 I represented Circlers’ feedback
and views to the Board as part of our
workforce engagement.
I do feel the feedback has sparked
clear action and improvements,
which shows we can really make
a difference in our Company.
Isobel Kain
Senior Fraud Analyst
My role was to represent Circlers by taking the Board through
our collective feedback, both positive and negative, which
was gathered through workshops with people from across
the business.
We did this to ensure Circlers have a voice in the boardroom
and I was pleased to see how committed the Board and
Global Leadership Team were to all the areas we discussed.
Culture is such a crucial part of any business, and it is
important to ensure there is effective communication with
all stakeholders, including shareholders, customers,
communities and employees.
I really enjoyed providing this feedback, and it was great to
see the engagement of Circlers when discussing various
topics. I do feel the feedback has sparked clear action and
improvements, which shows we can really make a
difference in our Company.
Annual Report and Accounts 2019
Annual Report and Accounts 2019
25
25
Strategic report
Sustainability
Building the place where
small businesses get the
funding they need to win
Funding Circle was founded in response to the
global financial crisis and the shortcomings that
it laid bare. Corporate responsibility is one of our
core values that we seek to incorporate into all
areas of the business, in particular through our
corporate governance practices, enterprise risk
management framework, human resources
practices and stakeholder engagement.
Funding Circle sits in a unique position between small businesses
at the centre of our communities, and investors and other
stakeholders, that are increasingly focused on issues of corporate
responsibility. While there is a growing consensus of the
importance of these issues, there continues to be a wide array
of approaches to engagement. We intend to take a practical
approach, leveraging our existing corporate governance and
enterprise risk management frameworks and setting achievable
near-term goals and a base upon which to build for the future.
Section 172(1) statement
The Directors recognise that they
have a duty under section 172 of the
Companies Act 2006 to act in the
way they consider, in good faith,
would most likely promote the
success of the Company for the
benefit of its members as a whole
and, in doing so, to have regard,
amongst other matters, to the:
‐
‐
likely consequences of any
decisions in the long term;
interests of the
Company’s employees;
‐ need to foster the Company’s
business relationships with
suppliers, customers and others;
‐
impact of the Company’s
operations on the community
and environment;
‐ desirability of the Company
maintaining a reputation for
high standards of business
conduct; and
‐ need to act fairly as between
members of the Company.
In discharging their section 172 duties,
the Board has regard to the factors set
out above, as well as to other factors
which they consider relevant to the
decision being made (for example,
the views of regulators). While the
Board accepts that not every decision
it makes will result in a positive
outcome for all of the Company’s
stakeholders, by considering the
Company’s purpose, mission and
values together with its strategic
priorities and having a process
in place for decision making, the
Directors aim to make sure that the
Board’s decisions are consistent
and predictable.
For details on how the Board
operates and the way in which it
reaches decisions, including the
matters discussed and debated
during the year, the key stakeholder
considerations that were central to
those discussions and the way in
which the Directors have had regard
to the need to foster the Company’s
business relationships with customers,
suppliers and other stakeholders,
please see the Corporate Governance
Report on pages 49 to 63, including
the Board’s activities on page 55 and
details on stakeholder engagement
on pages 57 to 60. Some examples of
how the Directors have had regard to
the matters set out in section 172(1)
(a)–(f) when discharging their section
172 duty during the year are also set
out on page 56.
26
26
Funding Circle Holdings plc
Funding Circle Holdings plc
Strategic report Developing our ESG strategy
and approach
In 2019, we began to formalise our
environmental, social and corporate
governance (“ESG”) strategy. Funding
Circle has a strong corporate governance
and risk management framework, in line
with requirements under UK legislation
such as the Companies Act 2006 and
UK Corporate Governance Code. However,
last year we developed a formal ESG
strategy and high level implementation
plans, with a view to integrating ESG
considerations into our existing policies
and practices.
Crucially, the Funding Circle Board
engaged with and approved our new
centralised approach and will provide
oversight and strategic leadership for
these initiatives. Senior management
responsibility and accountability for our
ESG strategy and implementation will be
led by our Group General Counsel with a
central working group to co-ordinate
strategy, policies and implementation
and local working groups to manage
these initiatives in each of our geographies.
Our in rk, defining ESG risks and issues
that are material to our business, and
incorporating ESG data and reporting
into core business practices.
With good progress made during the
year, we have developed a governance
framework, begun establishing central
and local working groups and expect to
complete our ESG framework in early
2020. We will then focus on setting
specific strategy objectives and
co-ordinating with local working groups
to ensure successful delivery. On the
lending side, we have long-standing
policies and practices that align with
certain principles of responsible lending,
including policies that prohibit lending
to certain businesses, for example in
connection with weapons manufacturing,
alcohol, tobacco or adult industries.
We know that equity and debt investors,
including investors in our loans and
investment products backed by our
loans, are increasingly focused on ESG
issues when making investment decisions.
We also recognise that many other
stakeholders including our employees,
suppliers, customers, communities and
local governments are also increasingly
focused on ESG issues.
We look forward to further development
of our ESG programme and to meaningful
engagement with our stakeholders on
these issues.
Meeting industry standards
and regulatory requirements
Funding Circle is committed to upholding
the highest industry standards across
all our markets, and since we first opened
for business in 2010 we have campaigned
for the regulation of our sector. We actively
engage with local, national, federal and
supra-national government agencies,
legislators, policy makers and industry
groups to provide insight and policy
leadership in connection with policy and
rulemaking related to issues affecting
SME borrowers, investors or lending in
the FinTech industry. We regularly host
events on industry issues, submit position
papers, and participate in expert hearings
and consultations, forums and other
policy engagement initiatives.
Our efforts in this area include forming
the UK Peer-to-Peer Finance Association
(a self-regulatory platform lending
association, which has recently merged
into Innovate Finance following the new
enhanced regulatory regime coming into
force in December) in 2011; and helping
to establish the Marketplace Lending
Association in the US in 2016. Both
associations in the UK and US promote
responsible business practices and in the
US, where the regulation is not bespoke,
the MLA has developed a specific code
of conduct for lending platforms.
In addition, we co-authored and adopted
the Small Business Borrowers’ Bill of
Rights, which represented the first
cross-sector consensus on responsible
SME lending in the US. We are also
members of the Nederland Crowdfunding
Association; the FinTech Delivery Panel
in the UK; and the Conference of State
Bank Supervisors (“CSBS”) FinTech
Advisory Group in the US.
In 2019, we progressed our efforts
to develop a self-regulated platform
lending association in Germany – the
European FinTech Association (“EFA”),
which will be officially launched in early
2020. The EFA will act as a focal point
for future regulatory FinTech projects in
Europe, advancing a wide-ranging agenda
designed to promote and protect SME
funding. We also continued to build
strong relations with stakeholders in
Europe to influence the development
of a pan-European regulatory framework.
Ensuring the platform lending industry
has a strong voice on the continent, we
participated in negotiations on proposed
Regulations for European Crowdfunding
Service Providers, which were agreed at
the end of 2019.
Annual Report and Accounts 2019
Annual Report and Accounts 2019
27
27
Strategic report
Sustainability continued
Making a difference
Our people are passionate, purpose-driven
advocates of charitable causes and issues
related to social impact, community
engagement, financial inclusion and
diversity, among others. To enable their
engagement with the issues that matter
to them, each year the Funding Circle
volunteer group, FC Impact, co-ordinates
internal action and initiatives.
During 2019, our employees:
‐
‐
‐
joined SF.Citi in the US to strengthen our
reputation as a leader in technological
innovation and social responsibility;
took part in various campaigns in
Germany, including blood and clothes
donation schemes, a summer football
bootcamp for local kids, a blood cancer
registration programme, and a surplus
food initiative for homeless people;
ran a food bank for deprived families
in the Netherlands, while also delivering
financial education for the elderly and
young people as part of the Ministry
of Finance’s Money Week; and
‐
took part in a range of schemes in the
UK, including:
-
fundraising for charitable causes,
with £20,000 raised for our charity
of the year, Whizz-Kidz, and £5,000
raised for mental health, cancer
research, men’s health, Children
in Need and Alzheimer’s;
28
28
Funding Circle Holdings plc
Funding Circle Holdings plc
- six feed-the-homeless events
and food drives;
In an effort to reduce our carbon
footprint in these areas, we:
- various sports challenges, including
Tough Mudder, the Three Peaks
Challenge, Prudential RideLondon,
Battle Cancer, Great City Race,
Shine Night Walk and Memory Walk;
- charitable yoga schemes;
- blood donation campaigns;
‐ use lighting with automatic shut-off
in our offices;
‐
recycle and separate waste at
all locations;
‐ monitor and minimise global
mobility and employee travel
between offices; and
- Dress for Success initiatives to help
prepare underprivileged women for
job interviews;
‐ drive efficiency through automation
and digitisation, reducing paper usage
and overall energy consumption.
In 2018, we reported for the first time
on our greenhouse gas (“GHG”) emissions.
In 2019, we continued to develop and
enhance our data gathering capabilities
for electricity, gas and water usage.
For example in the UK, we were pleased
to see a notable reduction in gas
consumption by 25% compared to last
year. This was in part thanks to the
introduction of environmental monitoring
software into our premises to automatically
limit energy consumption in areas that
did not require it at the time.
- stem cell donations, with 46 new
donors; and
-
laptop donations to
refugee charities.
Minimising our
environmental impact
Since Funding Circle was founded, climate
change has emerged as the defining issue
for humanity in the 21st century. As a
responsible corporate citizen, we are
committed to minimising the impact of
our operations and combating the effects
of climate change wherever possible.
Across the business, our natural resource
consumption is driven by our physical
locations and work environments, our
tech infrastructure and our global travel.
Strategic report 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
2019
tCO2e
147
493
640
167.4
3.82
2018
tCO2e
154
590
744
141.9
5.24
‐ We have published a Modern Slavery
Anti-corruption and anti-bribery
Act Transparency Statement in
compliance with section 54 of the
Modern Slavery Act.
‐ We recognise that our reputation
for integrity and trustworthiness
is critical to our success.
Additional commitments
As part of our broader commitments as
a progressive and responsible company,
we also take a stand on the following
issue areas:
Human rights
‐ We respect and promote human
rights through our employment
policies and practices.
Code of Conduct
‐ We are dedicated to implementing
and maintaining the highest standards
of behaviour, ethics and integrity
among our workforce.
‐ We apply these policies and
commitments equally to everyone who
works at or is part of Funding Circle.
‐ We have created a culture where
adherence to these standards is
recognised and rewarded.
‐ Modern slavery
‐ We have a zero tolerance approach to
modern slavery and human trafficking.
‐ We will roll out a Code of Conduct in
2020 outlining these standards and
addressing subjects such as integrity
and conflicts of interest.
‐ We uphold all laws relevant to countering
bribery and corruption in each of
our jurisdictions.
‐ Our employees are trained and tested
annually on bribery and corruption
risks that may arise in the course of
their employment at Funding Circle.
Annual Report and Accounts 2019
Annual Report and Accounts 2019
29
29
Key performance indicators
Delivering our strategy
Financial:
Statutory
Revenue
(£m)
Loss before tax
(£m)
Loss per share
(pence)
Segment adjusted
EBITDA (£m)
Adjusted EBITDA
(£m)
Alternative performance measures (“APMs”)
£167.4m
£(84.2)m
(24.4)p
£11.2m
£(27.5)m
+18%
Growth
167.4
141.9
2018
2019
2018
2019
2018
2019
12.1
11.2
2018
2019
+9%
+7%
-16%
-16%
Margin
Margin
Margin
Margin
(50.9)
(18.2)
(84.2)
(24.4)
2018
2019
(23.4)
(27.5)
Link to strategy
Link to strategy
Link to strategy
Link to strategy
Link to strategy
1
2
3
4
3
4
3
4
3
4
Definition
Loss before tax is
defined as revenue
after taking into
account all operating
expenses and
finance income.
Definition
The Group generates
revenues principally
from: transaction fees
earned from originating
loans with borrowers;
servicing fees from
servicing of loans
under management;
and net investment
income from Funding
Circle sponsored
(ABS) programmes.
Definition
Loss per share is
defined as the 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.
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.
2
3
4
Definition
Adjusted
EBITDA represents
the operating loss
before depreciation
and amortisation,
share-based
payments and
associated social
security costs, foreign
exchange gains/
(losses) and
exceptional items.
30
Funding Circle Holdings plc
Strategic report Focus areas relevant to our KPIs
1
2
Driving a better borrower experience
Investing in modern data, tech and analytics
3
4
Diversifying funding sources
Building a highly scalable global business
Alternative performance measures (“APMs”)
Operational:
Free cash flow
(£m)
£(49.4)m
Loans under
management (£m)
Originations
(£m)
Marketing costs as
a % of revenue
£3,731m
£2,350m 40%
2018
2019
(40.9)
(49.4)
+19%
Growth
3,731
3,148
+3%
Growth
2,350
2,292
41
40
2018
2019
2018
2019
2018
2019
Link to strategy
Link to strategy
Link to strategy
Link to strategy
4
1
2
3
4
1
2
3
4
1
4
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.
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.
Definition
This represents the
total cost of third party
marketing expenditure
in any particular year
divided by the revenue
earned in that year.
Definition
Free cash flow
represents the sum
of the net cash outflows
from operating
activities plus the
cost of purchasing
intangible assets,
property, plant and
equipment, lease
payments and interest
received and
excluding IPO costs
presented within
operating 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.
Annual Report and Accounts 2019
31
Finance review
Our results
In 2019, the Group
delivered revenue
growth of 18% to
£167.4 million. Loans
under management
grew 19% to reach
a record £3,731 million
with originations
growing 3% to
£2,350 million.
Overview
United Kingdom
United States
Developing Markets
Total
Loans under Management
(as at 31 December)
Originations
(year ended 31 December)
2019
£m
2,583
882
266
3,731
2018
£m
2,208
736
204
3,148
Change
17%
20%
30%
19%
2019
£m
1,556
619
175
2,350
2018
£m
1,531
596
165
2,292
Change
2%
4%
6%
3%
The Group’s loss before taxation was £84.2 million (2018:
£50.9 million) which is stated after a non-cash exceptional
write down of £34.3 million of goodwill and intangible assets
related to the Developing Markets. Excluding the impairment,
loss before taxation was £49.9 million (2018: £45.0 million).
Adjusted EBITDA loss of £27.5 million (2018: loss of £23.4 million)
represented a similar margin to the previous year of negative
16.4% (2018: negative 16.5%). Before central costs of £38.7 million
(2018: £35.5 million) segment adjusted EBITDA was £11.2 million
(2018: £12.1 million) representing a margin of 7% (2018: 9%).
Geographic highlights
United Kingdom
The UK represents Funding Circle’s largest and most mature
Business Unit. In 2019, loans under management rose by 17%
to £2,583 million whilst originations grew by 2% to £1,556 million.
Originations from existing customers, who require less marketing
investment and are therefore more profitable to the business,
grew by 4% to 42% of UK originations as the business continued
to build its reputation amongst small business owners as the
leading way to access finance in the UK. In total, the UK
delivered revenue growth of 16% to £108.5 million in 2019.
During the year, we commenced our new asset-backed bond
programme and sponsored the securitisation of £250 million
of SME loans in November 2019 in a joint transaction with
Waterfall Asset Management. This followed a separate transaction
in April 2019 where we assisted an institution to securitise
c.£180 million of loans originated on Funding Circle’s platform.
32
Funding Circle Holdings plc
Strategic report In June 2019 we launched a Private Fund raising initial lending
commitments from the Merseyside Pension Fund. The overall
intention is to raise more than £200 million over the next
few years.
These new products helped to continue to diversify the range
of investors on the Funding Circle platforms. In 2019 the mix
of investors on the Funding Circle platform was: funds of 30%
from retail investors; 30% from institutions and supra-national
banks; and 40% from ABS programmes (including those
sponsored by Funding Circle).
The year also saw the FCA introduce new rules and guidance
for our sector following consultation with platforms. We are
fully compliant with all of these changes and are supportive of
these new measures. We believe they will further protect retail
investors and raise standards across the wider industry.
United States
In the US, loans under management increased 20% to
£882 million with origination growth of 4% to £619 million.
Revenue in the US grew 23% to £45.6 million, benefiting from
strong net investment income associated with the ABS
programme that launched in the year.
We sponsored the securitisation of $210 million of SME loans
in August 2019 with a further securitisation of $247 million
occurring in January 2020. Unlike the UK, the vast majority
of funding in the US has come from institutional investors or
through the ABS programme.
In April 2019, the US entered into a partnership with Lending
Club where they refer all borrowers looking for small business
loans to Funding Circle.
Developing Markets
The Developing Markets consists of Germany and the
Netherlands. Loans under Management in the Developing
Markets increased by 30% to £266 million with originations
showing growth of 6% to £175 million.
Revenue for the year grew 19% to £13.3 million with repeat
loans to existing borrowers the main driver of business growth.
Following a strategic review of operations in Germany and the
Netherlands we are reorganising both businesses and
centralising operations in London. We will focus on originating
loans for local lenders we have partnered with in each market,
as opposed to originating loans on our platform for institutional
and retail investors.
We will continue to service the existing portfolio of loans of
c.€300 million on behalf of our existing customers. Germany
and the Netherlands represent only 8% of Group revenue but
c.60% of adjusted EBITDA losses. By reorganising both
businesses we move to a more efficient model that better
serves small businesses in these markets whilst allowing the
Group to accelerate its plans to deliver profitable growth.
Finance review
Profit and loss
Net income (“Revenue”)
Transaction fees
Servicing fees
Net investment income
Other fees
Operating expenses
People costs
(incl. contractors)
Marketing costs
Depreciation and
amortisation
Loan repurchase charge
Impairment (exceptional)
IPO adviser costs (exceptional)
Other costs
2019
£m
2018
(restated)
£m
Change
%
121.2
30.4
10.5
5.3
112.9
24.9
—
4.1
167.4
141.9
(90.3)
(66.5)
(14.9)
(6.5)
(34.3)
—
(39.6)
(79.2)
(57.8)
(12.5)
(2.6)
—
(5.9)
(34.7)
7%
22%
n/a
29%
18%
(14%)
(15%)
(19%)
(150%)
n/a
100%
(14%)
(252.1)
(192.7)
(31%)
Operating loss
(84.7)
(50.8)
(67%)
Loss per share (pence)
(24.4)p
(18.2)p
(34%)
Adoption of IFRS 16
From 1 January 2019, the Group adopted the new leasing
standard (IFRS 16) retrospectively. The adoption resulted
in a restatement of 2018 with a decrease in rental costs of
£5.1 million and an increase in depreciation of £4.3 million.
Net income (“Revenue”)
Transaction fees, representing fees earned on originations,
grew 7% to £121.2 million driven by origination increases of 3%
and a 5% increase in transaction yields to 5.2% (2018: 4.9%)
following changes in loan mix and including the yield enhancing
impact of a policy change in the US whereby a borrower is no
longer required to refinance an existing loan when taking out
a new loan.
Servicing fees, representing income for servicing loans under
management, grew 22% to £30.4 million being a function of
loans under management growth of 19% to £3,731 million.
Servicing yield remained flat year on year at 0.9%.
Servicing fees are not earned when Funding Circle is servicing
its own loans during the period that warehouses and securitisation
vehicles are on balance sheet.
Net investment income represents the income on loans
invested within the ABS warehouses, securitisation vehicles
and the Private Funds, together with fair value gains or losses
on those loans and the cost of servicing the debt incurred to
finance the purchase of SME loans. This new income stream
generated £10.5 million of net income in the year.
Other fees arise principally from a fee premium we received
from certain institutional investors in the year in respect of buying
back certain defaulted loans under a loan purchase commitment.
Annual Report and Accounts 2019
33
Finance review continued
Operating expenses
Total operating expenses increased during the year by 31%
to £252.1 million (2018 restated: £192.7 million) compared
with growth in revenues of 18%. These costs include the
exceptional impairment of goodwill and assets associated
with the Developing Markets business of £34.3 million.
Excluding these items, operating costs were £217.8 million,
17% higher than 2018.
People costs (including contractors) which represent the
Group’s largest ongoing operating cost increased during the
year by 16% to £104.6 million, before the capitalisation of
development spend. This was driven by growth in average
headcount of 16%. The share-based payment charge for the
year, included in people costs, remained relatively flat at
£8.0 million (2018: £8.6 million).
People costs
Less capitalised development
spend (“CDS”)
2019
£m
104.6
(14.3)
2018
£m
90.0
(10.8)
People costs net of CDS
90.3
79.2
Average headcount
(incl. contractors)
Year-end headcount
(incl. contractors)
1,165
1,004
1,139
1,074
6%
Marketing costs are primarily directed at new customers
rather than existing customers. These costs increased in
the year from £57.8 million in 2018 to £66.5 million in 2019
as the Group continued to drive growth in both originations
Change
%
16%
(32%)
14%
16%
and awareness in the Funding Circle brand. Marketing spend
overall was 40% of revenue during the year compared with
41% in 2018.
Depreciation and amortisation costs of £14.9 million
(2018: £12.5 million) largely represent the amortisation of
the cost of the Group’s capitalised technology development.
Loan repurchase charges relate to the buyback of certain
defaulted loans from certain financial institutions under a loan
purchase commitment in return for a fee premium (reflected
in Other fees). Under IFRS 9 this commitment is accounted for
under the expected credit loss model.
An exceptional impairment charge of £34.3 million was
recorded in respect of the Developing Markets (Germany and
the Netherlands). The Group concluded that the future cash
flow projections of these businesses were insufficient to
support the carrying value of the associated goodwill
and assets.
Other costs principally includes cost of sales, data and
technology costs and property costs. These grew by
£4.9 million to £39.6 million, following growth in the business
and greater data consumption.
Operating loss grew to £84.7 million (2018 restated: loss
£50.8 million). This increase mainly related to the exceptional
impairment of goodwill and assets associated with the
Developing Markets business of £34.3 million. Excluding
exceptional items, operating loss was £50.4 million
(2018: £44.9 million).
The loss per share was 24.4 pence (2018 restated: loss per
share 18.2 pence) based on a weighted average number of
ordinary shares in issue of 347.6 million (2018: 271.3 million).
Segment adjusted EBITDA and adjusted EBITDA
The Group also reviews the results of the Group and segments using segment adjusted EBITDA and adjusted EBITDA as
alternative performance measures. This is to remove the impact of items that are not managed at a segment level including
centralised product development costs and corporate costs as well as the depreciation and amortisation which arise principally
on previously capitalised development spend.
The table below sets out a reconciliation between these measures and the statutory operating loss:
2019
2018 (restated)
Revenue
Segment adjusted EBITDA
Segment adjusted EBITDA margin
Product development
Corporate costs
Adjusted EBITDA
Depreciation and amortisation
Share-based payments and social
security costs
Foreign exchange loss
Exceptional items
Operating loss
United
Kingdom
£m
United
States
£m
Developing
Markets
£m
108.5
34.0
31%
45.6
(10.3)
(23%)
13.3
(12.5)
(94%)
United
Kingdom
£m
United
States
£m
Developing
Markets
£m
93.6
24.6
26%
37.1
(5.7)
(15%)
11.2
(6.8)
(61%)
Total
£m
167.4
11.2
7%
(26.4)
(12.3)
(27.5)
(14.9)
(8.0)
—
(34.3)
(84.7)
Total
£m
141.9
12.1
9%
(24.5)
(11.0)
(23.4)
(12.5)
(8.6)
(0.4)
(5.9)
(50.8)
On adoption of IFRS 16, 2018 was restated with a £5.1 million increase in adjusted EBITDA and a £4.3 million increase
in depreciation.
34
Funding Circle Holdings plc
Strategic report United Kingdom
Segment adjusted EBITDA growth of 38% was achieved as the business continues to scale and grow its higher margin
existing customer base. Compared to revenue growth of 16%, costs only grew 8% with marketing spend falling to 35% of revenue
(2018: 40%). Revenue benefited from £4.9 million of net investment income on new products for the first time but lower conversion
of applications to loans, following risk tightening, led to origination growth of 2% and transaction revenue growth slightly higher
at 6%, with the difference a function of yield improvement. If central costs of product development and corporate costs had been
allocated, the UK would still have reported an operating profit for the first time in the second half of the year demonstrating the
profitable trajectory the business is on.
United States
Similar to the UK, conversion in the US declined following risk tightening and price increases, with originations flat year on year
restricting transaction revenue improvement. However, net investment income on new products helped overall revenue growth
to 23%. Segment adjusted EBITDA losses grew to £10.3 million as the US continued to invest for growth. Marketing spend rose
6 percentage points to reach 48% of revenue (2018: 42%), increasing the adjusted EBITDA loss margin to 23% (2018: 15%).
Product development costs which relate to the people and overhead costs of running and developing the Group’s technology
platforms grew on a net basis by 8%. This was the result of increased software engineering headcount as the Group invests in
its global platforms including the build of its new instant decision lending platform.
Internal development costs capitalised as intangible fixed assets in 2019 were £14.3 million, up from £10.8 million in 2018.
Corporate costs of £12.3 million (2018: £11.0 million) included a full year’s worth of operating costs associated with being a
public company compared to only six months of such costs in 2018.
Share-based payments and the associated social security costs totalled £8.0 million, a decrease of £0.6 million on 2018.
Social security costs are calculated with reference to the share price at the time of vesting and therefore this cost fluctuates
as the share price moves.
Balance sheet and liquidity
Following the launch of the new funding products, the Group’s balance sheet now includes the assets and debt of the ABS
programmes. The table below breaks down the Group’s balance sheet into its constituent parts.
Warehouse
SPVs
£m
Securitisation
SPVs
£m
2019
Private
Fund
£m
Assets
SME loans
Cash
Other assets
Liabilities
Bank debt
Bonds
Other liabilities
Equity
342.0
18.2
—
360.2
265.8
—
—
265.8
94.4
366.6
14.1
8.4
389.1
—
351.5
—
351.5
37.6
Other
£m
1.7
132.2
99.1
233.0
—
(2.8)
62.0
59.2
13.2
—
—
13.2
—
—
—
—
13.2
173.8
2018 (restated)
Total
£m
—
333.0
117.0
450.0
—
—
49.0
49.0
401.0
Total
£m
723.5
164.5
107.5
995.5
265.8
348.7
62.0
676.5
319.0
In the warehouse phase of each ABS programme, loans are accumulated prior to a securitisation event. During this period, the
Group controls and is exposed to the risks and rewards of the warehouse special purpose vehicles (“SPVs”) and accordingly
recognises the SME loans and associated bank debt onto its balance sheet.
On securitisation a new SPV raises capital through the issuance of rated senior and unrated junior bonds using the proceeds
to purchase SME loans from the warehouse SPV. In turn the warehouse SPV repays both the bank debt and the monies that
Funding Circle has invested. Regulations in both the UK and US require Funding Circle to invest alongside bondholders, retaining
at least a 5% interest in the issued bonds. In this circumstance, where the interest is reduced to 5%, Funding Circle is no longer
exposed to the significant risks and rewards of the securitisation SPV and derecognises both the underlying SME loans and bond
liabilities from its balance sheet.
Annual Report and Accounts 2019
35
Finance review continued
Balance sheet and liquidity continued
In circumstances where the majority of the most junior unrated
bonds have not been sold by the balance sheet date, Funding
Circle is required to recognise and consolidate onto its balance
sheet all the securitisation SPV’s SME loans and bond liabilities.
This is because the junior bonds rank beneath the senior bonds
and therefore have the greatest risk and reward. As at
31 December 2019, in both the UK and the US, Funding Circle
has retained a significant interest in the junior tranches of each
securitisation SPV and has consolidated these vehicles in
addition to the warehouse SPVs. Accordingly the Group balance
sheet includes £708.6 million of SME loans and £617.3 million
of related bank and bond liabilities plus other associated assets
and liabilities from these SPVs.
Both the warehouse and securitisation SPVs are bankruptcy
remote such that the net exposure to the Group is the
£94.4 million and £37.6 million, respectively, of net equity
invested in these vehicles as opposed to the total value of
either the SME loans or the related bank or bond liabilities.
Cash flow
As at 31 December 2019, the Group held cash and cash
equivalents of £164.5 million, down from £333.0 million at the
end of 2018. Of the £168.5 million decrease, £117.7 million has
been due to the introduction of the new investor products
where Funding Circle has injected seed capital into the Private
Funds and working capital into the warehouse phase of the
ABS programmes as well as retaining a residual investment in
the rated and unrated bonds in the securitisation vehicles. The
table across shows how the Group’s cash has been utilised.
Free cash flow, which is an alternative performance measure,
has been redefined in the year following the new funding
products, implementation of IFRS 16 and restatement of IPO
cost presentation and therefore the comparatives have been
restated. It represents the net cash flows from operating activities
plus the cost of purchasing intangible assets, property, plant
and equipment, lease payments and interest received and
excluding IPO costs presented in operating activities. It excludes
the warehouse and securitisation cash flows as well as the
funding of these investments.
36
Funding Circle Holdings plc
Cash outflow from operations
Tax received
2019
£m
2018
(restated)
£m
(27.0)
(32.0)
—
1.4
Net cash outflow from operations
(27.0)
(30.6)
Purchase of tangible and
intangible assets
IPO costs in operating activities
Interest received
Payment of lease liabilities
Free cash flow
Net cash outflow associated
with investor products
Net cash inflow from other
financing activities
Effect of foreign exchange
Movement in the year
Cash and cash equivalents
at the beginning of the year
Cash and cash equivalents
at the end of the year
(17.2)
(13.3)
—
1.9
(7.1)
5.9
0.9
(3.8)
(49.4)
(40.9)
(117.7)
(1.1)
0.7
(2.1)
(168.5)
333.0
285.6
0.5
244.1
88.9
164.5
333.0
Cash outflow from operations was £27.0 million in line with
the Group’s adjusted EBITDA loss of £27.5 million.
Free cash flow has principally increased due to increased
capitalised development spend of £3.5 million to £14.3 million
(2018: £10.8 million) and increases in lease payments
following office moves.
Outlook
The Group continues to focus on improving conversion across
the platform, keeping net returns attractive and delivering
profitable growth.
We expect combined UK and US revenue to grow by c.15%,
skewed to the second half due to seasonality and lapping
credit tightening actions taken in the first half of 2019.
The reorganised Developing Markets are expected to contribute
c.£7m of revenue in 2020, weighted to the first half of 2020
from the wind-down of the existing model with the second half
of 2020 seeing the scaling of the new model from a low base.
We are targeting Group adjusted EBITDA break-even in the
second half of 2020 reflecting operational leverage as the
business scales.
Group adjusted EBITDA losses for the year are expected to
halve, benefiting from the new approach in the Developing
Markets and marketing spend falling modestly as a
percentage of revenue.
However, we continue to assess the possible impact of
COVID-19 on borrowers and investors. The outbreak has not
affected trading to date, but we are monitoring the situation
closely given the uncertain outlook.
Strategic report IGNITING OPPORTUNITIES
The Radical Tea Towel Company
The Radical Tea Towel Company was founded
by Luke Pearce and his family in South Wales.
They manufacture and sell a range of historical,
political and literary gifts, including tea towels,
mugs, aprons, cards and oven gloves. Luke and
his family borrowed £200,000 last year to
purchase new stock, helping them grow far
quicker than they could have done without finance.
Annual Report and Accounts 2019
37
Risk management
Sustainable growth: doing the
right thing for our customers
In 2019, we have continued to evolve our risk management practices to support
sustainable growth of our business activities. As we scale Funding Circle, we deploy
more systematic and automated risk controls. For instance, a common technology
tool is now in place across all markets to perform risk and control self-assessments
(“RCSA”), register risk incidents and monitor remediation actions.
2019 highlights
We take the benefit of accumulating
more loan performance data to continually
upgrade our statistically driven analytical
tools. In 2019, we designed and deployed
the eighth generation of credit risk decision
models in the UK and the fourth generation
in the US. These new risk models take
advantage of larger training samples to
provide stronger risk discrimination through
refined machine learning algorithms.
Sound credit risk management is
central to the success of our lending
platform. We continuously monitor our
loan portfolios and make prudent
adjustments when needed to manage
credit risk on behalf of our investors. We
also perform annual stress tests of our
loan portfolios to ensure that our credit
and pricing parameters are adequate to
deliver resilient investors’ returns even
under economic downturn scenarios.
In 2019, in the context of Brexit and
uncertain macroeconomic conditions,
we tightened credit underwriting
parameters for the riskier borrower
segments. As a result, we reduced
credit acceptance rates and saw an
improvement in credit performance and
investors’ returns. We also invested in
strengthening our internal collections
capabilities with new predictive models,
automated workflows and specialist
vendor relationships helping us increase
effectiveness and productivity – providing
further strength to navigate potential
credit stress.
Funding Circle sponsored securitisation
is becoming an increasing part of our
diversified funding strategy. In order to
manage the risks associated with a more
sophisticated funding strategy, in 2019
we created an integrated risk management
framework across the Risk, Finance and
Capital Markets teams to consider
38
Funding Circle Holdings plc
funding and liquidity holistically as a
principal risk with its own specific risk
appetite, guardrails and controls.
In the UK, we also made significant
changes to the retail secondary market,
intended to enable investors to access
funds from their performing loans more
quickly and thereby providing a better
outcome for retail investors generally.
We are continuing to monitor our retail
secondary market and evaluate further
enhancements to improve liquidity for
retail investors.
Risk management overview
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
Group, our shareholders, our customers
and fellow Circlers.
A strong risk culture enables us to manage
the risks inherent to our business activities
seamlessly, every day, through the active
participation of all Circlers. At Funding
Circle all employees, regardless of their
position, 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. Our
approach to risk management consists of:
‐ putting our culture at the heart
of everything we do;
‐
investing in robust risk capabilities,
including advanced data and risk
analytics; and
‐ doing the right thing for our customers,
shareholders and employees.
As part of the second line of defence,
the Risk team oversees risk management
across the Company, in conjunction
with the Legal and Compliance teams.
We also support our first line of defence
colleagues in their risk management
activities – for example by providing
training and expert support for centralised
risk information management or
complex credit analysis.
Board role
The Board is responsible for setting
the strategy, corporate objectives and
risk appetite. The Board has delegated
responsibility for reviewing the
effectiveness of the risk management
framework to the Board Risk and
Compliance Committee (“RCC”). On the
advice of the RCC, the Board approves
the level of risk acceptable under each
principal risk category, whilst providing
oversight to ensure there is an adequate
framework in place for reporting and
managing those risks.
Chief Risk Officer and the
Risk function
Our Chief Risk Officer (“CRO”) leads the
Risk function, which is independent from
the business and has a direct reporting
line to the Board. He is responsible for
developing, maintaining and implementing
the ERMF. He is also responsible for
providing assurance to the Board that
the principal risks are appropriately
managed and that Funding Circle is
operating within risk appetite.
Strategic report Risk management policies
We have formalised and implemented risk management policies defining mandatory requirements to mitigate the principal risks
that we face, with clear risk limits and requirements to monitor risks and adherence to limits. The Risk and Compliance teams
regularly review these policies and controls to verify compliance and to reflect changes in the external environment and our activities.
Risk appetite
Our risk appetite is defined as the level of risk that we, as a Company, are prepared to accept whilst pursuing our core business
strategy, recognising a range of possible outcomes as business plans are implemented. The 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.
Principal risks
Our principal risks represent defined groupings that we use to help consistently identify, assess, manage, monitor and report
risks. Using consistent risk categories enables risks to be aggregated to determine their overall impact to the organisation.
We have identified five principal risks:
1
2
3
4
5
Strategic risk
Platform funding
and liquidity risk
Credit risk
Operational risk
Reputation and
conduct risk
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 Board. The risk governance framework includes delegations of authority from the 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. Funding Circle’s Three Lines of Defence
model and risk governance structure have been designed to manage our principal risks in a consistent manner across the Group,
as set out below.
Three Lines of Defence
FC CEO
FC Board
First line
UK MD
US MD
CE MD
Global CRO
Global General
Counsel
Second line
UK CRO
US CRO
CE CRO
ERM
Credit
quality
Data and
analytics
European
compliance
US
compliance
Compliance
monitoring
and testing
Third line
Internal Audit
D
i
r
e
c
t
a
c
c
e
s
s
t
o
F
C
B
o
a
r
d
Annual Report and Accounts 2019
39
Risk management continued
Risk governance structure
Funding Circle Holdings plc Board
Funding Circle Holdings plc Board
Funding Circle Holdings plc Board
Audit Committee
Risk and Compliance Committee
Market Disclosure
Committee
UK Board
Executive Risk
Committee
Platform Funding
and Liquidity Risk
Committee
Technology Security Risk
Sub-committee
Operational Risk
Committee
Credit Risk
Management
Committee
Reputation
and Conduct
Risk Committee
The RCC is supported by the Executive Risk Committee (“ERC”) comprising the Funding Circle Global Leadership Team and the
Platform and Liquidity Risk Committee. The ERC has sub-committees focused on each principal risk, as set out below.
Executive Risk Committee The ERC meets quarterly 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 ERC.
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.
Platform Funding and Liquidity Risk Committee The
Platform Funding and Liquidity Risk Committee meets on a
monthly basis and reviews Business Unit platform funding risk
and Funding Circle Group liquidity risk.
Operational 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 Credit Risk Management
Committees are held monthly in each Business Unit.
They focus on ensuring that the credit risk of each Business
Unit’s loan portfolio is adequately managed.
Market Disclosure Committee The Board has delegated to
the Market Disclosure Committee responsibility for overseeing
the disclosure of information by Funding Circle to meet its
obligations under the Market Abuse Regulation, the FCA’s
Listing Rules and the Disclosure and Transparency Rules.
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 global programme of “Doing
the Right Thing” every day for our customers, employees and community.
Risk assurance
Assurance on the management of risk is provided by the Three Lines of Defence model including the Funding Circle Internal Audit
function. We also execute external annual controls assurance reports (e.g. United Kingdom ISAE 3402) certified by auditors in
various geographies in which we operate.
40
Funding Circle Holdings plc
Strategic report Risk assessment framework
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
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.
Evaluate
As part of its responsibilities under the ERMF the Board
has formally recognised a series of risks that are continuously
present at 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 designated 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
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.
Annual Report and Accounts 2019
41
Principal risks and uncertainties
The Board confirms that in 2019 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:
‐ Funding
‐ Client detriment
‐ Economic environment
‐
Information security
‐ Portfolio risk management
‐ Financial crime
‐ Regulatory
‐ Reputation
‐ Liquidity
‐ Technology
‐ Client money
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.
RISK APPETITE Funding Circle will make efficient use
of its available resources to build a sustainable, diversified
and profitable business that can successfully adapt to
environment changes.
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.
We continually monitor the credit health of the loan
portfolios under management and perform stress
test simulations to help ensure that returns 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 and
continuous tuning of risk and pricing parameters
to correct for possible deviations in returns;
‐ monthly monitoring of internal and external signals
as part of the Credit Risk Management Committees;
‐
independent validation and continuous
monitoring of the performance of risk models;
‐ agile capability to rapidly deploy pricing and credit
strategy adjustments deemed necessary; and
‐
in-house experienced collections and recoveries
capabilities with built-in scalability.
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.
Although GDP and employment levels
remain strong, consumer and commercial
insolvencies are trending adversely. Q3
2019 Bank of England statistics showed
the highest consumer insolvency rate
since Q3 2011 and the highest company
insolvencies rate since Q1 2014.
We are also noticing negative signals
from recent business confidence surveys
in the UK.
42
Funding Circle Holdings plc
Strategic report Funding and liquidity risk
Funding and liquidity risk is defined as the risks associated
with platform funding (matching borrower demand and
investor cash supply), capital commitments and corporate
liquidity through normal and stress scenarios.
RISK APPETITE Funding Circle will make efficient use of its
balance sheet and optimise and diversify funding and liquidity
sources to enable a balanced funding strategy whilst limiting
downside risk.
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Funding risk
The risk that borrower
loan demand cannot be
met when and where they
fall due or can only be
met at an uneconomic
price. This risk varies
with the economic
attractiveness of Funding
Circle loans as an
investment, the level of
diversification of funding
sources and the level
of resilience of these
funding sources through
economic cycles.
Liquidity risk
The risk that Funding
Circle liabilities cannot
be met when and where
they fall due or can
only be met at an
uneconomic price.
Funding Circle’s business model is to be a lending
platform that matches the supply of capital to the
demand of SME borrowers more efficiently and
sustainably than banks.
We carefully manage the match between capital
supply and SME loan demand by:
‐ actively managing concentration risk and working
to diversify sources of funding;
‐
developing a forward-looking pipeline of
potential investors;
‐ managing Funding Circle’s lending activities
whether through direct lending capacity,
securitisation capacity or investment fund
lending vehicles;
‐ considering a broad range of management
information and key performance indicators at
the Funding and Liquidity Risk Committee, Risk
and Compliance Committee and Board;
‐ having a seasoned Capital Markets sales team
and a team responsible for structuring
transactions; and
‐ managing potential conflicts of interest between
investors and Funding Circle.
We carefully manage Funding Circle liquidity by:
‐
setting clear guardrails for FC liquidity;
‐
maintaining a prudent level of liquidity to cover
unexpected outflows to ensure that we are able to
meet financial commitments for an extended period;
‐ considering a broad range of management
information and key performance indicators at
the Funding and Liquidity Risk Committee and
Risk and Compliance Committee; and
‐ developing a dedicated and effective
Treasury function.
In the context of Brexit uncertainty, we
observed relatively lower retail investor
demand, as well as retail investor
outflows in the UK.
We continue to expand our reach to new
investors and have expanded our lending
strategy. We accelerated the
diversification of our funding sources
with Funding Circle sponsored UK and
US ABS bond products and private debt
funds in the UK and Europe.
Our overall approach to having a robust
balance sheet and prudent management
of liquidity remains unchanged.
Annual Report and Accounts 2019
43
Principal risks and uncertainties continued
Credit risk
Credit risk is the risk of financial loss to an investor should
any borrower fail to fulfil their contractual repayment
obligations. Credit risk management is the sum of activities
necessary to deliver a risk profile at portfolio level in line
with Funding Circle management’s expectations, in terms
of net loss rate, risk-adjusted rate of return and its volatility
through economic cycles.
RISK APPETITE Whether or not Funding Circle owns any
credit risk, credit risk of loans will be managed with the utmost
care and attention to deliver credit performance and returns
in line with expectations.
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
Portfolio risk management
Borrower acquisition:
Credit performance and
returns of new loans can
deviate from expectations
due to several factors:
changes in credit quality
of incoming applications,
calibration of risk models
or strategy parameters
and control gaps in
processing loan
applications.
Portfolio risk
management:
Credit performance and
returns of existing portfolio
can deviate from
expectations due
to several factors:
deterioration of credit
environment, increased
competition driving higher
prepayment rates,
effectiveness of
portfolio monitoring
and collections
and recoveries.
Funding Circle’s aim is for well-balanced loan
portfolios that generate positive returns for
investors through the economic cycle.
We are actively 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.
In 2019 we have been facing an
increasingly uncertain macroeconomic
environment with adverse emerging
trends of company insolvencies.
In this context, we have continued to
strengthen the quality of our risk
scorecards, leveraging larger and more
mature datasets to develop refined risk
models. In 2019 we have deployed in
the US our fourth generation of risk
scorecards, and in the UK the
eighth generation.
We have adopted tighter underwriting
parameters to minimise risk volatility.
We have improved and deployed a
global suite of credit risk management
information and dashboards across
all markets.
We have improved collections and
recoveries policies and practices and
increased resources and automation to
enable more productivity and scalability.
44
Funding Circle Holdings plc
Strategic report 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 company with products,
services and processes designed for customer success and
delivered in a way that will not cause customer detriment or
regulatory censure.
RISK APPETITE Funding Circle will not engage in activities
that detract from its 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 risk
Operational or
performance failures
could lead to negative
publicity that could
adversely affect our
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 remain vigilant 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 continue to implement and maintain business
practices and controls focused on regulatory risk,
including controls designed to comply with the
Senior Managers Certification Regime in the UK.
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:
‐ ensuring RCC consideration of new or iterated
products and initiatives;
‐ engaging fully with regulators in relation to any
such new or iterated products and initiatives
that might impact on customer outcomes;
‐ undertaking specific projects to address
identified risk topics and issues; and
‐ updating and refining our approach to issue
and risk identification and management.
There have been some changes to the
external and regulatory environment in
2019 in the UK with the introduction of
the Senior Managers and Certification
Regime and new peer-to-peer
(“P2P”) regulations.
In the US, a number of state law changes
impacting commercial lending have also
been announced.
A new licensing regime in Germany has
been announced with implementation
date in 2020, but we are well prepared
for the introduction of the new regulation
and do not consider there to be
increased regulatory risk.
Our overall approach to prudent management
of reputational and brand risk remains
unchanged.
In 2019 we faced a more challenging
media environment, with increased
scrutiny of the P2P industry generally
and of our secondary retail investors
market in particular.
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
Monitoring and Testing and Internal Audit functions,
and customer-impacting topics have been the
subject of review (for example data privacy,
complaints handling and sales conduct).
Complying with applicable laws and
regulations and ensuring positive
customer outcomes continues to be a
fundamental priority for Funding Circle.
In 2019 we invested significant efforts to
make our secondary market operate in
the best possible way for our retail investors,
aiming for a fair outcome to all participants.
Annual Report and Accounts 2019
45
Principal risks and uncertainties continued
Operational risk
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems or from
external events.
RISK APPETITE Funding Circle will operate well-managed
processes with reliable performance and effective controls
preventing significant and non-anticipated operational
risk losses.
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.
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.
While our information security risks are
increasingly mitigated over time, the
Company’s growth makes it more
attractive to attackers over time as well.
To stay ahead of these attackers, we
periodically update our Information
Security Roadmap to reflect evolution
of the security threat landscape, with a
focus on data protection, visibility and
incident response.
The Technology Security and Risk
Committee ensures oversight over the
mitigation of key security risks.
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
Financial Crime Compliance team.
Complying with the laws and regulations
designed to counter money laundering,
terrorist financing, corruption and bribery is
fundamental to Funding Circle’s operations.
46
Funding Circle Holdings plc
Strategic report Operational risk continued
KEY RISKS
MANAGEMENT OF RISK
CHANGE IN RISK IN YEAR
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.
Client money risk
Failure of Funding Circle to
adequately protect and
segregate client money
may lead to financial loss,
reputational damage and
regulatory censure.
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 Security and
Technology Risk team that is responsible for
risk oversight.
We continue to improve our technology
platform and migrate from legacy
systems to mitigate some of our key
technology risks. We perform annual
disaster recovery tests to provide
assurance of the effectiveness of our
disaster recovery plays.
Our Technology Security and Risk
Committee ensures oversight over the
mitigation of key risks in this area.
We have maintained a robust
control environment in relation
to payment creation, payment
authorisation, reconciliation review
and monthly reporting.
We continue with best practices in
relation to the holding and treatment
of client money and perform daily
reconciliations across all geographies,
not just the UK.
Funding Circle holds funds for retail and
institutional investors in segregated client money
bank accounts in line with the Financial Conduct
Authority’s CASS regulations.
We continue to manage the risk by:
‐ a monthly CASS 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 Ltd Board
including an annual report, prepared for and
approved by the Senior Manager with
responsibility for the firm’s compliance with
CASS, that highlights client money risks and
steps to mitigate; and
‐
Internal Audit focusing on regulatory returns and
governance, as well as specific compliance
monitoring activity.
Annual Report and Accounts 2019
47
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 2022 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 10 to 21, 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, aside
from macroeconomic factors, include the ability to:
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
2020 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.
Key assumptions
The key assumptions underpinning the strategic plan
(before severe but plausible scenarios) include:
‐ originations, Loans under Management (“LuM”), conversion
rates and revenue growth across the Group;
‐ conservative forecasts for gaining market share
in each geography;
‐ controlled cost growth;
‐ no fundamental breakdown in the IT infrastructure
‐ grow awareness of the Funding Circle brand in order to
or major data loss; and
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 datasets, 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.
‐ no significant impact on the business model or operations
from a recession, short-term liquidity constraints 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 42 to 47. They have
also considered the potential impact of the risks on the viability
of the Group.
Assessment of viability
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.
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 assessment 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 2022.
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.
48
Funding Circle Holdings plc
Strategic report Corporate governance
Chairman’s introduction
Promoting long-term success
while maintaining a culture of
openness and transparency
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 UK
Corporate Governance Code 2018 (the “Code”). The Code
can be found on the FRC website, www.frc.org.uk. The
Board considers that the Company has complied with all
provisions set out in the Code during the year.
We discuss our focus for the coming year with reference
to the Code. This report is set out under the following
headings of the Code:
Board leadership and Company purpose
Governance
50
61 Division of responsibilities
62
63 Audit, risk and internal control
63 Remuneration
Composition, succession and evaluation
Dear shareholders
I am pleased to present Funding Circle’s Corporate
Governance Report which incorporates reports from the
Chairs of each of our Board Committees.
UK Corporate Governance Code
The Board is committed to the highest standards of corporate
governance and the Company has complied with the Code
during the year.
The Company’s corporate governance policies and procedures
adopted prior to admission in 2018 were prepared to comply
with the Code. In addition, the Company Secretary carried out
a detailed analysis of the impact of the Code to identify any
changes required in 2019 to ensure compliance with the Code,
which resulted in (among other things) the appointment of
Cath Keers as the designated Non-Executive Director for
workforce engagement. People and culture have always been
considered fundamental to the success of the business and,
in her new role as the designated Non-Executive Director,
Cath has worked closely with the Company Secretary to
formalise and enhance the extensive workforce engagement
already in place. See further details on page 58.
The Corporate Governance section of the Annual Report sets
out further details on how we have complied with the principles
of the Code during the year, highlighting key areas of focus
and challenge for the Board and its Committees.
Board changes
As previously announced, Sean Glithero will be stepping down
as Chief Financial Officer and from the Board later this year, and
will be succeeded by Oliver White. Further detail on the process
followed in relation to Oliver’s appointment, and the Nomination
Committee’s approach to succession planning generally, is set
out in the Nomination Committee Report on pages 64 and 65.
Governance activity
Our Corporate Governance Report describes our work to
continue developing Board and Committee processes and
supporting 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.
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.
We have held a number of meetings with institutional
shareholders this year and we look forward to continuing
to proactively engage with shareholders in an open and
transparent way throughout 2020.
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 2019.
Andrew Learoyd
Chairman
12 March 2020
Annual Report and Accounts 2019
49
Board of Directors
An
experienced
and effective
leadership
team
Board Committees
A
R
N
Audit Committee
Remuneration Committee
Nomination Committee
RC
Risk and Compliance Committee
Committee Chair
50
Funding Circle Holdings plc
Andrew Learoyd
Chairman of the Board
N
R
Samir Desai CBE
Co-founder, Chief Executive Officer
Term of office: Appointed to the Board as a
Non-Executive Director in February 2010 and
became Chairman of the Board in May 2016.
Term of office: Samir co-founded Funding
Circle in 2010, and was appointed to the Board
as Chief Executive Officer in January 2010.
Committee membership: Andrew has chaired
the Nomination Committee since September
2018 and is a member of the Remuneration
Committee. He also attends meetings of the
Risk and Compliance Committee and Audit
Committee by invitation.
Independent: On appointment.
Skills and experience: Andrew spent 23 years
working in investment banking as a research
analyst in corporate finance and equity capital
markets and finally as Chief Operating Officer of
the Equities Division in Europe of Goldman
Sachs. He retired as a Managing Director of
Goldman Sachs in 2006.
External appointments: Andrew has
been involved as an angel investor,
Non-Executive Director and consultant
to several start-up businesses.
Committee membership: Samir attends
meetings of the Risk and Compliance,
Remuneration, Audit and Nomination
Committees by invitation.
Independent: Not applicable.
Skills and experience: Prior to founding
Funding Circle, Samir was 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.
External appointments: None.
Cath Keers
Non-Executive Director
R
N
Hendrik Nelis
Non-Executive Director
RC
Term of office: Hendrik was appointed to
the Board as a Non-Executive Director in
September 2013.
Committee membership: Hendrik is a member
of the Risk and Compliance Committee.
Independent: No.
Skills and experience: Hendrik joined Accel in
2004 and focuses on software, FinTech and
consumer internet companies. He led Accel’s
investments in KAYAK (NASDAQ: KYAK,
acquired by Priceline), Showroomprive (EPA:
SRP), Funding Circle (LON: FCH), CHECK24,
WorldRemit, Celonis and Instana.
Hendrik started his career in Silicon Valley as an
Engineer at Hewlett-Packard before founding a
venture-backed software company. He is from
the Netherlands and graduated from Harvard
Business School and Delft University of
Technology.
External appointments: 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.
Term of office: Cath was appointed to the Board
as a Non-Executive Director in May 2018. She
became Chair of the Remuneration Committee
in September 2018.
Committee membership: Cath chairs the
Remuneration Committee and is a member
of the Nomination Committee. Cath is also
the designated Non-Executive Director for
workforce engagement.
Independent: Yes.
Skills and experience: 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 in 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.
External appointments: Cath currently serves
as Chair of Ustwo Fampany Limited, an
independent digital product, games and venture
business, as Non-Executive Director and Chair
of the remuneration committee at The British
United Provident Association Limited (parent
company of the Bupa group of companies) and
as Non-Executive Director at Sage Group plc
and Trustedhousesitters Ltd. She is also an
adviser to a number of small businesses
predominantly in the technology sector.
Corporate governance Sean Glithero
Chief Financial Officer
Eric Daniels
Non-Executive Director
RC
A
Geeta Gopalan
Non-Executive Director
A
RC
Term of office: Sean was appointed to
the Board as Chief Financial Officer in
November 2017. As announced, Sean will be
succeeded by Oliver White later in the year.
Term of office: Eric was appointed to the Board
as a Non-Executive Director in September 2016.
He became Chair of the Risk and Compliance
Committee in September 2018.
Term of office: Geeta was appointed to the
Board as a Non-Executive Director in November
2018. She became Chair of the Audit Committee
in November 2018.
Committee membership: Sean attends
meetings of the Risk and Compliance,
Remuneration, Audit and Nomination
Committees by invitation.
Independent: Not applicable.
Skills and experience: 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.
External appointments: None.
Committee membership: Eric chairs the Risk
and Compliance Committee and is a member
of the Audit Committee.
Committee membership: Geeta chairs the Audit
Committee and is a member of the Risk and
Compliance Committee.
Independent: Yes.
Independent: Yes.
Skills and experience: 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.
External appointments: Eric currently holds a
range of business appointments which include
as an adviser, a mentor, a non-executive director,
a trustee or a board member. He also advises
several innovative technology companies.
Skills and experience: 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
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.
External appointments: Geeta serves as
Non-Executive Director of Virgin Money UK PLC
(formerly CYBG plc) (where she is Chair of the risk
committee and a member of the audit committee),
Wizink Bank S.A. (where she is Chair of the risk
committee and a member of the audit committee)
and Ultra Electronic Holdings plc.
Neil Rimer
Non-Executive Director
Bob Steel
Senior Non-Executive Director
N
Ed Wray
Non-Executive Director
A
R
Term of office: Neil was appointed to the Board
as a Non-Executive Director in March 2011.
Committee membership: None.
Independent: No.
Skills and experience: 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 was previously
a Director of Photobox Holdco Limited,
Supercell Oy and The Climate Corporation.
External appointments: Neil is currently a
Director or observer on various boards of
companies based in the UK, Europe and the US
including Prodigy Investments Limited, Raisin
GmbH, Nexthink SA and Pitch Software GmbH.
He is also a Director of Human Rights Watch.
Term of office: Bob was appointed to the Board
as a Non-Executive Director in July 2014 and
became Senior Independent Director in
September 2018.
Committee membership: Bob is a member of
the Nomination Committee.
Independent: Yes.
Skills and experience: 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.
External appointments: Bob is a Partner at
Perella Weinberg Partners and a Director of Union
Square Hospitality Group. He 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. He is also a trustee
of the Economic Club of New York, Hospital for
Special Surgery and the Aspen Institute.
Term of office: Ed was appointed to the Board
as a Non-Executive Director in August 2011.
Committee membership: Ed is a member of the
Audit and Remuneration Committees.
Independent: Yes.
Skills and experience: 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 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.
External appointments: Ed also serves as a
Director for a number of companies in the UK
including Prodigy Finance Limited, Prodigy
Investments Limited and The London House
Exchange Limited. He is also Chairman of
Coach Core Foundation and Mental
Health Innovations.
Annual Report and Accounts 2019
51
Corporate governance report
The Board has a collective objective of promoting the long-term
success of the Company for its shareholders and provides
dedicated leadership in the development and promotion of the
Group’s strategy, and the 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%
Board composition
20+
20+
Non-Executive
Executive
20%
80%
52
Funding Circle Holdings plc
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. 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 23).
Through our employee share plans, all Circlers have the
opportunity to become shareholders in the Company, which
helps to ensure they are aligned with our mission, vision and
objectives. The Board regularly receives reports on people-related
matters, including results from our culture surveys, and the
individual Directors spend time with employees, for example
by participating from time to time in our Full and Half Circle
events or as part of the workforce engagement programme run
by Cath Keers in her role as the designated Non-Executive
Director for workforce engagement. For more details on the
Board’s engagement with the workforce, please see page 25
in the Our People section of the Strategic Report and the Our
Stakeholders section on page 58.
Matters reserved for 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 met regularly 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 for 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.
Each Board Committee has written Terms of Reference
defining its role and responsibilities as summarised in the
table on pages 53 and 54, which are reviewed and updated as
necessary as part of an annual review. 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/investors/governance.
Corporate governance80
+
Q
80
+
Q
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 the Global Leadership Team
‐ Keeps the Executive and Non-Executive leadership needs of the Group
under review
Nomination Committee Report – page 64
‐ Evaluates the combination of skills, knowledge, experience,
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 66
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 and risk management 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 engagement, independence and approves the provision of
non-audit services by the external auditors
Risk and Compliance Committee
Key objectives
Principal responsibilities
Reviewing and making recommendations to the
Board in relation to the Group’s internal control
and risk management systems and compliance
with the Group ERMF, 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 72
‐ Assesses the emerging and current principal risk exposure of the Group and
advises the Board on those risk exposures and future risk strategy
‐ Advises the Board on the Group’s overall risk appetite, tolerance and strategy
‐ Reviews the Group’s capability to identify and manage new risk types
‐ Monitors and keeps under review the adequacy and effectiveness of the
Group’s internal control and risk management systems, in conjunction with
the Audit Committee
‐ Considers and approves the remit and effectiveness of the Risk
Management and Compliance functions
‐ 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, funding and liquidity, credit, operational
and reputational and conduct risks and managing their impact on the Group
‐ Considers and approves the annual risk and compliance monitoring and
testing plans
Annual Report and Accounts 2019
53
Corporate governance report continued
Matters reserved for the Board and role of the Committees continued
Remuneration Committee
Key objectives
Principal responsibilities
Determining the remuneration of the Directors
and the Global Leadership Team 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 75
‐ 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 the Global Leadership Team
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
Market Disclosure Committee
In addition, the Board has delegated to the Market Disclosure Committee responsibility for overseeing the disclosure of
information by the Company to meet its obligations under the Market Abuse Regulation, the Financial Conduct Authority’s
Listing Rules and the Disclosure and Transparency Rules. The Market Disclosure Committee is chaired by the Company
Secretary and comprises the Chairman of the Board, the Chair of the Audit Committee, the CEO, the CFO and the CRO.
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 CEO, 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.
Board activity
The table below sets out attendance at Board and Committee meetings in 2019, including the strategy offsite held at the Company’s
San Francisco offices in October 2019.
The Company Secretary or her Deputy attended all of the Board and Committee meetings in 2019.
Board
Audit
Compliance Remuneration1 Nomination
Risk and
No. of meetings
Andrew Learoyd
Samir Desai
Sean Glithero
Eric Daniels
Geeta Gopalan
Cath Keers2
Hendrik Nelis
Neil Rimer2
Bob Steel2
Ed Wray
11
11
11
11
11
11
10
11
10
10
11
3
3
3
3
3
3
3
3
1
1
1
1
8
8
8
8
1. The Remuneration Committee held four ad hoc meetings in 2019
(in addition to the four originally scheduled) to discuss, among other
things, the Remuneration Policy to be adopted by shareholders at
the Company’s AGM in June 2019. See further detail on the Remuneration
Committee’s activities in 2019 on page 75.
The Remuneration Committee has four meetings scheduled for 2020,
but additional meetings will be scheduled as required.
2. Cath Keers, Neil Rimer and Bob Steel were unable to attend certain
meetings (as indicated in the table) that were called on relatively short
notice due to prior commitments.
The Board and Board Committee meeting schedule for 2020 has been approved by the Board and the Board will meet formally at least
six times during the year with an additional Board strategy session. Ad hoc meetings may be called as and when appropriate, as was
the case in 2019.
The Board’s activities throughout the year are underpinned by our external reporting calendar and our internal business planning
processes. A rolling annual agenda ensures that all important topics receive sufficient attention. Standing items provide an
anchor to the strategy and provide the Board with a consistent view of progress during the year, whilst sessions on priority topics
allow deeper insight. A summary of the Board’s key activities during 2019 is set out on the next page. In addition, some examples
of decisions taken by the Board in 2019, in the context of its section 172 duties, are set out on page 56.
54
Funding Circle Holdings plc
Corporate governance 2019 Board activities
Q1 2019
‐ Full-year results announcement
‐ Annual Report and Accounts
‐ Update to 2019 budget and plan
‐
Review of credit, funding and
liquidity risk
‐ Resilience (including recession
risk planning)
‐ Proposal for new global
technology platform
Q4 2019
‐ Strategy offsite
‐ Automation
‐ Culture review
‐ Employee reward proposition
‐ 2020 budget and plan
Q2 2019
‐ Review and approval of new
investor products
‐ Approval of new US office premises
‐ AGM
‐ 2019 budget and plan update
‐ Product strategy review
‐ Proposal to open up the
FC marketplace
Q3 2019
‐ Half-year results announcement
‐
Investor relations
‐ No-deal Brexit planning
‐ New generation credit risk models
‐ Bringing the employee voice into
the boardroom
‐ ESG strategy
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;
‐
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, as appropriate. All Directors have direct access to senior management should they require additional information on
any of the items to be discussed.
The Audit Committee and the Risk and Compliance Committee receive further regular and specific reports to allow the monitoring
of the adequacy of the Group’s systems of internal controls (described in more detail in the Audit Committee Report on page 66
and the Risk and Compliance Committee Report on page 72).
Annual Report and Accounts 2019
55
Corporate governance report continued
Board decision making and section 172 duties
As set out in the Section 172(1) Statement on page 26, the Directors are fully aware of their section 172 duties, and some
examples of how they have had regard to the matters set out in section 172(1)(a)–(f) when discharging their duties during the
year are set out below. See also pages 57 to 60 for further detail on how the Board engages with key stakeholders.
Changes to secondary loan sale mechanics
The Board reviewed and approved the launch of the new selling tool designed to improve UK retail investors’ ability to access
their funds more quickly and regularly. See page 18 for more detail. In making its decision, the Board carefully considered the
impact on retail investors, including taking into account retail investor feedback, with a focus on ensuring that the changes would
improve their lending experience and were equitable as between investors. The Board also reviewed the results of the Group’s
consultation with the FCA in respect of these changes, to ensure that the changes were within all applicable laws and regulations.
New employee share plans
As part of the Board’s review of the Group’s employee reward proposition, the Board approved new employee share plans,
including (subject to shareholder approval at the AGM) a share incentive plan in the UK designed to reflect the Company’s
evolution from start-up to listed company and help deliver long-term success to the Company. See page 76 for more details.
In reaching its decision, the Board balanced the need to design a plan which resonated with all Circlers (taking into account
feedback from employees, including culture survey results) against the costs of the plan and the need to keep share dilution
within accepted guidelines.
Instant decision lending platform
Taking into account customer feedback, and with a focus on driving a better borrower experience, improved efficiency
(including from an environmental perspective) and maintaining strong customer relationships, the Board approved the
implementation of the new global technology platform to enable instant decision making and a simplified loan application
process for a number of borrowers. The Board was of the view that this development has considerable long-term benefits for
the Company and its stakeholders, including exciting future possibilities to be explored over the coming year.
ESG policy
When approving the Company’s formal ESG strategy and high level implementation plans (see page 27 for more detail), the
Board took into account the views and increasing focus of the Company’s key stakeholders (including its shareholders, investors,
borrowers and employees) on ESG issues. The Board will continue to provide oversight and leadership as the Company further
develops its ESG programme, and engages with its stakeholders on ESG-related issues, in 2020.
56
Funding Circle Holdings plc
Corporate governance Our stakeholders
The Board believes that maintaining strong stakeholder relationships is essential to the Group’s long-term, sustainable success,
and is committed to effective engagement with all of the Group’s stakeholders.
The table below sets out how the Group engages with its key stakeholders. Not all information is reported directly to the Board
and not all engagement takes place directly with the Board. However, the output of this engagement informs business-level
decisions, with an overview of developments and relevant feedback being reported to the Board and/or a Committee.
Stakeholder group
Form of engagement
Our shareholders
The Company is committed
to transparent and open
engagement with its
shareholders. This enables
the Board to clearly
communicate its strategy,
provide updates on the
Group’s performance and
receive regular feedback.
It also gives the Group the
opportunity to respond to
questions and suggestions.
‐ Shareholder communications, such as our quarterly trading
results, half-year results, Annual Reports, notices of general
meetings and other information, provided on our corporate
website at corporate.fundingcircle.com/results-and-reports.
‐ Our AGM, where the Chairman and the Chairs of the Audit,
Remuneration and Risk and Compliance Committees are
present to answer questions put to them by shareholders.
‐ Analyst and investor meetings and presentations/investor
roadshows. In addition, the Chairman, Chief Executive Officer,
Chief Financial Officer and Head of Investor Relations attend
individual ad hoc meetings and events with our larger
shareholders and prospective shareholders.
How this engagement influenced Board
discussions and decision making
Investors’ opinions were taken into
account in the shaping of Company
strategy and, in particular, feedback
received from shareholders and
proxy advisers was incorporated
into the Remuneration Policy
approved at the 2019 AGM.
‐ The Chairman and other Directors are available to discuss
any matter shareholders might wish to raise and to attend
meetings with shareholders and analysts, as required.
The 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 Head of Investor Relations provides regular reports to
the Board on shareholder interactions, and satisfactory
dialogue with shareholders is a matter reserved for the Board.
‐ The Chair of the Remuneration Committee engaged with
proxy advisers and our key shareholders regarding the
Remuneration Policy.
Annual Report and Accounts 2019
57
How this engagement influenced Board
discussions and decision making
Feedback received from Circlers
as part of our global employee
engagement initiative has resulted
in the implementation of some
clear actions and improvements
to address employee concerns,
including enhanced employee
communication and improvements
to our customer experience process.
The views of Circlers were also
carefully considered as part of the
review by the Remuneration
Committee and the Board of our
reward proposition, including our
employee share plans (see more
details on this on page 76).
The Board and Nomination
Committee also monitor the results
of our global culture surveys and
diversity and inclusion initiatives
to ensure they are driving actions
to improve life at Funding Circle
(for example the creation of a
number of diversity and support
groups including Women@FC,
FC Allies (LGBT) and FC Impact
(volunteering and charity work).
Taking customer feedback into
account, the Board has overseen
the implementation of key platform
innovations in 2019 to further
enhance our borrower experience,
including our new technology
platform and the initiative to open
up our marketplace to a panel of
specialist SME lenders (see pages
16 and 17 for further detail).
Corporate governance report continued
Our stakeholders continued
Stakeholder group
Form of engagement
Our people
Our people are our business.
The Board is committed to
creating a culture, by setting
the “tone from the top”,
where Circlers can thrive and
share in our mission, values
and ambition.
‐ Regular employee Global and Local Gatherings and our Full
and Half Circle events (which are also attended by Non-
Executive Directors from time to time) provide an opportunity
for Circlers to communicate, share information and interact
with senior management. Employees also receive regular
updates on the Company’s performance, including
following the publication of our loans’ performance
statistics and financials.
‐ Cath Keers, our workforce engagement Non-Executive
Director, meets regularly with employee groups in all of
our offices, and Cath and an employee representative then
provide feedback to the Board on topics of interest and/or
concern arising from those meetings. The employee
representative in turn updates Circlers on their discussions
with the Board and the actions and improvements implemented
as a result of their feedback, thereby providing an important
feedback loop. See the feedback from an employee
representative on page 25.
‐ The Board or its Committees regularly receive reports on
people-related matters, including the results of our regular
global culture surveys, diversity reports and updates on
diversity and inclusion initiatives.
‐ All Circlers have the opportunity to become shareholders
through our employee share plans. We provide regular
employee briefings, FAQs and the option of individual
meetings with our Share Plan team to encourage
employee participation.
‐ We monitor customer feedback (including through
customer satisfaction surveys) to help us establish
customers’ views on our products and services, as well as
the ways in which they would like us to improve our offering.
‐ We hold regular focus groups with SME borrowers around
product changes and new marketing campaigns. In 2019,
we held numerous focus groups with borrowers to hear their
views on our new Your Business Is Your Baby TV campaign.
‐ The Board reviews strategy and monitors performance in
the light of this customer feedback with the aim of meeting
the needs of our borrowers more effectively.
‐ Additionally, we regularly use written and video case
studies of our borrowers in marketing and internally with
Circlers. This helps the team (including the Directors) to
stay connected to the Funding Circle mission.
Our borrowers
SMEs are the growth engine
of the economy, and the
Board is committed to helping
them fulfil their ambitions.
58
Funding Circle Holdings plc
Corporate governance Stakeholder group
Form of engagement
Our investors
Providing attractive and
stable returns to a wide
range of investors in our
loans remains a key part of
the Board’s strategy.
‐ The Board is committed to maintaining an open dialogue
with our diverse investor base, including obtaining its
feedback on our products and ensuring we provide effective
loan performance reporting. Some examples of the ways in
which we engage with our investors in our loans are set out
below, and the results of this engagement are fed back to
the Directors to inform their strategic review and
decision making.
‐ We very actively engage with investors in our loans and
loan-backed investment products (including retail and
high net worth individuals, institutional investors, asset
managers and government-backed investors) as well
as the wider investment community such as market
commentators, service providers, finance providers,
rating agencies and at investor conferences.
‐ We provide and/or facilitate ongoing loan performance
reporting to investors so that they may monitor their
investments in our loans.
‐ We regularly engage with investors in our loans to facilitate
understanding and collaboration on investment criteria,
trends and investor regulatory obligations (for example
related to data protection, anti-money laundering,
outsourcing and regulatory capital).
‐
‐
In those markets with retail investors in our loans, we
provide information and support to those investors in an
accessible format, including, for instance, through blog
posts and email newsletters.
In 2019, the Board oversaw a process to begin formalising
our ESG strategy, including developing our understanding
and priorities in respect of engagement with our
various stakeholders.
‐ We currently regularly speak and meet with investors
regarding their ESG investment criteria as they apply to
our loans and loan-backed investment products. See
further details of our engagement in relation to ESG
matters on page 27.
‐ FC Impact (volunteering and charity work) co-ordinates
internal action and initiatives. See details of our
engagement on page 28.
Our communities
The SMEs that we serve
are at the centre of our
communities. We also
engage with a diverse array
of investors as set out under
“Our investors” above. In
addition, our people are
passionate advocates of
charitable causes and issues
related to social impact and
community engagement.
How this engagement influenced Board
discussions and decision making
Having considered retail investor
feedback in the UK, the Board
approved changes to the secondary
loan sale mechanics to facilitate
a more equitable and timely
sale process.
The Board has also overseen
the diversification of the ways
in which investors can invest in
our loans by adding asset-backed
securitisation and private
investment fund programmes
for investors that prefer these
to whole loans.
Taking into account the results of
such stakeholder engagement the
Board adopted an ESG strategy,
with a centralised approach,
including the development of a
governance framework and the
establishment of central and local
working groups (see page 27 for
more details).
Annual Report and Accounts 2019
59
Corporate governance report continued
Our stakeholders continued
Stakeholder group
Form of engagement
FCA/other regulators/
government
The Board is committed to
its goal of Funding Circle
being a trusted and reputable
financial services company,
and ensuring the Group
complies with all
applicable regulation.
‐ Engagement with local, national, federal and supra-national
government agencies, legislators, policy makers and
industry groups to provide insight and policy leadership in
connection with policy and rulemaking related to issues
affecting SME borrowers, investors or lending in the FinTech
industry. For example, this year we engaged with the FCA
around the new P2P regulations and the changes to our
secondary market. In addition, we engaged with the European
Commission around plans to introduce pan-European
regulation for the online platform lending industry and with
US federal and state regulators regarding a number of state
law changes impacting commercial lending.
‐ We regularly host events on industry issues, submit position
papers and participate in expert hearings and consultations,
forums and other policy engagement initiatives.
‐ The Board ensures it is kept apprised of the results of the
above engagement as well as the key legal and regulatory
changes affecting the business (for example the new P2P
regulations) to inform its strategy and decision making.
How this engagement influenced Board
discussions and decision making
When considering proposed
changes to the secondary loan
sale mechanics in the UK, the
Board carefully considered the
views of the FCA, in addition to
investor feedback, to ensure any
changes fell within all applicable
regulations, as well as being
beneficial to investors in
our loans.
60
Funding Circle Holdings plc
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:
Responsible for:
‐
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; and
‐ ensuring effective communication
with shareholders, including in
relation to governance,
remuneration and strategy.
‐
‐
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; and
‐ 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.
‐ being available to shareholders
if they have concerns, which
contact through the normal
channels of the Chairman, CEO
or other Executive Directors has
failed to resolve;
‐ attending meetings with and
listening to the views of major
shareholders as required;
‐ providing a sounding board for the
Chairman and acting as an
intermediary for shareholders
when necessary; and
‐ meeting other Non-Executive
Directors without the Chairman
present once a year to appraise
the Chairman’s performance.
Chief Financial Officer
Non-Executive Directors
Company Secretary
Responsible for:
Responsible for:
Responsible for:
‐ all aspects of finance
‐ providing objective and constructive
including financial planning, tax,
treasury and procurement;
challenge to management;
‐ being available to all Directors to
provide advice and assistance;
‐ assisting with the development of
‐ providing governance advice; and
‐
investor relations;
strategic proposals; and
‐ working with the CEO to develop
and implement the Group’s
strategic objectives, annual
budget and business plan; and
‐ scrutinising and monitoring
financial and operational
performance and the Group’s
risk management framework.
‐ ensuring effective financial
compliance and control.
‐ ensuring compliance with the
Board’s procedures and with
applicable laws and regulations.
Annual Report and Accounts 2019
61
Composition, succession and evaluation
As at the date of this report, the Board comprised the
Chairman, the Executive Directors and the Non-Executive
Directors, including the Senior Independent Director. The
current Directors served throughout all of 2019.
Board induction and training
All new Directors receive a comprehensive induction plan on
joining the Board, and this was reviewed and enhanced by the
Nomination Committee in 2019.
The Code recommends that at least half of the Board, excluding
the Chairman, should comprise Non-Executive Directors who
the Board considers to be independent. 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
continue to be held by those Non-Executive Directors, no
further options will be granted to Non-Executive Directors
under any of the Company’s share plans. The options held
by the relevant Non-Executive Directors are all vested. Further
details are set out on page 81. The Board does not consider
that the historical granting of options to Non-Executive Directors,
or the continued vesting of options already granted, 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, as reviewed and confirmed by the Nomination
Committee, the Board is satisfied that 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. The Nomination Committee has reviewed the
other directorships and commitments held by the Non-Executive
Directors and is satisfied that each of them continues to be
able to devote sufficient time to discharge their duties effectively
as Directors of the Company. During the year, any additional
external appointments requiring a significant time commitment
have been approved by the Board. See further details in the
Nomination Committee Report on page 65.
The Board considers all Directors to be effective and committed
to their roles. All members of the Board (other than Sean
Glithero, who, as announced, will be stepping down as Chief
Financial Officer during 2020) will be offering themselves for
re-election at the Company’s AGM in May 2020, in compliance
with provision 18 of the Code.
This includes the following:
‐ overview of Funding Circle, including its structure, strategy
and key stakeholders, through meetings with members of
the Global Leadership Team;
‐ overview by the Chairman on the Board structure and
procedures, Committees and roles and responsibilities and
an overview of the Board calendar, key dates and Board
documentation and corporate policies by the
Company Secretary;
‐ overview of key stakeholders, including borrowers,
investors, our people and shareholders;
‐
training on public company and Directors’ duties, in addition
to our standard new joiner training (which covers, for example,
whistleblowing, information security and anti-bribery and
corruption); and
‐ meeting with internal and external auditors, key advisers and
key stakeholders (e.g. major shareholders) as appropriate.
The Board is committed to the training and development of
Directors and employees and the Nomination Committee also
considered, with the assistance of the Company Secretary, any
development needs or training requirements of the Directors.
The Company Secretary is responsible for helping the
Chairman regularly review and organise appropriate training
for the Directors to ensure they are fully comfortable with their
role within the Board and to enable them to contribute to the
operation of the Board and the long-term success of the
Company in the fullest manner possible. All Directors have the
opportunity to visit the Company’s offices and operations, and
have continuous access to the knowledge and expertise of
senior management. In addition, the Board was given
presentations during the year by the Company’s advisers,
brokers and senior management, and updated on key legislative
and regulatory changes by the Company Secretary.
Board effectiveness
The review of Board effectiveness for 2019 was run internally by
way of a self-assessment questionnaire, circulated to the Board.
It was led by the Chairman and managed by the Company
Secretarial team. The questionnaire required a combination of
qualitative and quantitative responses to enhance the evaluation
and included questions regarding the effectiveness of the Board’s
internal relationships, the Board’s communication with the
management team, the composition of the Board and the
effectiveness of the Chairman’s role. The Company Secretarial
team analysed and summarised the responses, which were
then considered and discussed in detail by the Board. The
results of the review concluded that the Board’s role and
performance are effective and had matured during the course
of 2019, whilst identifying areas where further improvements
could be made (for example more focused executive summaries
to be included in Board papers and the provision of additional
training to Directors to ensure they understand the detail behind
key business developments, including the Group’s new products).
62
Funding Circle Holdings plc
Corporate governance Audit, risk and internal control
The Board’s Audit, Risk and Compliance, Remuneration and
Nomination Committees also conducted reviews of their own
effectiveness during 2019. Each Committee Chair agreed a
tailored questionnaire which was circulated to Committee
members. The results were analysed by the Company
Secretarial team and discussed by the Committees and
actions were agreed for the coming year. The results of the
reviews concluded that the Committees are working well and
that there are no significant concerns among the Directors
about their effectiveness. More information on each Committee’s
effectiveness review can be found in their reports.
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. Details of this
process and the focus of the review and of the Audit Committee’s
role, activities and relationship with the external auditors are
on pages 67 to 71 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
is on page 89 in the Statement of Directors’ Responsibilities.
The Company’s external auditors explain their responsibilities
on page 95.
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,
borrowers and investors in our loans. 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 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 our
borrowers. This includes
ensuring that an appropriate
system of risk governance is
in place throughout the Group.
The Board oversees the Group’s risk management and internal
control system and is responsible for reviewing its effectiveness.
During the year, the Board carried out a robust assessment of
the principal risks and uncertainties facing the Group, which
are described in more detail on pages 42 to 47 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 and Audit Committees. The Risk and
Compliance Committee also monitors compliance with the
ERMF. More information on the ERMF is provided on page 41.
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 Risk and Compliance and Audit Committees
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 (although the Group plans to
transition to a co-sourced model during the course of 2020).
The Internal Audit function provides independent and
objective assessment on the robustness of the ERMF and the
appropriateness and effectiveness of internal controls to the
Risk and Compliance and Audit Committees and the Board.
More information on the Internal Audit function is set out in
the Audit Committee Report on page 70.
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. Details about this can be found in the
Directors’ Remuneration Report starting on page 75.
Annual Report and Accounts 2019
63
Report of the Nomination Committee
Members and attendance
Member
Meetings
Attendance
Andrew Learoyd (Chair)
1/1
100%
Bob Steel (Senior
Independent Director)
Dear shareholders
On behalf of the Board, I am pleased to present our Nomination
Committee Report for the year ended 31 December 2019.
2019 highlights
‐ Oversaw the nomination of Oliver White to succeed
Sean Glithero as Chief Financial Officer.
‐ Developed orderly succession plans for both the Board
and the Global Leadership Team, which were successfully
implemented in respect of the appointment of Oliver White
as Chief Financial Officer and certain roles within the Global
Leadership Team.
‐ Approved the Group’s diversity and inclusion initiatives for
2019 (which are further detailed on page 24), as well as
requesting regular and detailed reporting to the Committee
to enable it to effectively monitor the impact of these initiatives.
1/1
100%
‐ Developed an enhanced induction plan for new Board members.
Cath Keers (Independent
Non-Executive Director)
1/1
100%
The Company is
committed to creating an
inclusive culture, free
from discrimination of
any kind, and this extends
to Board appointments.
64
Funding Circle Holdings plc
2020 priorities
‐ Renewing the Board and senior management succession
plans especially in light of recent changes; the Committee
has engaged a leadership advisory firm to assist with
this process.
‐ Considering whether the Board and senior management
have the appropriate combination of skills, experience,
diversity and knowledge, especially in light of the Group’s
evolving business, and how this should best be addressed.
‐ Promoting diversity – the Committee recognises the
importance of diversity and intends to continue to take an
active role in setting and meeting diversity objectives and
strategies for the Group as a whole (as well as for the Board
and the Global Leadership Team) and in monitoring the
impact of new and existing diversity initiatives.
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 53 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/investors/governance.
Operating rhythm of the Committee
The Committee met once during 2019, when the Committee
agreed its role and key areas of focus for 2019. The Committee
also met in January 2020, when it reviewed the results of the
Board and Committee evaluation process and discussed
(among other things) the appointment of Oliver White to
succeed Sean Glithero, the composition of the Board and
succession planning.
Corporate governance Board induction and training
All new Directors receive a comprehensive induction plan
on joining the Board, and this was further developed during
2019. Further details of the induction plan are set out on page
62 of the Corporate Governance Report.
The Committee is also mindful of the need to ensure that the
Directors have the skills, knowledge and experience necessary
to meet the evolving needs of the business, and therefore
ensures, with assistance from the Company Secretary, that the
Board completes regular training on key and developing areas.
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 Committee is pleased with the improvements
in gender diversity made over the last few years, both at a Board
level through the appointment of Cath Keers and Geeta Gopalan
in 2018 and at a Global Leadership Team level through the
appointment of Lisa Jacobs as UK Managing Director in 2019,
although it recognises that there is more work to do.
The Committee is committed to enhancing the level of diversity
at all levels of the business, including at a Global Leadership
Team and Board level, and believes in recruiting the right
candidates based on their skills, knowledge and experience,
while always having due regard for the benefits of diversity
(including gender diversity).
A breakdown by gender of the Board and the Global Leadership
Team is provided on page 24. We have also published the UK’s
gender pay gap report on our UK website which 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 24. These initiatives were reviewed and approved
by the Committee in 2019, together with specific reporting
requirements to ensure the Committee is able to monitor
their impact.
Board appointments and composition
No additional Board appointments were made during 2019.
As previously announced, Sean Glithero informed the Board, in
early 2020, of his intention to step down from his role as Chief
Financial Officer and from the Board, and he will be succeeded
by Oliver White later this year. In line with our succession plan,
it was agreed that the position should be filled by an external
hire, and Egon Zehnder was engaged in the search for suitable
candidates. Egon Zehnder does not have any other connection
with the Company or individual Directors.
Following the completion of a formal and rigorous selection
process, which included Oliver meeting with members of the
Global Leadership Team and a number of the Non-Executive
Directors (including two members of the Committee), the
Committee recommended that Oliver be appointed to the Board
on joining the Company. Oliver will receive a comprehensive
induction, in line with the induction plan approved by the
Committee, to ensure he is fully prepared to take on the role.
The Committee also assessed the Board’s current balance of
skills, knowledge and diversity and how this aligns with the
Company’s strategic priorities and concluded that the mix of
skills, experience and knowledge was appropriate to enable
the Board to effectively discharge its responsibilities and
support the Company’s future development.
Commitment and interests
The Committee considered the commitment of all Directors
both in terms of dedication to the role and their time availability
including a review of the Directors’ current directorships. It
concluded that all Directors are fully dedicated and commit an
appropriate amount of time to their roles.
The Committee also monitors additional external appointments
of Directors from both an availability and conflict of interest
perspective, which are not undertaken without the prior
approval of the Board. For example, this assessment was
carried out in respect of the appointment of Cath Keers as
a Non-Executive Director of The British United Provident
Association Limited (parent company of the Bupa group of
companies) in November 2019, and subsequently approved by
the Board on the basis that it would not impede on her ability
to perform her roles on the Board and relevant Committees of
the Company.
Succession planning
The Committee completed an initial succession plan, to cover
both interim and longer-term solutions, for both the Board and
the Global Leadership Team in 2019. This was successfully
implemented in relation to the appointment of Oliver White as
Chief Financial Officer to succeed Sean Glithero, as well as in
relation to certain other members of the Global Leadership
Team. This will continue to be a focus in 2020, with the Committee
looking to update and enhance the existing succession plan,
including to reflect these recent changes. The Committee has
also engaged a specialist consultant to assist with its long-term
succession planning.
Committee effectiveness
As introduced on page 63, the Committee undertook an
effectiveness review during 2019 whereby each Committee
member completed a tailored questionnaire. The question set
covered topics such as the composition of the Committee, the
quality and timeliness of information provided and succession
plans for the Board and senior management. The feedback
from the review was positive and was discussed in detail at the
Committee meeting in January 2020. The review process was
also instrumental in directing the Committee’s focus for 2020
(which is detailed above).
Re-election
The position of each Board member was closely reviewed
during the year as part of the consideration of succession
arrangements and the Board and Committee evaluation
processes. While the Committee will continue to assess this
in 2020, 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, recommended to the Board
that each Director stand for election at the forthcoming AGM
(with the exception of Sean Glithero, who will be stepping
down from his role as Chief Financial Officer in 2020).
Andrew Learoyd
Chair of the Nomination Committee
12 March 2020
Annual Report and Accounts 2019
65
Dear shareholders
On behalf of the Board, I am pleased to present our Audit
Committee Report for the year ended 31 December 2019. This
was the first full year of the Committee’s deliberations and the
focus was on establishing the appropriate operating rhythm
to enable oversight of a maturing control environment and a
growing business with more complex products and services
on offer.
2019 highlights
‐ Reviewed the effectiveness of the Group’s internal controls
and the Internal Audit function, together with the internal
audit plan for 2020, suggesting changes to priorities,
processes and reporting.
‐ Assessed the Group’s significant audit and accounting
judgements, particularly with respect to goodwill impairment
and the appropriate valuation of the Group’s new funding
products (see page 68 for more detail).
‐ Reviewed and approved the Group’s 2019 Annual Report
and Accounts and preliminary announcement, including the
Viability Statement and going concern assessment.
‐ Reviewed and approved the external audit plan and fees for
the 2019 financial year and carried out a formal evaluation
to assess the independence, objectivity and effectiveness of
the external auditors.
‐ Reviewed and approved the Group’s non-audit services fees
and policy.
‐ Considered and approved the appointment of Nick Morrison
as the Group’s new external audit partner and
recommended the reappointment of the external auditors.
‐ Approved the Group building an in-house Internal Audit
team during 2020.
‐ Reviewed the adequacy and security of the Group’s
whistleblowing arrangements and received
whistleblowing updates.
2020 priorities
‐ Continue to review of the Group’s internal controls over
financial reporting, including to ensure these are developed
to reflect the Group’s growing and evolving business,
including new funding products.
‐ Continue the assessment of accounting judgements in
relation to Funding Circle sponsored ABS bond products.
‐ Overseeing the Group’s transition to a co-sourced internal
audit model.
Report of the Audit Committee
Members and attendance
Member
Meetings
Attendance
Geeta Gopalan (Chair)
3/3
100%
Eric Daniels (Independent
Non-Executive Director)
3/3
100%
Ed Wray (Independent
Non-Executive Director)
3/3
100%
The Board has delegated
to the Committee
responsibility for
overseeing the financial
and corporate reporting
and internal financial
controls of the Group.
66
Funding Circle Holdings plc
Corporate governance Committee composition, skills and experience
We confirm that we have complied with the Code provision
that the Committee comprises Independent Non-Executive
Directors and between us we 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 pages 50 to 51. The Board is satisfied that the
Committee meets the Code provision to have recent and
relevant financial experience.
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, 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.
The key responsibilities of the Committee are summarised
on page 53 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/investors/governance.
The Committee reports regularly to the Board on its activities
and makes recommendations, all of which have been
accepted during the year.
Operating rhythm of the Committee
The Committee met three times during 2019. All members of
the Committee attended all meetings, together with (by invitation)
representatives of the external and internal auditors, the CFO
and, where it was deemed appropriate, other members of the
senior management team. I am satisfied that the Committee
received information on a timely basis and meetings were
scheduled adequately to allow members to have an
informed debate.
As Funding Circle Ltd (“FCL”) is authorised and regulated by
the FCA, it has its own Audit and Risk and Compliance
Committees, both chaired by FCL’s Independent Director (who
is not on the Board), Matthew King. The FCL Audit Committee
meets at the same time as the Committee and Matthew King
has attended all meetings.
The external and internal auditors attended all Committee
meetings, and the Committee also met with them separately
without management present. In addition, I maintain an open
and regular dialogue with the Company’s external and internal
audit partners, as well as the CFO.
A summary of the Committee’s 2019 highlights and 2020
priorities is set out on page 66, with further detail on certain
key matters which warrant further consideration set out
below, including the key considerations and conclusions
of the Committee.
Significant issues considered in relation to the financial statements
The Committee assessed the quality and appropriateness of, 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 2019 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 principal risks as set out on pages 42 to 47;
‐ assessing and reviewing the guardrails established by the Risk and
Compliance Committee to track the Group’s capital, liquidity and
exposures following the evolution of its funding products;
‐
reviewing the Group’s medium-term plan, its cash and liquidity; and
‐
reviewing the 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.
Annual Report and Accounts 2019
67
Report of the Audit Committee continued
Significant issues considered in relation to the financial statements continued
Reporting issue
Audit Committee action
Goodwill and carrying value of investments in the
Parent Company
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 (referred to as
FCCE and FCUSA respectively in the financial statements
goodwill note). Additionally the Group considered the
carrying values of the investments in subsidiaries held
in the Parent Company. There remained sufficient
headroom in the Group accounts in respect of the US
goodwill, and in the Parent Company accounts in
respect of both the UK and US investments.
However, the European business, which operates in
Germany and the Netherlands, has seen a deterioration
in its performance and trading prospects, such that the
underlying projected cash flows of the cash-generating
unit were insufficient to cover the carrying value of
goodwill or Parent Company investments.
Accordingly, the Group has taken an impairment
charge of £34.3 million consisting of goodwill of
£29.0 million and other tangible and intangible assets
of £5.3 million. Additionally the Parent Company
investment of £77.5 million has been fully written down.
As members of the Board, all Committee members received updates
on the financial performance of the Group and its medium-term plan
as part of the 2020 budget process.
The Committee also reviewed papers from management during the
year which set out the key assumptions underpinning the value-in-use
assessment and the level of headroom and sensitivity to those
assumptions, the financial projections of which were based on the
medium-term plan.
The Group’s external auditors provided their view of the assessment
to the Committee.
After due challenge and discussion, the Committee concluded that the
assets associated with the businesses in Germany and the Netherlands
were unsupportable and should be impaired.
However, the Committee was comfortable that there remained
sufficient levels of headroom over the carrying values of the assets
associated with the other cash-generating units and that the remaining
investments in the Parent Company accounts were supportable.
Exceptional items
The Group has a defined accounting policy for the
treatment of non-recurring and material items
as exceptional.
The impairment of assets totalling £34.3 million has
been disclosed as an exceptional item. In 2018, IPO
costs of £5.9 million in the income statement were
treated as exceptional.
The Committee received a paper from management setting out the
analysis of the exceptional items, linked to the goodwill impairment
above. It also considered the restructuring costs incurred in the year.
The Committee received the views of the external auditors on the items
that management had included within these costs.
The Committee considered the appropriateness of presenting the
impairment separately from other costs together with the non-inclusion
of restructuring costs.
The Group also incurred restructuring costs during the
year of c.£2.0 million. However, given the quantum,
these have not been disclosed as exceptional.
It noted that the disclosure as exceptional was consistent with the
Group’s accounting policy, and concluded that the amounts and this
presentation were appropriate.
Valuation of financial instruments
Following the introduction of the new funding products
during 2019, the Group holds significant levels of
financial instruments at fair value on its balance sheet.
These instruments are valued using valuation estimation
techniques including discounting cash flow analysis
and valuation models.
The Committee received and reviewed a paper from management that
included the assumptions and methodologies used to value the financial
instruments together with the level of sensitivity to those assumptions.
The Committee also considered the views of the external auditors on
the valuation approach and the assumptions.
The Committee considered the disclosures within the Annual Report
and after due challenge concluded that the valuations were reasonable
and the disclosures were appropriate.
68
Funding Circle Holdings plc
Corporate governance Reporting issue
Audit Committee action
Loan repurchase provisions (also known as expected
credit losses)
With certain institutional investors, the Group has
entered into agreements to assume the credit risk
on loan investments funded by institutional investors,
as detailed in note 16 of the financial statements on
pages 123 and 124, in return for a fee premium.
The Group is therefore required to make its best
estimate for the expected defaults on these loan
investments and therefore the level of loan
repurchases it must make.
This requires estimation on the expected level
of defaults using both historical trends and
forward-looking information.
Alternative performance measures (“APMs”)
The Group uses APMs in its reporting of segment
adjusted EBITDA and adjusted EBITDA for the Group.
These measures are defined within the segmental
information note on page 115.
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 external investors
and analysts use to assess the Group’s
underlying performance.
Fair, balanced and understandable reporting
The Board is required to report as to whether the
contents of the 2019 Annual Report and Accounts,
when taken as a whole, is fair, balanced
and understandable.
The Committee received and reviewed information from management
during the year on the levels of loan repurchases and the associated
repurchase provisions also referred to as expected credit loss provisions.
The Committee also received views of the external auditors.
Taking each of these into account, the Committee concluded that the
approach and the quantum of provision and the associated disclosures
for loan repurchase costs were reasonable.
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 Committee also considered the other measures used by the Group,
including loans under management and originations, and agreed that
these were significant drivers of fees earned by the Group and, in turn,
its financial performance and as such required sufficient disclosure to
explain the revenue performance.
The Group also obtained the view of the use of these APMs from the
external auditors.
The Committee considered the appropriateness of these APMs in
providing meaningful information about the underlying performance of
the business and concluded that these APMs should continue to be
used in the Group’s external reporting, although noting that these
should not be given undue prominence.
The Committee reviewed the Annual Report as a whole and concluded
that the use of these measures was not excessive relative to statutory
measures and that appropriate reconciliation to statutory measures
was provided.
At the request of the Board, the Committee has assessed the
information contained within the 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 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 and press releases through
the year, it has concluded that, in its judgement, the 2019 Annual Report
and Accounts, when taken as a whole, is fair, balanced and understandable.
Annual Report and Accounts 2019
69
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.
The Committee is pleased with the improvements made to the
Group’s internal financial controls over the year, but this will
remain an area of focus to ensure controls are developed and
improved to reflect the Group’s growing and evolving business,
including the recently launched new funding products.
Internal audit
The Group uses KPMG, which is accountable to the Committee,
as its outsourced Internal Audit function. Its work focuses on
areas of key business risk, significant processes and current
areas of concern to define its audit plan.
Areas reviewed by KPMG during 2019 included information
and cyber security, investor and borrower communications,
collections and recoveries, compliance with regulatory
frameworks (including client money requirements) and
risk oversight.
The internal audit plan for 2020 was approved by the Audit
Committee in November 2019 and covers a broad range
of processes and controls across the business including:
‐ business continuity and system resilience;
‐ new investor and borrower onboarding processes, ‘know
your customer’ and anti-money laundering and sanctions
compliance;
‐ credit risk underwriting and monitoring processes (including
on the new global technology platform);
‐
investor servicing; and
‐ capital and liquidity planning, and the securitisation process.
Actions arising from the audits are monitored through to
completion and reported to the Committee to ensure they are
appropriately addressed.
The Audit Committee has reviewed the effectiveness of the
Internal Audit function throughout the year, including as part
of the Committee effectiveness review. Following the completion
of this review and a detailed discussion, it concluded that the
function had been effective during 2019, although improvements
were requested to Internal Audit reporting in particular.
The Committee also considered the appropriateness of
continuing with the current fully outsourced model given the
change in size and complexity of the business in recent years.
It has concluded that it is an appropriate time to build in-house
capabilities and plans to transition to a co-source model
during the course of 2020.
Whistleblowing
The Board adopted a revised whistleblowing policy in January
2019, incorporating the Committee’s recommendations. The
Group 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 arrangements and receives
whistleblowing updates at each meeting (which include
updates on steps taken to ensure employees’ awareness of
the whistleblowing policy), 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, 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 were first appointed as the external auditors of the Company in 2015. Having worked with the Company for four years, Brian
Henderson (the previous lead audit partner) stepped down in 2019, and Nick Morrison was appointed as the Company’s new lead
audit partner. Prior to approving Nick’s appointment, the Committee carried out a thorough evaluation of Nick’s skills and
experience to ensure he was the most suitable candidate for the role and subsequently ensured a smooth handover process.
The Committee undertook a formal assessment of PwC’s effectiveness during 2019 by following the process below:
Tailored questionnaire
prepared covering
Questionnaire provided to
Results of the
questionnaire
Assessment
‐ External audit partner time
‐ Committee members
‐ CFO
commitment
‐ Quality of the team
‐ Quality of the service
provided and audit
presentations
‐ Accounting, technical and
governance insight
‐
Independence and
professional scepticism
‐ Quality of communication
and interaction
70
Funding Circle Holdings plc
The results of the evaluation
were collated by the Company
Secretarial team and
presented to the Committee.
The Committee considered
the results of the evaluation,
together with a detailed review
of the quality of PwC’s audit
plan and their assessment of
management’s judgements
during the year. Following
detailed discussion, together
with some suggestions for
improvement (which have been
discussed with PwC), the
Committee concluded that the
audit process was effective
and that PwC remained
independent and objective.
Corporate governance PwC are prohibited from providing certain non-audit services
including but not limited to internal audit work, valuations work
and tax-related work. Further details on audit and non-audit
fees are shown in note 4 to the financial statements.
PwC have confirmed to the Committee that it remained
independent during the year.
Committee effectiveness
As introduced on page 63, the Committee undertook an
effectiveness review during 2019 whereby each Committee
member completed a tailored questionnaire. The question set
covered topics such as the composition of the Committee, the
quality and timeliness of information provided, the oversight of
the Committee and the ongoing engagement with the internal
and external auditors. The output from this review was positive
and, following an open and productive discussion, the
Committee agreed a number of actions to be implemented
during 2020, including continued focus by the Committee, in
conjunction with the Risk and Compliance Committee, on the
Group’s new funding products and improvements to be made
to internal audit reporting to provide a more qualitative and
thematic approach.
Geeta Gopalan
Chair of the Audit Committee
12 March 2020
The Committee also considered the findings of the FRC’s
Audit Quality Review (“AQR”) team into the conduct of PwC
audits generally. The AQR team selected to review the audit
of the Group’s 2018 Annual Report and Accounts as part of
its annual inspection of audit firms. I received a copy of the
findings of the AQR team in my capacity as Chair of the
Committee, and have discussed them with PwC. Whilst there
were no significant findings, there were some areas of PwC’s
audit procedures identified as requiring improvement and we
are satisfied with the responses implemented by PwC in the
audit of the Group’s 2019 Annual Report and Accounts. None
of the findings relate to the Group’s accounting policies.
Following the above evaluations, the Committee has
recommended to the Board that PwC are reappointed as the
Company’s external auditors. A resolution recommending the
appointment of PwC as external auditors of the Company will
be put to shareholders at the Company’s AGM in May 2020.
In accordance with the Competition and Markets Authority
order 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 Committee approval for non-audit
services. This policy was amended in 2019 to prohibit PwC
from providing tax compliance work in the US, in line with
PwC’s updated internal policies, and giving me, as Chair of the
Committee, delegated authority from the Committee to
approve individual non-audit services items of up to £50,000
per service.
All fees paid to PwC for non-audit services have been approved
by the Committee or the Chair (in accordance with the non-audit
services policy), and a summary of all non-audit services is
provided at Committee meetings.
During the year ended 31 December 2019, PwC were engaged
to provide non-audit services relating to the following:
Description
Total assurance-related services
£m
0.3
The Audit Committee concluded that it was in the best
interests of the Group to purchase these services from PwC
on the basis that they were able to provide them more efficiently
than an alternative provider (or, in some cases, they were
required to be performed by the external auditors).
Annual Report and Accounts 2019
71
Report of the Risk and Compliance Committee
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 2019.
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 47 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 funding and liquidity risk with the
development of a specific risk management framework to
address the additional risks resulting from the evolution of the
Group’s funding strategy. The Committee’s highlights from 2019
are set out below.
The Committee members have a wealth of risk management
experience, including strong representation in financial
services. Further details of their experience are set out on
pages 50 and 51 of this report.
2019 highlights
‐ Recognised funding and liquidity risk as an additional
principal risk and developed and implemented a specific
funding and liquidity risk management framework.
‐ Further enhanced the Company’s risk governance
framework by (among other things) updating the Group’s
qualitative and quantitative risk appetite statements and
implementing a new escalation process and approval
protocol for changes to credit parameters.
‐
Initiated improved risk management practices, including the
introduction of (i) a governance, risk and compliance tool
(“GRC tool”) to perform risk and controls self-assessments
(“RCSA”), register risk incidents and monitor remediation
actions and (ii) an improved risk assessment methodology
to include more robust risk ratings and an improved approach
to the management of, and reporting on, low impact and
high frequency events.
‐ Oversaw the evolution of the Group’s stress test methodology
to implement proposals made by the external consultancy
appointed on the recommendation of the Committee to
validate the Company’s approach.
‐ Reviewed and approved the Group’s new credit risk decision
models, and oversaw the tightening of credit underwriting
parameters for the riskier borrower segments to improve
credit performance and protect investors’ returns.
2020 priorities
‐ Continue to review of the Group’s risk strategy and risk
management capabilities, including revising the ERMF and
the RCSA process (continuing with the implementation of
the GRC tool) as necessary to reflect the Company’s growing
and evolving business, as well as any emerging risks.
‐ Continue to monitor the economic and political
environment, including the exit of the UK from the European
Union, and contingency planning to respond and mitigate
the impact of any adverse macroeconomic conditions.
Members and attendance
Member
Meetings
Attendance
Eric Daniels (Chair)
3/3
100%
Geeta Gopalan (Independent
Non-Executive Director)
3/3
100%
Hendrik Nelis
(Non-Executive Director)
3/3
100%
The main purpose of
the Committee is to
review and make
recommendations to the
Board in connection with
the Group’s risk strategy.
72
Funding Circle Holdings plc
Corporate governance ‐ Continue careful monitoring of the Group’s funding and
liquidity risk, including to ensure diversification of funding
sources and to maintain a prudent level of balance sheet liquidity.
‐ Review of the framework of controls, guardrails, monitoring
and testing for the next phase of implementation of Funding
Circle’s global technology platform.
During 2019, the Committee considered a wide range of risks
facing the Group, both existing and emerging, across all key
areas of risk management. A summary of the Committee’s
2019 highlights and 2020 priorities is set out on page 72, with
further detail on certain key risks and matters which warrant
further consideration set out below, including the key
considerations and conclusions of the Committee.
‐ A detailed review of the Group’s people risk (excluding the
Board and Global Leadership Team, which fall within the
remit of the Nomination Committee).
‐ Continue overview of the Group’s credit risk decision
models, following the introduction of the eighth generation
model in the United Kingdom and the fourth generation
model in the United States.
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 (in light of the Committee’s assessment of the
emerging and current principal risks to the Group) and its attitude
to and appetite for risk and to monitor and review the Group’s
compliance with the ERMF. In addition, the Board has delegated
responsibility to the Committee 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 53 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/investors/governance.
The Committee reports regularly to the Board on its activities
and makes recommendations, all of which have been
accepted during the year.
Operating rhythm of the Committee
The Committee met three times during 2019. All members
of the Committee attended all meetings, together with
(by invitation) the CRO, CEO, CFO, Chairman of the Board,
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 and debate.
As FCL is authorised and regulated by the FCA, it has its own
Risk and Compliance and Audit Committees, 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.
In addition, I maintain an open and regular dialogue with the
CRO, and am satisfied that matters were escalated to the
Committee or me, as necessary, in line with the escalation
protocols approved by the Committee earlier in the year.
Funding and liquidity risk
The Company’s funding strategy has evolved over the course
of 2019, resulting in increasing diversification of funding
sources including Funding Circle sponsored ABS bond
products. Accordingly, funding and liquidity risk has been a
focus of the Committee during 2019 to ensure the downside
risks of this diversified funding, and the sponsored ABS
products in particular, are carefully managed, and that the
Company maintains a prudent level of balance sheet liquidity.
Accordingly, the Committee has been instrumental in the
recognition of funding and liquidity risk as an additional
principal risk in the ERMF and the development of a specific
funding and liquidity risk management framework, together
with the maintenance of an effective Treasury function. This
has resulted in the implementation of guardrails, controls and
monitoring and escalation protocols, which are carefully
reviewed and monitored by the Committee.
In addition, the Committee continues to closely monitor levels
and sources of funding in light of the lower retail and institutional
investor demand observed, particularly in the UK in the context
of Brexit uncertainty.
Funding and liquidity risk will continue to be closely monitored
by the Committee in 2020.
Credit risk management
The Committee monitored credit risk performance against the
Group’s risk appetite metrics and policies, together with the
results of the stress tests carried out each year. Given the
increasingly uncertain macroeconomic conditions, the Committee
oversaw the tightening of certain credit underwriting parameters
in 2019, together with the strengthening of internal collections
and recoveries capabilities, including new predictive models,
automated workflows and specialist vendor relationships.
This will remain an area of focus for the Committee in 2020.
Regulatory, reputation and conduct risk
The Committee has been kept apprised of the new regulatory
environment, including the Senior Managers and Certification
Regime and the new P2P rules in the UK, a number of state
law changes in the US impacting commercial lending and the
new licensing regime in Germany, and is comfortable that the
Group has taken all appropriate steps to ensure compliance
with the new regulatory requirements.
The Committee has also been regularly updated on the media
focus in the UK on Funding Circle’s secondary market (as well
as the industry generally) and the changes made to improve
the retail investor experience and is comfortable with the
Company’s approach in this regard.
Annual Report and Accounts 2019
73
Report of the Risk and Compliance Committee continued
Economic environment
The Global CRO provided the Committee with reports on
early warning signals of a possible recession and potential
implications to the credit portfolio performance in each
geography. The Committee also received detailed stress
testing reports of the Group’s loan portfolios, including an
independently validated report on the UK stress testing model.
Further reports will be provided to the Committee in 2020.
Other matters
Other key matters considered at the meetings of the
Committee during the year included:
‐
review of the ERMF and relevant Group policies;
‐
‐
‐
review of results of the RCSA and ongoing risk reports
including risk appetite;
review of internal risk controls (further details of which are
covered on page 63 of 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 Management
and Compliance functions and is satisfied that they are
adequately resourced and sufficiently independent with
appropriate authority and standing within the Group.
Committee effectiveness
As introduced on page 63, the Committee undertook an
effectiveness review during 2019 whereby all Committee
members completed a tailored questionnaire. The question
set covered topics such as the composition of the Committee,
the quality and timeliness of information provided and the
Committee’s oversight of the Company’s attitude to and appetite
for risk and risk strategy. Following a productive discussion,
the Committee agreed a number of actions to be implemented,
including that the Committee include people risk as an additional
focus for 2020 and improvements to the escalation protocols
under the ERMF.
Eric Daniels
Chair of the Risk and Compliance Committee
12 March 2020
74
Funding Circle Holdings plc
Corporate governance Directors’ remuneration report
Members and attendance
Member
Meetings
Attendance
Cath Keers (Chair)
8/8
Andrew Learoyd (Chairman)
8/8
Ed Wray (Independent
Non-Executive Director)
8/8
100%
100%
100%
The Committee’s primary
role is to determine the
remuneration of the
Directors and Global
Leadership Team of the
Group and to determine
the Remuneration Policy
for the Executive Directors.
Dear shareholders
On behalf of the Board, I am pleased to present the Directors’
Remuneration Report for the year ended 31 December 2019.
In addition to my annual statement as Chair of the Remuneration
Committee, this report contains:
‐
the Annual Report on Remuneration, which sets out payments
made to the Directors for the year ended 31 December 2019
and how the Policy is intended to be implemented in
2020; and
‐ a summary of the Directors’ Remuneration Policy which
was approved by shareholders at the 2019 AGM.
The Annual Report on Remuneration is subject to an advisory
shareholder vote at the 2020 AGM.
2019 highlights
‐ Established the appropriate operating rhythm and support
requirements to effectively run the Committee through its
first year as a listed company Remuneration Committee.
‐ Developed the Remuneration Policy for Executive Directors
and engaged with shareholders to achieve a vote of 99.7%
in favour of the report and policy.
‐ Oversaw the development of a new approach to reward
for members of the Global Leadership Team and all
other Circlers.
2020 priorities
‐ Conduct a comprehensive review of the Remuneration Policy.
‐
Introduce an all-employee Share Incentive Plan ("SIP") to
align all Circlers more closely with shareholder interests.
Aligning remuneration with Funding Circle’s
culture and strategy
Funding Circle is a founder-led business. From inception, the
remuneration philosophy has been to support share ownership
across the business. This has been achieved through equity
incentives to encourage all Circlers to behave as owners –
taking decisions that balance long-term value creation with
achieving shorter-term strategic priorities. The current
Remuneration Policy was developed based on this fundamental
principle of share ownership, in order to continue to foster
stewardship and fully align Executive Directors with shareholders
– which the Committee continues to fully support.
In 2020 we have launched our Circler Promise – our employee
value proposition. As part of this we have an all-Circler new
approach to reward (other than the Executive Directors). This
approach reflects the share price of the Company to date, as
well as taking into account the feedback received from
Circlers as part of engagement with them during 2019.
Annual Report and Accounts 2019
75
Directors’ remuneration report continued
Aligning remuneration with Funding Circle’s
culture and strategy continued
In this context, along with the new CFO appointment, the
Committee intends to do a comprehensive review of the
existing Remuneration Policy in 2020. This is to ensure that
the Remuneration Policy:
‐ appropriately incentivises the Executive Directors to deliver
the Company’s strategic goals and create long-term
shareholder value; and
‐
takes into account the Code, including adherence with the
principles of clarity, simplicity, risk, predictability,
proportionality and alignment to culture as set out in
Provision 40 of the Code.
The Committee will consider all stakeholders when
conducting the review, including canvassing the opinion of our
largest shareholders as well as considering the remuneration
packages of Circlers more widely.
Post-employment shareholding guidelines
The Committee introduced post-employment shareholding
guidelines effective from 1 January 2020. Executive Directors
who step down from the Board following 1 January 2020 are
required to retain a holding in “guideline shares” equal to:
‐ 200% of salary (or their actual shareholding at the point
of departure if lower) for the first 12 months following
departure from the Board; and
‐ 100% of salary (or their actual shareholding at the point
of departure if lower) for the subsequent 12 months.
“Guideline shares” do not include shares which the Executive
Director held at IPO, purchased in the market directly, or
acquired pursuant to the exercise of pre-IPO awards.
Board changes
As announced in January 2020, Oliver White will succeed
Sean Glithero as CFO during 2020. Sean Glithero will not
receive any payments linked to the cessation of his employment
and all unvested long-term incentives will lapse on his termination
date. Details relating to Oliver White’s remuneration arrangements
will be disclosed in next year’s Directors’ Remuneration
Report. The arrangements were considered in line with the
current Remuneration and Recruitment Policies.
Remuneration arrangements for 2020
Executive Directors and Non-Executive Directors will not
receive a salary/fee increase in 2020. Consideration was given
to the appropriateness of an increase and the Committee
concluded that no increases should be awarded as the
intention is to engage with shareholders during 2020 on the
Remuneration Policy.
As in 2019, Samir Desai has decided not to take up his LTIP
award for 2020. As Sean Glithero will stand down from his role
as CFO during 2020, he will not receive a 2020 LTIP award.
Oliver White will receive a LTIP award following his
commencement of employment. Details of quantum will be
disclosed at the time of grant and details of performance
measures and quantum (which are in line with the current
Remuneration Policy) will be disclosed in next year’s Directors’
Remuneration Report.
76
Funding Circle Holdings plc
Remuneration arrangements for Circlers
All Circlers contribute to the achievement of the Group’s
long-term success and the Board believes that extending
share ownership throughout the Group fosters stewardship
and enhances loyalty and engagement.
For 2020, the key elements to the remuneration arrangements are:
‐ The Global Leadership Team, the leadership team and
other management roles participate in a discretionary
share-based LTIP.
‐ From 2020, the Global Leadership Team, the leadership
team, and other management roles and senior technical
specialists will participate in an annual bonus plan. Whilst
it remains an important principle that all Circlers are
focused on the long-term sustainable growth of the
Company, introducing a short-term annual bonus enables
us to incentivise behaviours that will allow us to take steps
to achieving those goals. It is also common practice in the
industry to offer short-term incentives and, in doing so, it
enhances our proposition to the talent market.
‐ Subject to shareholder approval at the AGM, all Circlers will
participate in an equity grant that will operate in the UK as a
Share Incentive Plan ("SIP"). Annual grants up to the current
Free Share Award limit of £3,600 will be made to Circlers.
‐ Equity to Circlers, including the existing Global Leadership
Team (other than the Executive Directors), is subject to
continued employment for the two years following the
grant date but is not otherwise normally subject to
performance conditions.
CEO v employee pay ratio
All main market UK listed companies with more than 250
employees are required to publish the pay ratio of the total
remuneration of the CEO compared to other UK employees.
Our median ratio was 3.9:1 for 2019. Further information can
be found on page 85.
Committee composition, skills and experience
Ed Wray and Andrew Learoyd remain in their positions as the
other members of the Committee. We confirm that we have
complied with the Code provision that the Committee
comprises three independent Non-Executive Directors.
Role of the Committee
The Committee’s primary role is to determine the
remuneration of the Directors and Global Leadership Team
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 54 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 corporate website.
Operating rhythm of the Committee
The Committee met eight times during 2019.
All members of the Committee attended all meetings and, by
invitation, were joined by the Chief People Officer and other
members of the senior management team where it was
deemed appropriate
Corporate governance 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 and debate.
expected to continue to improve with additional internal
remuneration resource and the appointment of Deloitte as
the new external Remuneration Committee consultants.
Committee effectiveness
As noted on page 63, the Committee undertook an
effectiveness review during 2019, whereby each Committee
member completed a tailored questionnaire which included a
consideration of the remuneration support provided to the
Committee. It was agreed that the support provided to the
Committee improved in the second half of the year and is
Cath Keers
Chair of the Remuneration Committee
12 March 2020
Shareholder vote on Annual Report on Remuneration and Remuneration Policy
The Committee’s resolutions at the Company’s 2019 AGM in respect of the Annual Report on Remuneration and the
Remuneration Policy received the following votes from shareholders:
2019 AGM
Votes cast in favour
Votes cast against
Votes withheld
Annual Report on Remuneration
Remuneration Policy
256,867,652
99.6%
256,886,226
783,726
322,233
0.3%
0.1%
769,531
317,854
Total votes cast (including withheld)
257,973,611
100%
257,973,611
99.6%
0.3%
0.1%
100%
The Remuneration Policy applies to the roles of Chairman, Executive Directors and Non-Executive Directors and was approved
by a binding vote at the 2019 AGM. A summary of the Remuneration Policy is included below. Our full Remuneration Policy can
be found in the 2018 Annual Report and Accounts available on our website at:
https://corporate.fundingcircle.com/results-and-reports.
Executive Directors’ remuneration
Element of
remuneration
Key features
Salary
Reviewed annually in March.
Salaries take account of the
external market and the overall
employee context.
Purpose and
link to strategy
Supports the attraction
and retention of the
best talent.
Maximum opportunity
Performance measures
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.
The 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.
Allowances
and benefits
Executive Directors are eligible
for 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.
The CEO has opted not to take up
his right to the pension contribution.
Pension
Market competitive
(and cost effective)
benefits provide
reassurance and risk
mitigation and support
retention of talent.
The value of benefits is not
capped as it is determined by
the cost to the Company, which
may vary.
n/a
To provide retirement
benefits for Executives.
Maximum contribution in line
with contribution to other
employees in the Group, which is
currently 3% of salary increasing
to 5% of salary from April 2020.
n/a
Annual Report and Accounts 2019
77
Directors’ remuneration report continued
Executive Directors’ remuneration continued
Element of
remuneration
Key features
Purpose and
link to strategy
Our policy is to place
greater emphasis on
long-term variable pay
elements for Executive
Directors. Incentives are
awarded under the LTIP.
Rewards long-term
sustainable
performance, in line with
Funding Circle’s strategy.
Focuses Executives on
delivering outstanding
value creation for
shareholders.
Bonus
Executive Directors do not currently
participate in a discretionary annual
cash bonus plan.
LTIP
Executive Directors are granted
awards under the LTIP.
Awards may be made as conditional
share awards or nil-cost options as
considered appropriate.
Awards will be performance shares
with a three-year performance period.
Following the end of the performance
period, 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.
Shareholding
requirement
Executive Directors are expected
to build and maintain a holding of
shares in the Company during and
post-employment.
Supports our
ownership mentality
focus, promotes
stewardship and helps
align management
with shareholders.
78
Funding Circle Holdings plc
Maximum opportunity
Performance measures
n/a
n/a
Normally subject
to annual revenue
growth and average
annual EPS over
three years.
The Committee
retains certain
discretions, in
line with market
practice, in relation
to the operation
and administration
of the plan. This
includes the
determination of
performance
measures and
targets and
resultant vesting
and payout levels.
n/a
A maximum opportunity
of £1.98 million per annum
for the CEO.
A maximum opportunity of
£1.12 million per annum for
the CFO or any other Executive.
Within employment
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.
Post-employment
Executive Directors who step
down from the Board following
1 January 2020 are required to
retain a holding in “guideline
shares” equal to:
‐ 200% of salary (or their actual
shareholding at the point of
departure if lower) for the first
12 months following departure
from the Board; and
‐ 100% of salary (or their actual
shareholding at the point of
departure if lower) for the
subsequent 12 months.
“Guideline shares” do not include
shares which the Executive
Director held at IPO, purchased in
the market directly, or acquired
pursuant to the exercise of
pre-IPO awards.
Corporate governance Non-Executive Directors’ remuneration
Element of
remuneration
Fees
Key features
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 inclusive of any tax due on
these expenses.
Maximum opportunity
n/a
Purpose and
link to strategy
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.
Change of control provisions
In the event of a change of control of the Company, awards granted under the 2018 LTIP 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 (if any) 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 or vesting 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. The Board may also permit the accelerated vesting of unvested options granted under
the Company’s pre-IPO share plans, in which case the options must be exercised within the period determined by the Board,
after which they will lapse.
Pre-IPO awards held by the GLT and the Executive Directors and LTIP awards held by the GLT (but not the Executive Directors)
are subject to additional protections which 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 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 Board’s discretion to determine that a greater number of shares subject to an award
should vest upon a change of control.
Annual Report and Accounts 2019
79
Annual report on remuneration
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 in 2020. An advisory shareholder resolution to approve this report will be proposed at the AGM.
We also provide 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 year ended 31 December 2019 and
2018 respectively.
2019
Executive Directors
Samir Desai
Sean Glithero
Non-Executive Directors
Andrew Learoyd
Ed Wray
Eric Daniels
Bob Steel
Cath Keers
Geeta Gopalan
Hendrik Nelis4
Neil Rimer4
Salary
and fees
£000
Taxable
benefits 1
£000
Bonus
£000
Pensions 2
£000
Long-term
incentives 3
£000
210
300
200
65
65
65
65
65
—
—
1
1
—
—
29
—
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
£000
211
309
Total
fixed
£000
211
309
200
200
65
94
65
68
65
—
—
65
94
65
68
65
—
—
Total
variable
£000
—
—
—
—
—
—
—
—
—
—
1. Taxable benefits for Executive Directors principally include private medical cover and life assurance cover. Taxable benefits for Non-Executive Directors relate to reimbursement
of travel to the workplace. The Company ensures that the Non-Executive Directors are 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. Executive Directors are eligible to 3% of base salary as pension contribution. From April 2020, this will increase to 5%. The CEO has opted not to take up his right to the
pension contribution.
3. No long-term incentives vested in respect of 2019.
4. Hendrik Nelis and Neil Rimer, who are not independent Non-Executives, have waived their entitlement to a fee.
2018
Executive Directors
Samir Desai
Sean Glithero
Non-Executive Directors
Andrew Learoyd
Ed Wray
Eric Daniels
Bob Steel
Cath Keers4,5
Geeta Gopalan4,6
Hendrik Nelis7
Neil Rimer7
Salary
and fees
£000
Taxable
benefits 1
£000
Bonus
£000
Pensions 2
£000
Long-term
incentives 3
£000
210
300
50
16
16
16
154
111
—
—
1
—
—
—
20
—
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
3,870
777
—
—
—
—
—
—
—
—
Total
£000
4,081
1,082
50
16
36
16
156
111
—
—
Total
fixed
£000
Total
variable
£000
211
305
50
16
36
16
156
111
—
—
3,870
777
—
—
—
—
—
—
—
—
1. Taxable benefits for Executive Directors principally include private medical cover and life assurance cover. Taxable benefits for Non-Executive Directors relate to reimbursement
of travel to the workplace. The Company ensures that the Non-Executive Directors are 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. Executive Directors were eligible to 2% of base salary as pension contribution. The CEO opted not to take up his right to the pension contribution.
3. 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 2019. The values of the Pre-IPO Exec Options in the table above are calculated based on their fair market value on grant of £1.80.
4. Cath Keers received a pre-admission fee of £100,000 in September 2018 and Geeta Gopalan received a fee of £100,000 on joining the Board in November 2018, in both cases to
reflect the 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.
5. Appointed 10 May 2018.
6. Appointed 1 November 2018.
7. Hendrik Nelis and Neil Rimer, who are not independent Non-Executives, waived their entitlement to a fee.
80
Funding Circle Holdings plc
Corporate governance No LTIP awards capable of vesting for the financial year 2019
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 years to 31 December 2018 or 31 December 2019.
LTIP award granted during the financial year 2019
An LTIP award was granted to the CFO on 28 June 2019. The award was granted as a nil-cost share option over 584,246 shares,
which vests subject to revenue and EPS performance measures over the three financial years ending 31 December 2021. Furthermore,
the award will lapse if the share price at the end of the performance period is less than £4.40.
The CEO chose not to participate in the 2019 LTIP award.
Details of the LTIP award are set out below:
Sean Glithero
1. Based on a grant date share price of £1.80.
LTIP payout matrix
Revenue growth
Compound annual growth per annum
over three years based on 2018
Number of
shares
Face value
at grant 1
Exercise
price
% of award vesting
at threshold
584,246
£1,051,643
£0
25%
Performance level
At and above 50%
At and above 40%
At and above 30%
Below 30%
% of award vesting
55%
27.5%
13.8%
—
66.3%
38.8%
25%
11.3%
77.5%
50%
36.3%
22.5%
100%
72.5%
58.8%
45%
Straight-line vesting between points
Above (1.1)p
Positive
Above 1.6p
Earnings per share for the year 2021
The LTIP award granted to the CFO will lapse on cessation of his employment.
Directors’ shareholding and share interests (audited)
Table of Directors’ share interests as at 31 December 2019
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 but
unexercised
awards
Unvested
awards
(not subject to
performance
conditions)
Unvested
awards
(subject to
performance
conditions)
Total
15,161,533
379,336
1,689,991
1,543,538
—
614,754
12,045
13,216
—
—
—
—
3,090,625
—
18,252,158
865,377
584,246
1,828,959
100,000
671,400
371,485
350,000
—
—
—
—
—
—
11,719
—
—
—
—
—
—
—
—
—
—
—
—
—
1,789,991
2,214,938
383,204
964,754
12,045
13,216
—
—
1. Includes shares owned by connected persons.
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 end of the 2019 financial year, the CEO complied
with this requirement. The CFO was appointed to the Board on 28 November 2017 and currently holds vested shares equal to
111% of salary, calculated on 31 December 2019 when the share price was £0.874. Unvested awards are not taken into account.
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 be held
by those Non-Executive Directors going forward, no further options will be granted to Non-Executive Directors under any of the
Company’s share option plans. The options held by the relevant Non-Executive Directors are all vested.
Annual Report and Accounts 2019
81
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 type1
Growth
ESS
Growth
Growth
ESS
Growth
Unapproved
Growth
Growth
2018 Long Term Incentive Plan
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
No. of
awards at
1 January
2019
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
Awards
granted
in the year
Awards
lapsed
in the year
Awards
vested
in the year
Awards
exercised
in the year
Exercise price/
subscription price
Market price
on exercise
—
—
—
—
—
—
—
—
—
584,246
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
No. of
awards at
31 December
2019
600,000
625,032
1,209,375
—
—
940,625
2,150,000
379,336
433,527
584,246
431,850
100,000
—
—
571,400
100,000
195,704
175,781
11,719
250,000
100,000
—
Date of
grant/vesting
commenced
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
28/06/2019
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
18/06/2015
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
416,688
537,500
(416,688)
(537,500)
216,763
(216,763)
12,500
(12,500)
12,500
(12,500)
46,875
(46,875)
12,500
(12,500)
£0.00
£0.00
£0.02
£0.00
£0.00
£0.02
£0.00
£0.02
£0.02
£0.00
£0.00
£0.32
£0.32
£0.03
£0.32
£0.32
£0.03
£0.39
£0.39
£0.21
£0.35
£0.35
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
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
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 79 (e.g. on termination of employment or change of control),
unapproved options can be exercised during a period of ten years from the date of grant.
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.
82
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
Awards
vested
in the year
Awards
exercised
in the year
—
416,688
537,500
—
(416,688)
(537,500)
—
216,763
(216,763)
—
—
12,500
(12,500)
—
12,500
(12,500)
—
46,875
(46,875)
—
12,500
(12,500)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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
2018 Long Term Incentive Plan
584,246
Award type1
Growth
ESS
Growth
Growth
ESS
Growth
Growth
Growth
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
No. of
awards at
1 January
2019
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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 79 (e.g. on termination of employment or change of control),
unapproved options can be exercised during a period of ten years from the date of grant.
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.
No. of
awards at
31 December
2019
600,000
625,032
1,209,375
—
—
940,625
2,150,000
379,336
433,527
584,246
431,850
100,000
—
571,400
100,000
—
195,704
175,781
11,719
250,000
100,000
—
Date of
grant/vesting
commenced
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
28/06/2019
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
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
£0.00
£0.32
£0.32
£0.03
£0.32
£0.32
£0.03
£0.39
£0.39
£0.21
£0.35
£0.35
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
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Annual Report and Accounts 2019
83
Annual report on remuneration continued
Performance graph
The chart below illustrates the Company’s TSR performance compared with that of the FTSE AllShare Index. This index has
been chosen as the Company is a constituent and it is considered the most appropriate benchmark against which to assess the
relative performance of the Company. The chart shows the value of £100 invested in Funding Circle at the IPO offer price of
£4.40 per share on 28 September 2018 compared with the value of £100 invested in the FTSE AllShare Index.
£
120
100
80
60
40
20
0
Sep 2018
Dec 2018
Mar 2018
Jun 2018
Sep 2019
Dec 2019
Funding Circle plc
FTSE AllShare Index
CEO remuneration table
The table below sets out the CEO’s single figure of total remuneration.
£000
CEO total remuneration1,2
2019
211
2018
4,081
2017
204
2016
160
2015
160
1. The 2018 figure includes share options that were granted prior to IPO which are subject to continued employment only. See footnote 3 to the 2018 single figure total
remuneration table on page 80 for further details.
2. The CEO received no bonus during the five-year period.
Relative importance of spend on pay
The table below sets out our 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
Average number of employees
2019
£167.4m
£(27.5)m
£96.9m
1,055
2018
(restated)
£141.9m
£(23.4)m
£84.8m
954
%
Change
18%
(18%)
14%
11%
Percentage change in CEO remuneration compared with employees
The CEO did not receive an increase to any element of his remuneration in 2019. The table below shows the average increase
in each component between the CEO and the average employee in the Company from 2018 to 2019.
Change in remuneration levels
CEO
—
—
Average
employee
4%
—
Salary
Benefits
No bonus was paid to the CEO in 2018 or 2019.
84
Funding Circle Holdings plc
Corporate governance
CEO pay ratio
Funding Circle is committed to remunerating its employees fairly and competitively. We calculated our CEO pay ratio using the
prescribed Methodology A, as shown in the table below. Methodology A was selected as this is considered the most accurate
approach and is generally the preferred approach by shareholders and proxy agencies.
2019
CEO pay ratio
Salary
Total remuneration
Total remuneration
P25 (lower quartile)
P50 (median)
P75 (upper quartile)
6.8:1
£27,576
£30,921
3.9:1
£45,818
£54,035
2.5:1
£78,798
£83,298
The CEO remuneration is the total single figure remuneration for the year ended 31 December 2019 as disclosed on page 80.
The UK employee total remuneration has been calculated based on the amount paid or receivable for the year ended 31 December 2019.
The Board has confirmed that the ratio is consistent with the Company’s wider policies on employee pay, reward and progression.
Fees for the Chairman and Non-Executive Directors
The fees payable to the Non-Executive Directors in 2019 and for 2020 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 received a further £10,000 during 2019 for his involvement on multiple Committees. It is
expected that he will step down as Chairman of Funding Circle Ltd in April 2020, at which point his Non-Executive Director fee will
be £55,000.
Implementation of the Remuneration Policy for the year ended 31 December 2020
The table below shows the salaries for the Executive Directors as at 1 January 2020 in comparison to base salary as at
1 January 2019.
£000
Samir Desai
Sean Glithero
1 Jan 2020
1 Jan 2019
% change
210,000
300,000
210,000
300,000
—
—
The CFO will continue to be eligible to receive a pension contribution currently equal to 3% of base salary until April 2020, where it
will increase to 5% of his base salary, which is in line with the wider workforce. The CEO continues not to take up his Company
funded pension contribution.
Samir Desai has decided not to take up his LTIP award for 2020.
As Sean Glithero will stand down from his role as CFO during 2020, he will not receive a 2020 LTIP award.
An award to Oliver White will be made following commencement of his employment. The arrangements were considered in line
with the Remuneration and Recruitment Policies and will be discussed in the 2020 Directors’ Remuneration Report.
2020 Non-Executive Director remuneration
It has been determined that the Non-Executive Director fees will remain as set out in the table above, with the exception of
Ed Wray, whose salary is expected to reduce to £55,000 with effect from April 2020 as described above.
External advisers
In September 2019, the Committee appointed Deloitte LLP as remuneration consultants in place of Pearl Meyer. During the year
the Committee also received advice from Mercer. The Committee is satisfied that the advice it has received is independent and
that the Deloitte, Pearl Meyer and Mercer 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, Pearl Meyer and Mercer in 2019
in relation to advice provided to the Committee were agreed by the Company in advance for specific projects and were £22,700,
£115,000 and £5,000 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 UK Listing Authority’s Listing Rules.
Annual Report and Accounts 2019
85
Report of the Directors
for the year ended 31 December 2019
The Directors present their report (the “Directors’ Report”) and the Annual Report and Accounts for the year ended 31 December 2019.
Information required to be part of the Directors’ Report either by statute, by Listing Rule 9.8 or by the DTRs 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/DTRs
Corporate governance statement
Going concern
Directors’ interests
Corporate Governance Statement (page 49)
Risk Management (page 48)
Remuneration Report (page 81)
Long-term incentive schemes
Remuneration Report (pages 78 to 83)
Powers for the Company to buy back its shares
Directors’ Report (page 87)
Allotment of shares during the year
Significant shareholders
Related party agreements
Statutory information
Stakeholder engagement
Employee involvement
Note 18 to the financial statements
Directors’ Report (page 88)
Note 26 to the financial statements
Corporate Governance Statement – Our stakeholders (pages 57 to 60)
Corporate Governance Statement – Our stakeholders (page 58) and
Strategic Report - Our people (page 22)
Policy concerning the employment of disabled persons
Strategic Report – Our people (page 24)
Financial instruments
Future developments of the business
Greenhouse gas emissions
Significant agreements
Non-financial reporting
Note 17 to the financial statements
Strategic Report (pages 4 to 29)
Strategic Report – Sustainability (page 28)
Directors’ Report (page 88)
Strategic Report – see below
Management Report
This Directors’ Report, together with the Strategic Report on pages 1 to 48, 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 48.
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 22 to 25,
the Sustainability section on pages 26 to 29, the Business Model and Risk Profile sections on pages 12 to 21 and the Risk
Management and Going Concern and Viability Statement sections on pages 38 to 48.
Directors
The Directors of the Company during the year and for the period up to the date of this report were:
Andrew Learoyd (Chairman)
Samir Desai CBE (co-founder, Chief Executive Officer)
Sean Glithero (Chief Financial Officer)
Eric Daniels (Independent Non-Executive Director)
Geeta Gopalan (Independent Non-Executive Director)
Cath Keers (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)
86
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 234 of the Act
pursuant to a separate deed of indemnity. Such indemnities
contain provisions that are permitted by the Director liability
provisions of the 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 2019 comprises 348,399,274 ordinary shares
of £0.001 each. Further information regarding the Company’s
issued share capital can be found on page 133 of the
financial statements.
Directors’ interests
The number of ordinary shares in which the Directors were
beneficially interested as at 31 December 2019 is set out
in the Directors’ Remuneration Report on page 81.
In line with the requirements of the 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 have 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 96 to 154.
The Directors do not recommend payment of a final dividend
for 2019 (2018: £nil).
Appointment and replacement of Directors
The rules governing the appointment and replacement of
Directors are set out in the Company’s Articles and are governed
by the Code, the Act and related legislation. At the AGM, all
Directors will offer themselves for re-election to the Company’s
Board other than Sean Glithero, who, as previously announced,
will be stepping down as Chief Financial Officer in 2020.
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 AGM.
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 2020 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
34,636,663 of the Company’s ordinary shares. However, the
Company did not repurchase any of its ordinary shares during
the year.
Details of the shares held by the Group’s Employee Benefit
Trust are disclosed in note 18 to the financial statements.
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 Act 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 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
approval to deal in the Company’s securities.
The lock-up arrangements agreed to by the Directors (and
certain of their immediate family members), the GLT and
certain major shareholders at the time of the Company’s IPO
expired in 2019.
Annual Report and Accounts 2019
87
Report of the Directors continued
for the year ended 31 December 2019
Change of control
Save in respect of certain awards made under the Company’s share plans (as further described on page 79), 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 2019 and 28 February 2020, the Company has been notified pursuant to DTR5.1, 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 London Management
Merian Global Investors
Invesco
DST Managers
Mr Samir Desai
Union Square Ventures
T Rowe Price International
Mr James Meekings
Number
of ordinary
shares as at
31 December
2019
58,618,351
46,507,936
26,906,743
22,862,703
21,499,027
16,505,378
15,161,533
14,174,547
12,577,892
10,478,357
Percentage
issued share
capital as at
31 December
2019
16.83
13.35
7.72
6.56
6.17
4.74
4.35
4.07
3.61
3.01
Number
of ordinary
shares as at
28 February
2020
58,618,351
46,507,936
26,906,743
22,862,703
9,518,275
16,505,378
15,295,908
14,174,547
15,330,656
10,478,357
Percentage
issued share
capital as at
28 February
2020
16.82
13.35
7.72
6.56
2.73
4.74
4.39
4.07
4.40
3.01
Nature of
holding
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
In the period between 28 February 2020 and 12 March 2020 (the latest practicable date prior to the date of this report), the
Company received a further notification pursuant to DTR5.1 in which T Rowe Price International disclosed a holding of 7.14%.
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 Kingdom, the
United States of America, Canada, Germany, Spain and the
Netherlands but the Group had no registered external
branches during the reporting period or prior year.
External auditors
PwC have confirmed their willingness to continue as external
auditors and a resolution to reappoint them as the Company’s
external auditors, and to authorise the Directors to fix the
auditors’ remuneration, will be proposed at the 2020 AGM.
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 external 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 section 418 of the Act.
2020 AGM
The Company’s AGM will take place on 20 May 2020 at the
Company’s offices at 71 Queen Victoria Street, London EC4V 4AY.
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 the Company
registrars’ 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 (corporate.fundingcircle.
com/investors/shareholder-meetings ) after the meeting and
notified to the UK Listing Authority.
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Funding Circle Holdings plc
Corporate governance Statement of Directors’ responsibilities in respect of the financial statements
Directors’ confirmations
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 position and performance,
business model and strategy.
Each of the Directors, whose names and functions are listed
in the Report of the Directors, confirm that, to the best of
their knowledge:
‐
‐
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 loss of the Group and
Company; and
the Strategic 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 it faces.
Approved by the Board and signed on its behalf.
Samir Desai
Chief Executive Officer
12 March 2020
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable
law and regulation.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have
prepared the Group 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:
‐ 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 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 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 and
the Directors’ Remuneration Report comply with the Companies
Act 2006 and, as regards the Group financial statements,
Article 4 of the IAS Regulation.
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.
Annual Report and Accounts 2019
89
Independent auditors’ report
to the members of Funding Circle Holdings plc
Report on the audit of the financial statements
Opinion
In our opinion, Funding Circle Holdings plc’s Group financial statements and Company financial statements (the “financial statements”):
‐ give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2019 and of the Group’s loss and
the Group’s and the Company’s 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 regards the Company’s financial statements, 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 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 and Company balance sheets as at 31 December 2019; the Consolidated statement of comprehensive income,
the Consolidated and Company statements of changes in equity, and the Consolidated and Company statements 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 4 to the financial statements, we have provided no non-audit services to the Group or the Company
in the period from 1 January 2019 to 31 December 2019.
Our audit approach
Overview
Materiality
Audit scope
Key audit matters
‐ Overall Group materiality: £2.5 million (2018: £2.2 million), based on 5% of
loss before tax (adjusted for the impairment charge in respect of the Funding Circle
Continental Europe (“FCCE”) business). We considered it appropriate to reduce
materiality through the exclusion of the impairment charge from our calculation
given that this is material and one-off in nature.
‐ Overall Company materiality: £5 million (2018: £5.7 million), based on 1%
of total assets.
‐ Our audit included full scope audits of the UK and US components which
accounted for approximately 91% of the Group’s net income and 68% of the
Group’s loss before tax (adjusted for the impairment charge in respect of
the FCCE business).
‐ We performed specified procedures in respect of the FCCE component and at a
Group level which together with the full scope audits accounted for 98% of the
Group’s net income and 88% of the Group’s loss before tax (adjusted for the
impairment charge in respect of the FCCE business).
‐ Accounting for the Asset Backed Securities (‘ABS’) bond programmes and the
fair value of the SME loans (Group)
‐ Capitalisation of development costs (Group)
‐ Carrying value of investment in the US subsidiary (Company)
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.
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Funding Circle Holdings plc
Financial statements Report on the audit of the 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 compliance with 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 relevant correspondence with the FCA and conducting inquiries of the Group’s general counsel and the Group’s
head of legal and regulatory;
‐ 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;
Identifying and testing journal entries and period end adjustments;
Incorporating unpredictability into our testing; and
‐
‐
‐ Challenging assumptions and judgements made by management in its accounting estimates, in particular in relation to the
capitalisation of development costs, loan loss provision, the fair value of SME loans and 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
Accounting for the Asset Backed Securities (‘ABS’) bond
programmes and the fair value of the SME loans
Refer to Report of the Audit Committee – Significant issues
considered in relation to the financial statements; Note 1 (Accounting
policies); Note 13 (Investments in SME loans); and Note 17 (Financial
risk management)
During the year, the Group launched a series of UK and US ABS
bond programmes.
As at the balance sheet date, the Group had not sold its residual
holding in two securitisation vehicles and consequently management
concluded that based on the exposure to the variability of cash flows,
the securitised vehicles were required to be consolidated. As a result,
the underlying SME loans held in the securitisation vehicles remain
on balance sheet along with the bond liabilities to third parties.
In the initial “warehousing phase” of the programmes the Group
invests in SME loans and these are recorded on the balance sheet at
fair value.
As at the balance sheet date, the Group holds investments in SME
loans amounting to £708.6m with corresponding bank borrowings of
£265.8m for those in the warehousing phase and bond liabilities of
£351.5m for those which have been securitised.
How our audit addressed the key audit matter
Our audit procedures comprised the following:
‐ Assessed the appropriateness of the accounting for the ABS bond
programmes, in particular the judgements related to the consolidation
of assets and liabilities associated with the warehoused and securitised
vehicles and the classification and measurement of investments in
SME loan assets and related liabilities;
‐ Engaged our own valuation experts to assess the appropriateness of
the methodology used by management in determining the fair value
of the investments in SME loan assets and bond liabilities. This
included assessing the appropriateness of the key assumptions within
the valuation model which we considered to be the discount rate, default
rate and prepayment rate;
‐ We derived our own independent estimate of the discount rate and
compared this to that used by management. We concluded that the
discount rate utilised by management fell within a reasonable range;
‐ We performed sensitivity analysis over each of the key assumptions in
light of market rates, comparables and underlying performance of
the loans;
‐ Performed testing over a sample of the underlying loans, including
obtaining loan confirmations, agreeing to original loan contracts and
agreeing the initial funding of SME loans to bank statements; and
We have focused on this in our audit as:
‐ Recalculated the interest income on the warehoused and securitised
‐
‐
‐
these are new and complicated transactions which have a significant
impact on the Group’s statement of comprehensive income and
balance sheet;
judgement is required in relation to determining the appropriate
accounting treatment for the recognition and measurement of the
SME loans and related borrowings on the balance sheet; and
there is judgement in relation to estimating the fair value of the
investments in SME loan assets and bond liabilities on the Group
balance sheet.
SME loans.
Based on the above procedures performed, we concluded that the
accounting for the ABS bond programmes is appropriate and that
the estimated fair value of the SME loans and bond liabilities
was reasonable.
We considered the appropriateness of the accounting policies in Note 1
to the Group financial statements and the disclosures of financial
instruments in Note 17 and considered these to be reasonable.
Annual Report and Accounts 2019
91
Independent auditors’ report continued
to the members of Funding Circle Holdings plc
Report on the audit of the financial statements continued
Our audit approach continued
Key audit matters continued
Key audit matter
How our audit addressed the key audit matter
Capitalisation of development costs
Refer to Note 1 (Accounting Policies) and Note 11 (intangible assets).
The Group incurs costs in respect of developing its platforms
(predominantly comprising staff and contractor costs) which are
capitalised as an intangible asset on the Group’s balance sheet.
A total of £14.3m was capitalised in the year (2018: £10.8m)
In order to capitalise the costs as intangible assets each of the
criteria under IAS 38 ‘Intangible Assets’ needs to be met.
The reliable measurement of expenditure attributable to such
development relies on the appropriate recording and accurate
measurement of, in particular, time incurred by the Group’s product
development teams.
We have focused on this in our audit as:
‐
the application of judgement is required in assessing whether the
IAS 38 criteria have been met;
‐ determining the amounts to be capitalised requires estimation; and
‐
there is judgement around estimating the useful economic lives
(“UELs”) of the capitalised assets and whether UELs are
still appropriate.
Carrying value of investment in the US subsidiary
Refer to Report of the Audit Committee – Significant issues considered
in relation to the financial statements; Note 1 (Accounting policies);
and Note 5 (Investments in subsidiary undertakings) of the Company
financial statements.
The Company holds an investment in the US subsidiary with a
carrying value of £243.9m. This has increased from £129.8m in 2018
following significant capital contributions, in particular for the US
securitisation programme.
IAS 36 ‘Impairment of Assets’ requires that investments are subject
to an impairment review when there is an indication that an asset
may be impaired. The indications that the carrying value of the
investment in the US subsidiary may be impaired are:
‐
the carrying amount of net assets of the Company exceeded the
market capitalisation at 31 December 2019; and
‐ actual or forecast net cash outflows or operating profits or losses
are significantly worse than expected.
Management performed an impairment assessment and estimated
the recoverable amount using a value-in-use model and concluded
there was no impairment of the carrying value. The key assumptions
in this assessment included the forecast cash flow growth, the
discount rate and the perpetuity growth rate.
We have focused on this area as the calculation of value in use
involves a significant degree of judgement and the estimation
uncertainty is high.
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Funding Circle Holdings plc
Our audit procedures comprised the following:
‐ For a sample of projects, we assessed whether each of the capitalisation
criteria described in IAS 38 had been met and therefore whether
capitalisation was appropriate. In doing so, we made inquiries of the
Group’s Director of Engineering and individual project leads. We
obtained corroborating evidence to support the fulfilment of the
criteria for each project we tested;
‐ Tested the components of capitalised costs, e.g. salary, Employer
National Insurance Contributions and pensions contributions. We
tested these amounts to employee contracts and payroll reports.
Where costs relate to contractors, we agreed amounts directly to
invoices and checked the invoice description correlated to the project
in question;
‐ Assessed the proportion of time spent by the product development
team on relevant projects. This involved confirming employee time
spent on projects with project leads and for a selection of employees,
corroborating this with supporting evidence such as calendar invites
for a given month;
‐ We assessed the UELs of individual assets capitalised and
understood the basis on which these were determined. We
challenged management on whether the UELs of existing assets
remained appropriate where planned development may supersede
the asset; and
‐ We assessed management’s analysis of the continued use of
intangible assets. Selecting in particular older assets, we made
inquiries of the Group’s Director of Engineering and corroborated
their continued use.
Based on the above procedures performed, we concluded that the
capitalisation of development costs in the year complied with the
requirements of IAS 38 and the estimation of the UELs of intangible
assets was reasonable.
Our audit procedures comprised the following:
‐ Assessed the methodology used by management against the
requirements of the financial reporting framework and tested the
mathematical accuracy of the model;
‐ Agreed the forecast financial information to budgets and forecasts
approved by senior management and the Board;
‐ Evaluated the reliability of management’s forecasting by comparing
actual results with previous years’ forecasts;
‐ Compared the forecast growth rates with those achieved by the UK
business when it was at a similar stage in its life cycle as well as
those of similar businesses in the US market;
‐
Identified the key drivers in management’s forecasts and assessed
their reasonableness by comparing them to historical results. Where
significant improvements were forecast in key assumptions
underpinning the forecast cash flow growth, we challenged
management on whether the forecast improvements were
reasonable and supportable;
‐ Assessed the appropriateness of the discount rate assumption by
using experts to derive an independent view on the rate. We agreed the
inputs into management’s calculation to third party data;
‐ Assessed the appropriateness of the long term growth rate by
agreeing it to independent external evidence including OECD
publications and analyst reports; and
‐ We performed sensitivity on the key assumptions in the model.
Based on the above procedures performed, we considered the Directors’
conclusion that the carrying value of the US subsidiary is not impaired to
be reasonable.
We considered the appropriateness of the related disclosures in Note 1
to the Company financial statements and considered these to be reasonable.
Financial statements Report on the audit of the financial statements continued
Our audit approach continued
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
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
£2.5 million (2018: £2.2 million).
Group financial statements
Company financial statements
£5 million (2018: £5.7 million).
How we determined it
5% of loss before tax (adjusted for the impairment charge
related to the FCCE business).
1% of total assets.
Rationale for
benchmark applied
We determined materiality by applying 5% to consolidated loss
before tax after adjusting for the impairment charge related to
the FCCE business. We consider loss before tax to be the most
appropriate benchmark used in assessing the performance of
the Group as the business is listed and profit orientated. We
believe that loss before tax adjusted for the impairment charge
related to the FCCE business is the most appropriate measure
as it eliminates the impact of this material and one-off charge.
We highlight that this gives rise to a lower materiality than would
be derived if using the statutory measure of loss before tax.
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
investments in the Group’s subsidiaries.
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 £1,200,000 and £2,100,000. 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 £125,000 (Group
audit) (2018: £110,000) and £250,000 (Company audit) (2018: £280,000) as well as misstatements below those amounts that, in our
view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
We are required to report if we have anything material to add or
draw attention to in respect of the directors’ statement in the
financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the directors’ identification
of any material uncertainties to the Group’s and the 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.
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 and
Company’s ability to continue as a going concern. For example, the
terms of the United Kingdom’s withdrawal from the European Union
are not clear, and it is difficult to evaluate all of the potential
implications on the Group’s and 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.
With respect to the Strategic Report, Report of the Directors and Corporate Governance Statement, we also considered whether the
disclosures required by the UK Companies Act 2006 have been included.
Annual Report and Accounts 2019
93
Independent auditors’ report continued
to the members of Funding Circle Holdings plc
Report on the audit of the financial statements continued
Reporting on other information continued
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 Report of the Directors
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Report of the
Directors for the year ended 31 December 2019 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did
not identify any material misstatements in the Strategic Report and Report of the Directors. (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 49 to 89) 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 Company and their 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 49 to 89) 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 42 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 48 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 Company and their environment
obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
‐ The statement given by the directors, on page 89, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the Group’s and Company’s position and
performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company obtained in the
course of performing our audit.
‐ The section of the Annual Report, on pages 66 to 71, describing the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
‐ The directors’ statement relating to the 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)
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Funding Circle Holdings plc
Financial statements Report on the audit of the financial statements continued
Reporting on other information continued
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 89, the
directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being
satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
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 Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the directors on 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 5 years, covering the years ended 31 December 2015 to 31 December 2019.
Nick Morrison (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
12 March 2020
Annual Report and Accounts 2019
95
Consolidated statement of comprehensive income
for the year ended 31 December 2019
Transaction fees
Servicing fees
Net investment income:
– Investment income
– Investment expense
– Fair value (losses)/gains
Other fees
Net income
People costs
Marketing costs
Depreciation and amortisation
Loan repurchase charge
Impairment (exceptional)
IPO adviser costs (exceptional)
Other costs
Operating expenses
Operating loss
Finance income
Finance costs
Share of net loss of associates
Loss before taxation
Income tax
Loss for the year
Other comprehensive (loss)/income
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.
Note
3
6
4
4
4
5
5
4
7
7
29
8
20
31 December
2019
£m
121.2
30.4
10.5
28.3
(7.9)
(9.9)
5.3
167.4
(90.3)
(66.5)
(14.9)
(6.5)
(34.3)
—
(39.6)
31 December
2018
(restated)
£m
112.9
24.9
—
—
—
—
4.1
141.9
(79.2)
(57.8)
(12.5)
(2.6)
—
(5.9)
(34.7)
(252.1)
(192.7)
(84.7)
1.8
(1.2)
(0.1)
(84.2)
(0.5)
(84.7)
(7.7)
(92.4)
(50.8)
0.9
(1.0)
—
(50.9)
1.4
(49.5)
2.4
(47.1)
(92.4)
(47.1)
9
(24.4)p
(18.2)p
The year to 31 December 2018 has been restated for the impact of IFRS 16 Leases – refer to note 1.
The notes on pages 100 to 143 form part of these financial statements.
96
Funding Circle Holdings plc
Financial statements Consolidated balance sheet
as at 31 December 2019
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Investment in associates
Investment in SME loans (other)
Current assets
Investment in SME loans (curing)
Investment in SME loans (warehouse)
Investment in SME loans (securitised)
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Bank borrowings
Bonds
Short-term provisions
Lease liabilities
Non-current liabilities
Long-term provisions
Lease liabilities
Total liabilities
Equity
Share capital
Share premium account
Foreign exchange reserve
Share options reserve
Retained earnings
Total equity
Total equity and liabilities
31 December
2019
Note
£m
31 December
2018
(restated)
£m
10
11
12
29
13
13
13
13
14
23
15
17
17
16
12
16
12
18
19
20
21
11.3
23.6
39.0
13.2
1.7
88.8
—
342.0
366.6
33.6
164.5
906.7
995.5
19.7
265.8
348.7
3.1
8.5
645.8
0.9
29.8
676.5
0.3
292.3
8.0
11.9
6.5
319.0
995.5
42.3
21.5
25.2
—
0.3
89.3
4.7
—
—
23.0
333.0
360.7
450.0
19.3
—
—
3.8
5.0
28.1
0.8
20.1
49.0
0.3
291.8
15.7
6.0
87.2
401.0
450.0
The year to 31 December 2018 has been restated for the impact of IFRS 16 Leases – refer to note 1.
The financial statements on pages 96 to 143 were approved by the Board and authorised for issue on 12 March 2020. They were
signed on behalf of the Board by:
Sean Glithero
Director
Company registration number 07123934
The notes on pages 100 to 143 form part of these financial statements.
Annual Report and Accounts 2019
97
Consolidated statement of changes in equity
for the year ended 31 December 2019
Share
capital
£m
Share
premium
account
£m
Foreign
exchange
reserve
£m
Note
Balance at 1 January 2018 as previously reported
Impact of adoption of IFRS 16 (note 1)
Restated balance at 1 January 2018
Loss for the year
Other comprehensive income
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 (restated)
Loss for the year
Other comprehensive loss
Exchange differences on translation of
foreign operations
Transactions with owners
Transfer of share option costs
Issue of share capital
Employee share schemes – value of employee services
21
20
21
19
18, 19
19
21
20
21
18, 19
0.2
—
0.2
—
—
—
—
0.1
—
—
0.3
—
—
—
—
—
278.0
—
278.0
—
—
—
(278.1)
301.0
(9.1)
—
291.8
—
—
—
0.5
—
Share
options
reserve
£m
(Accumulated
losses)/
retained
earnings
£m
Total
equity
£m
13.9
—
13.9
—
(153.2)
152.2
(1.2)
(1.2)
(154.4)
(49.5)
151.0
(49.5)
13.3
—
13.3
—
2.4
—
—
2.4
—
—
—
—
—
15.7
—
(13.0)
—
—
—
5.1
6.0
—
13.0
278.1
—
—
—
87.2
(84.7)
—
—
301.1
(9.1)
5.1
401.0
(84.7)
(7.7)
—
—
(7.7)
—
—
—
(4.0)
—
9.9
4.0
—
—
6.5
—
0.5
9.9
319.0
Balance at 31 December 2019
0.3
292.3
8.0
11.9
The year to 31 December 2018 has been restated for the impact of IFRS 16 Leases – refer to note 1.
The notes on pages 100 to 143 form part of these financial statements.
98
Funding Circle Holdings plc
Financial statements Consolidated statement of cash flows
for the year ended 31 December 2019
Net cash outflow from operating activities
Investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Cash receipts from SME loans (curing)
Purchase of SME loans (other)
Purchase of SME loans (warehouse phase)
Purchase of SME loans (securitised)
Cash receipts from SME loans (warehouse phase)
Cash receipts from SME loans (securitised)
Investment in associates
Interest received
Net cash outflow from investing activities
Financing activities
Proceeds from bank borrowings
Repayment of bank borrowings
Proceeds from issuance of bonds
Payment of bond liabilities
Preferred dividend payment
Proceeds on the issue of ordinary shares on IPO
Payment of IPO adviser costs
Proceeds from the exercise of share options
Payment of lease liabilities
Net cash inflow from financing activities
Net (decrease)/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
Note
23
19
5
31 December
2019
£m
(27.0)
(14.5)
(2.7)
4.7
(1.5)
(381.2)
(414.5)
32.5
37.4
(13.9)
1.9
(751.8)
462.1
(192.7)
379.5
(30.1)
—
—
—
0.7
(7.1)
612.4
(166.4)
333.0
(2.1)
164.5
31 December
2018
(restated)
£m
(30.6)
(11.0)
(2.3)
0.2
(1.3)
—
—
—
—
—
0.9
(13.5)
—
—
—
—
(0.5)
300.0
(9.1)
1.1
(3.8)
287.7
243.6
88.9
0.5
333.0
The year to 31 December 2018 has been restated for the impact of IFRS 16 Leases – refer to note 1 - and to re-present certain
IPO adviser costs within operating cash flows – refer to note 23.
The impact of exceptional items on the consolidated statement of cash flows is detailed in note 5.
The notes on pages 100 to 143 form part of these financial statements.
Annual Report and Accounts 2019
99
Notes forming part of the consolidated financial statements
for the year ended 31 December 2019
1. Accounting policies
General information
Funding Circle Holdings plc (the “Company”) is a public company limited by shares, which is listed on the London Stock Exchange
and is domiciled and incorporated in the United Kingdom under the Companies Act 2006 and registered in England and Wales.
The address of its registered office is given on page 156. The consolidated financial statements of the Group for the year ended
31 December 2019 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”).
The principal activities of the Group and the nature of the Group’s operations are as a global SME loan platform.
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 £92.4 million during the year ended 31 December 2019 (2018 restated: loss of
£47.1 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 of 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 48.
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 (“FVTPL”).
The preparation of financial statements in conformity with IFRS requires the use of certain 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 2.
Significant changes in the current reporting year
The financial position and performance of the Group were affected by the following events and transactions during the year
ended 31 December 2019:
i) Asset-backed securities (“ABS”)
During the year, the Group commenced bond programmes in the UK and US. In the initial “warehousing phase” of the programmes
the Group invested in SME loans using both its own cash and amounts borrowed under a credit facility with lending institutions.
The loans are held within a bankruptcy remote special purpose warehouse vehicle which is consolidated in the Group’s balance
sheet. Once the warehouse vehicle reaches sufficient scale, the SME loans are sold into another bankruptcy remote special
purpose vehicle (“SPV”) financed through the issuance of bonds to third party investors and the amounts borrowed under the
credit facility are repaid. As at 31 December 2019, £292.2 million of SME loans have been sold to SPVs.
The bonds are split into senior rated bonds (referred to as “rated”) and junior unrated bonds (referred to as “unrated”) and
under risk retention regulations the Group is required to retain at least 5% of the bonds issued by the SPV (referred to as the
“retention holding”).
Whilst the Group is required to retain 5% of the overall bond issuance, in the UK and the US, as at 31 December 2019 the Group
holds 51% and 100% respectively of the unrated bonds (referred to as the “residual”). The residual is similar to equity and, given
that the risks and rewards of ownership and exposure to the majority of the variability in cash flows continue to reside with the
Group, the securitisation SPVs in both the UK and US are currently consolidated. As a result the underlying SME loan book held
in the securitisation SPVs remain on balance sheet along with the bond liabilities to third parties.
100
Funding Circle Holdings plc
Financial statements 1. Accounting policies continued
Significant changes in the current reporting year continued
i) Asset-backed securities (“ABS”) continued
Warehousing phase
During the warehousing phase the Group earns interest income on the SME loans and incurs interest expense on the drawn credit
facility as well as gains/losses from changes in the fair value of the SME loans retained on its balance sheet. As the SME loans and
bank borrowings under the credit facility are held within a bankruptcy remote vehicle, the Group’s credit exposure is limited to its
loan funding to the vehicle.
Securitisation phase
As the securitisation vehicles currently remain on balance sheet, the Group continues to earn interest income on SME loans
securitised and incurs interest expense on the bond liabilities, as well as gains/losses from changes in the fair value of both the
SME loans and unrated bond liabilities held at fair value. Again, as the SME loans and bonds are held within bankruptcy remote
vehicles, the Group’s credit exposure is limited to its net residual and retention holding in the vehicles.
If the residuals were to be substantively sold in the future, which is the Group’s intention, it is expected that the securitisation
SPVs would be deconsolidated.
ii) Private Funds (note 30)
During the year, the Group established a European private fund for its Developing Markets and a UK private fund, which are used
to acquire loans originated on the Funding Circle platform. In order to establish the funds the Group provided seed capital.
Further institutional investors have subsequently invested in these vehicles. As at 31 December 2019, the Group’s interest in the
European fund was 24% and in the UK fund was 14% and these investments have been accounted for as associates. The Group’s
interest in the funds is expected to decline over time as further institutions invest in the funds.
Changes in accounting policy and disclosures
The Group has adopted the following new and amended IFRSs and interpretations from 1 January 2019 on a full retrospective basis.
Standard/interpretation
IFRS 16
Prepayment Features with Negative Compensation
– Amendments to IFRS 9
Long-term Interests in Associates and Joint Ventures
– Amendments to IAS 28
Annual Improvements to IFRS Standards
2015–2017 Cycle
Plan Amendment, Curtailment or Settlement
– Amendments to IAS 19
Interpretation 23 – Uncertainty over Income
Tax Treatments
Content
Leases
Financial instruments
Applicable for financial
years beginning on/after
1 January 2019
1 January 2019
Associates and joint ventures
1 January 2019
Business combinations, joint
arrangements, income taxes and
borrowing costs
1 January 2019
Employee benefits
1 January 2019
Income taxes
1 January 2019
Aside from IFRS 16 detailed below, the other amendments and interpretations listed above did not significantly affect the current
year and are not expected to significantly affect future years.
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2019
reporting years, have not yet been endorsed by the EU and have not been early adopted by the Group as follows:
Standard/interpretation
Amendments to IFRS 3 Business Combinations,
definition of a business
Amendments to IAS 1 Presentation of Financial
Statements, and IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, definition of material
Revised Conceptual Framework for Financial Reporting
and Sale or Contribution of Assets Between an Investor
and its Associate or Joint Venture – Amendments to
IFRS 10 and IAS 28
Content
Applicable for financial
years beginning on/after
Business combinations
1 January 2020
Definition of material
1 January 2020
Associates and joint ventures
1 January 2020
Annual Report and Accounts 2019
101
1. Accounting policies continued
Changes in accounting policy and disclosures continued
These standards are not expected to have a material impact on the Group in the current or future reporting years and on foreseeable
future transactions. IFRS 16 Leases was issued in January 2016 and was endorsed by the EU in 2017. The standard is effective
for annual periods beginning on or after 1 January 2019 and sets out the principles for the recognition, measurement, presentation
and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model.
The Group adopted IFRS 16 using the full retrospective method of adoption with the date of initial application of 1 January 2019.
The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were
previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application.
The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease
term of 12 months or less and do not contain a purchase option (“short-term leases”), and lease contracts for which the
underlying asset is of low value (“low-value assets”).
The impact of IFRS 16 Leases has resulted in the Group recording its current property leases on the balance sheet as a right-of-use
asset and a corresponding lease obligation. The leases impacted were previously treated as operating leases. The change in recognition
has resulted in increased depreciation charges, a reduction in lease costs in the income statement and an increase in finance costs.
Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating
or finance leases using similar principles as in IAS 17.
Upon recognition, the weighted average incremental borrowing rate used in measuring lease liabilities across the Group was 4%.
The following tables summarise the impact of adopting IFRS 16 on the Group’s consolidated statement of comprehensive income,
consolidated statement of cash flows and consolidated balance sheet for the year ended and as at 31 December 2019. The
tables below show the adjustments recognised for each individual line item. Line items that were not affected by the changes
have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated from the numbers provided.
Impact of the change in accounting policies on the consolidated statement of comprehensive income
Year ended 31 December 2019
Year ended 31 December 2018
Depreciation and amortisation
Other costs
Operating expenses
Operating loss
Finance costs
Loss before taxation
Loss for the year
Other comprehensive income:
Total comprehensive loss for
the year
Total comprehensive loss
attributable to:
Owners of the Parent
Amounts
without
adoption of
IFRS 16
£m
(9.4)
(46.2)
(253.2)
(85.8)
—
(84.1)
(84.6)
IFRS 16
£m
As reported
£m
(5.5)
6.6
1.1
1.1
(1.2)
(0.1)
(0.1)
(14.9)
(39.6)
(252.1)
(84.7)
(1.2)
(84.2)
(84.7)
Amounts
without
adoption of
IFRS 16
£m
(8.2)
(39.8)
(193.5)
(51.6)
—
(50.7)
(49.3)
IFRS 16
£m
Restated
£m
(4.3)
5.1
0.8
0.8
(1.0)
(0.2)
(0.2)
(12.5)
(34.7)
(192.7)
(50.8)
(1.0)
(50.9)
(49.5)
(92.3)
(0.1)
(92.4)
(46.9)
(0.2)
(47.1)
(92.3)
(0.1)
(92.4)
(46.9)
(0.2)
(47.1)
102
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements
1. Accounting policies continued
Impact of the change in accounting policies on the consolidated balance sheet
As at 31 December 2019
As at 31 December 2018
Amounts
without
adoption of
IFRS 16
£m
IFRS 16
£m
As reported
£m
Amounts
without
adoption of
IFRS 16
£m
IFRS 16
£m
Restated
£m
5.0
961.5
22.7
—
640.3
—
641.2
7.8
320.3
961.5
34.0
34.0
(3.0)
8.5
5.5
29.8
35.3
(1.3)
(1.3)
34.0
39.0
995.5
19.7
8.5
645.8
29.8
676.5
6.5
319.0
995.5
5.3
430.1
23.1
—
26.9
—
27.7
88.6
402.4
430.1
19.9
19.9
(3.8)
5.0
1.2
20.1
21.3
(1.4)
(1.4)
19.9
25.2
450.0
19.3
5.0
28.1
20.1
49.0
87.2
401.0
450.0
Non-current assets
Property, plant and equipment
Total assets
Current liabilities
Trade and other payables
Lease liabilities
Non-current liabilities
Lease liabilities
Total liabilities
Equity
Retained earnings
Total equity
Total equity and liabilities
Impact of the change in accounting policies on the consolidated statement of cash flows
Year ended 31 December 2019
Year ended 31 December 2018
Amounts
without
adoption of
IFRS 16
£m
IFRS 16
£m
As reported
£m
Amounts
without
adoption of
IFRS 16
£m
(34.1)
7.1
(27.0)
(34.4)
IFRS 16
£m
3.8
Restated
£m
(30.6)
—
(7.1)
(7.1)
—
(3.8)
(3.8)
619.5
(7.1)
612.4
291.5
(3.8)
287.7
Net cash outflow from
operating activities
Financing activities
Payment of lease liabilities
Net cash inflow from
financing activities
Annual Report and Accounts 2019
103
1. Accounting policies continued
Impact of the change in accounting policies on segmental information
Year ended 31 December 2019
Year ended 31 December 2018
Amounts
without
adoption of
IFRS 16
£m
31.2
(13.1)
(13.5)
4.6
(34.1)
(9.4)
(85.8)
IFRS 16
£m
As reported
£m
2.8
2.8
1.0
6.6
6.6
(5.5)
1.1
34.0
(10.3)
(12.5)
11.2
(27.5)
(14.9)
(84.7)
Amounts
without
adoption of
IFRS 16
£m
21.8
(7.4)
(7.4)
7.0
(28.5)
(8.2)
(51.6)
IFRS 16
£m
As reported
£m
2.8
1.7
0.6
5.1
5.1
(4.3)
0.8
24.6
(5.7)
(6.8)
12.1
(23.4)
(12.5)
(50.8)
United Kingdom
United States
Developing Markets
Segment adjusted EBITDA
Adjusted EBITDA
Depreciation and amortisation
Operating loss
Summary of new and amended accounting policies
Consolidation of special purpose entities (“SPEs”)
Subsidiaries are those entities, including structured entities, over which the Group has control. The Group controls an entity
when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the investee. The Group has power over an entity when it has existing rights that give it the current ability
to direct the activities that most significantly affect the entity’s returns. Power may be determined on the basis of voting rights or,
in the case of structured entities, other contractual arrangements.
The Group assesses whether it controls special purpose entities (“SPEs”) and the requirement to consolidate them under the
criteria of IFRS 10. Control is determined to exist if the Group has the power to direct the activities of each entity (for example,
managing the performance of the underlying assets and raising debt on those assets which is used to fund the Group) and uses
this control to obtain a variable return (for example, retaining the residual risk on the assets). Structures that do not meet these
criteria are not treated as subsidiaries and the assets are derecognised when they are sold.
Where the Group manages the administration of its securitised assets and is exposed to the risks and rewards of the underlying
assets through its continued investment or where the Group does not retain a direct ownership interest in an SPE, but the Directors
have determined that the Group controls those entities, they are treated as subsidiaries and are consolidated.
Net investment income
Net investment income from financial instruments measured at fair value through profit or loss includes:
‐
interest income from investments in SME loans that the Group holds on balance sheet (“investment income”);
‐
interest payable on funds borrowed to finance the acquisition of underlying loan investments (“investment expense”);
‐
interest payable on bond liabilities held on balance sheet;
‐ gains/losses from changes in the fair value of financial assets held on balance sheet;
‐ gains/losses from changes in fair value of hedging instruments; and
‐ amortisation of costs associated with the issuing of bonds and the credit facility.
Leases
At inception of a contract, the Group assesses whether or not a contract is, or contains, a lease. A contract is, or contains, a lease
if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. When
a lease is recognised in a contract the Group recognises a right-of-use asset and a lease liability at the lease commencement date.
Right-of-use assets are initially measured at cost, comprising the initial measurement of the lease liability, less any lease incentives.
Subsequently, right-of-use assets are measured at cost, less any accumulated depreciation and any accumulated impairment
losses, and are adjusted for certain remeasurements of the lease liability. Depreciation is calculated on a straight-line basis over
the length of the lease.
104
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 1. Accounting policies continued
Summary of new and amended accounting policies continued
Leases continued
Liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the
following lease payments:
‐
fixed payments less any lease incentives receivable;
‐ variable lease payments based on an index or a rate, initially measured using the index or rate at the commencement date; and
‐ amounts expected to be payable by the Group under residual value guarantee.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the Group’s
incremental borrowing rate is used, which is the rate that the Group would have to pay to borrow the funds necessary to obtain an
asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.
To determine the incremental borrowing rate, the Group:
‐ where possible, uses recent third party financing received by the individual lessee as a starting point, adjusted to reflect changes
in financing conditions since third party financing was received;
‐ uses an approach taking the risk-free interest rate adjusted for credit risk for leases held by Funding Circle Holdings plc; and
‐ makes adjustments specific to the lease for term, country and currency.
Subsequently, the lease liability is measured by increasing the carrying amount to reflect interest on the lease liability and reducing
it by the lease payments made. The lease liability is remeasured when there is a lease modification.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease
period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included
in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease
liability is reassessed and adjusted against the right-of-use asset.
Extension and termination options are included in a number of property leases in the Group. Management considers the facts
and circumstances that may create an economic incentive to exercise an extension or termination option in order to determine
whether the lease term should include or exclude such options. Extension or termination options are only included within the
lease term if they are reasonably certain to be exercised in the case of extension options and not exercised in the case of
termination options.
Considerations include:
‐
if leasehold improvements are expected to have significant value at the end of the lease term;
‐ expected costs or business disruption as a result of replacing a lease; and
‐ significant penalties incurred in order to terminate.
Lease terms are reassessed if the option is exercised or if a significant event occurs which impacts the assessment of
reasonable certainty.
The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e. those
leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also
applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value.
Lease payments on short-term leases and leases of low-value assets are recognised as expenses on a straight-line basis over
the lease term.
When the Group is an intermediate lessor, entering into a sublease, it accounts for the head lease and the sublease separately.
The sublease is classified as a finance or operating lease by reference to the right-of-use asset arising from the head lease.
Rental income from operating leases is recognised on a straight-line basis over the lease term and the Group retains the
right-of-use asset deriving from the head lease and the lease liability on the balance sheet.
Amounts due from lessees under finance leases are recognised as receivables equivalent to the Group’s net investment in the
lease and the right-of-use asset from the head lease is derecognised. Any difference resulting from the derecognition of the
right-of-use asset and recognition of the net investment in the sublease is recognised in the consolidated statement of comprehensive
income. The head lease liability remains on the balance sheet and interest expense continues to be recognised, while interest
income is recognised from the sublease.
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1. Accounting policies continued
Summary of new and amended accounting policies continued
Investment in associates
An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the
financial and operating policy decisions of the investee, but is not control or joint control over those policies. The considerations
made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.
The Group’s investment in its associate is accounted for using the equity method.
Under the equity method of accounting, the investments are initially recognised at cost. This is adjusted thereafter to recognise
the Group’s share of the post-acquisition profits or losses of the investee in the consolidated statement of comprehensive income.
The Group’s share of movements in other comprehensive income of the investee is recognised in other comprehensive income.
Dividends received or receivable from associates are recognised as a reduction in the carrying amount of the investment.
When the Group’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any
other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made
payments on behalf of the other entity.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest
in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the
asset transferred.
After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its
investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment
in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between
the recoverable amount of the associate and its carrying value, and then recognises the loss within the statement of
comprehensive income.
Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair
value. Any difference between the carrying amount of the associate upon loss of significant influence or joint control and the
fair value of the retained investment and proceeds from disposal is recognised in profit or loss.
Financial instruments
Financial assets
The Group determines the classification of its financial assets at initial recognition. The requirements of IFRS 9 for classification
and subsequent measurement are 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 other comprehensive income (“FVTOCI”) if they are held within the
business model defined as ”held to collect and sell”, 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 (‘FVTPL’). 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 SME loans 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 investment in SME loans under cure period, investment in SME loans (warehouse) and investment in SME
loans (securitised), all financial assets are held to collect contractual cash flows.
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Financial instruments continued
Financial assets continued
Under certain circumstances the Group holds investments in SME loans. The four types of investment in SME loan securities
held are as follows:
i) Investment in SME loans (curing)
In the US, investors commit to provide funding 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 SME loans (curing) have been classified as financial assets at fair value through profit or loss.
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 the consolidated statement of comprehensive income.
ii) Investment in SME loans (warehouse)
During the warehouse phase of the securitisation programme, the SME loans purchased using both the Group’s cash and
amounts borrowed under credit facilities are held on the Group’s balance sheet. These investments in SME loans have been
classified as financial assets at fair value through profit or loss. The above classification is because all such loans are acquired
principally for selling in the short term and the collection of interest is incidental. They are initially measured at fair value on the
balance sheet with the subsequent measurement at fair value with all gains and losses being recognised in the consolidated
statement of comprehensive income.
iii) Investment in SME loans (securitised)
Under risk retention regulations the Group is required to retain at least 5% of the bonds issued by the securitisation SPV.
Retaining a significant proportion of the residual
Whilst the Group is required to retain 5% of the overall bond issuance, where the Group holds a significant proportion of the
unrated bonds (referred to as the “residual”), the Group continues to consolidate the securitisation SPV as it considers that the
risks and rewards of ownership continue to reside with the Group. As a result the underlying SME loan book held in the SPV
remains on balance sheet along with the bond liabilities to third parties. They continue to be measured at fair value on the
balance sheet with the subsequent measurement at fair value with all gains and losses being recognised in the consolidated
statement of comprehensive income.
Selling a significant portion of the residual
Where the Group sells a significant portion of the residual, the Group may no longer be deemed to retain the majority of the risks
and rewards of ownership and the Group deconsolidates the securitisation SPV. The Group would still need to apply the
derecognition rules of IFRS 9 to the investment in SME loan assets.
iv) Investment in SME loans (other)
The Group holds investments in certain SME business loans as a result of a commercial arrangement with institutional investors
in the marketplace (see note 13).
These investments in other SME loans are classified as amortised cost (as they are held solely to collect principal and interest
payments) 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 are classified as 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 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.
Annual Report and Accounts 2019
107
1. Accounting policies continued
Financial instruments continued
Financial assets continued
Impairment of financial assets
The Group applies the impairment requirements of IFRS 9. The IFRS 9 impairment model requires 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 (“ECLs”) (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 ECLs (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 ECLs 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 associated with its financial assets carried at
amortised cost and recognises a loss allowance for such losses at each reporting date. The measurement of ECLs 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.
Bank borrowings
Bank borrowings (drawdowns under the credit facilities) are recognised initially at fair value, being their issue proceeds net of
transaction costs incurred. These instruments are subsequently stated at amortised cost using the effective interest rate method.
Derivative financial instruments
Interest rate caps are in place to partially mitigate the floating rate interest rate risk associated with drawn amounts from
borrowing facilities and risk associated with floating rate ABS bond liabilities consolidated into the Group. The derivatives are
recognised initially at fair value reflecting the time value implicit in the premium paid and are subsequently recognised at fair
value with gains and losses recognised in profit or loss. See note 17 for details of interest rate risk.
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Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 1. Accounting policies continued
Financial instruments continued
Financial liabilities continued
Bonds
Bonds represent the bond liabilities which the Group must pay to the bond holders from the cash flows generated from the SME
loans (securitised) held on balance sheet. The liability excludes any amount of bonds that the Group has retained as these are
eliminated upon consolidation.
IFRS 9 permits a company to elect to fair value the bond liabilities where there is an accounting mismatch. In the Group’s case
the associated assets generating the cash flows to pay the bonds are the SME loans (securitised) which are measured at fair
value through profit and loss.
As the cash flows from the SME loans are used to repay the rated bond tranches in advance of the unrated bonds, the Group
does not consider there to be a significant accounting mismatch as default levels impact the unrated bonds first. Therefore the
rated bonds are measured at amortised cost. However, as the unrated bonds are most affected by fair value movements in the
SME loans, the Group has elected to measure the unrated tranches of bonds at fair value through profit and loss to eliminate the
accounting mismatch.
See note 17 for details of the fair value methodology and interest rate risk.
Transaction costs associated with the issuance of bonds are deferred to the balance sheet and recognised over the lifetime of
the bonds using the effective interest rate method.
Summary of existing accounting policies
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.
Structured entities are entities that are designed so that their activities are not governed by voting rights. In assessing whether
the Group has power over such entities, the Group considers factors such as the purpose and design of the entity; its practical
ability to direct the relevant activities of the entity; the nature of the relationship with the entity; and the size of its exposure to the
variability of returns of the entity.
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 balance sheet, 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.
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.
Presentation currency
These consolidated financial statements are presented in GBP sterling, which is the Group’s presentation 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 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.
Annual Report and Accounts 2019
109
1. Accounting policies continued
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 the function 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.
Transactions 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 (see note 5).
Income recognition
Revenue is recognised in line with IFRS 15 which 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.
Revenue earned for the arrangement of loans is classified as transaction fees and is a cost of the borrower. The contract signed
by the borrower and related terms are clearly identifiable. The performance obligation in the contract is considered to be the
funding of the loan through the marketplace platform and the transaction price is clearly stated in the borrower’s contract. Fees
are recognised immediately once loans are fully funded on the marketplace and after the loans are accepted by the borrowers. At
this point the performance obligation has been met and there are no clawback provisions. Such fees are automatically deducted
from the amount borrowed and recognised at that point as the Group has the right to consideration and the performance
obligation has been satisfied.
Revenue earned from servicing third party loans is classified as servicing fees and is a cost of the investor. It comprises an
annualised fee representing a percentage of outstanding principal. The contractual basis for the servicing fee and transaction
price is based on the terms and conditions agreed by investors to the lending platform. The performance obligation is in order to
service the loans and allocate repayments of the loan parts to the respective lenders. The transaction price is allocated to the
outstanding principal balance being the outstanding ongoing performance obligation. Fees are recognised on a monthly basis
upon repayment of loan parts. Due to the conditions of the trade, there are no partially completed contracts at the balance sheet
date and no advance payments from customers.
Net investment income includes:
‐
interest income from SME loans that the Group holds on balance sheet (“investment income”);
‐
interest payable on funds borrowed to finance the acquisition of underlying loan investments (“investment expense”);
‐ gains/losses from changes in the fair value of financial assets held on balance sheet;
‐ gains/losses from changes in fair value of hedging instruments; and
‐ amortisation of costs associated with the issuing of bonds and the credit facility.
Net investment income is generated from financial instruments, with the recognition criteria of IFRS 9 and not IFRS 15.
Fees included within other fees include referral fees, excess premium or fees earned from agreeing to buy back defaulted loans
from certain institutional investors and any income earned on investments in loan securities and are recognised as services are
performed on an accruals basis.
Net income, being revenue and net investment income, comprises the fair value of the consideration received or receivable in the
ordinary course of the Group’s activities. Net income recorded in the financial statements is generated in the UK, the US,
Germany and the Netherlands. All fees are calculated based on the above income recognition policy.
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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.
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, revenue, earnings per share
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, US and Netherlands. The schemes are
pension plans 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.
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
affects 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.
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111
1. Accounting policies continued
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, which is up to five years as at 31 December 2019.
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, build 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 build of the platform products so that they will be available for use;
‐ management intends to complete the build of the platform products for use within the Group;
‐
there is an ability to use the platform products;
‐
it can be demonstrated how the platform products will generate probable future economic benefits;
‐ adequate technical, financial and other resources to complete the development and to use the platform products are available; and
‐
the expenditure attributable to the platform products 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.
The capitalisation of employee costs is based on the amount of time spent on specific projects which meet the criteria as a proportion
of their total time, and this proportion of their salary-related costs is attributed to the applicable projects.
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.
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.
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Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial 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.
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.
Loan buy back contracts
Loan buy back 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.
Loan buy back contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable
to the issuance of the contract. 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. The expected credit loss model
is used to measure and recognise the financial liability (as further detailed in note 16).
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.
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 year.
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 reserve represents the cumulative foreign currency translation movement on the assets and liabilities
of the Group’s international operations at year-end exchange rates and on the profit and loss items from average exchange rates
to 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.
Annual Report and Accounts 2019
113
2. Critical accounting judgements and key sources of estimation uncertainty
The preparation of the consolidated financial statements requires the Group to make estimates and judgements that affect the
application of policies and reported amounts. Critical judgements represent key decisions made by management in the application
of the Group accounting policies. Where a significant risk of materially different outcomes exists due to management assumptions
or sources of estimation uncertainty, this will represent a key source 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. Although these estimates are based on management’s
best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.
There were no critical judgements in the current year. The significant estimates applied by the Group in the financial statements
have been applied on a consistent basis with the financial statements for the year to 31 December 2018.
Key sources of estimation uncertainty
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 financial statements.
Estimated impairment of assets (note 10)
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 (“CGUs”) 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. During the year, impairment was identified in relation to the goodwill
and tangible and intangible assets of the German and Dutch businesses within the Developing Markets segment. Based on the
performance of the German and Dutch businesses and changes to the medium-term outlook for the non-financial assets
included within the associated CGU it was determined that the carrying value exceeded the recoverable amount. Goodwill was
fully impaired by £29.0 million, tangible fixed assets by £0.7 million and intangible assets by £4.6 million. There was not
considered to be a recoverable amount in relation to these assets.
Loan repurchase provision (note 16)
In certain circumstances, in the less mature markets, Funding Circle has entered into arrangements with institutional investors
to assume the credit risk on the loan investments made by the institutional investors. The Group must estimate the expected
credit loss (“ECL”) for these commitments at each reporting date.
Significant estimation 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 including macroeconomic forecasts such
as changes in interest rates, GDP and inflation. The most significant estimation is with delinquencies and default rates on
performing loans. For the year ended 31 December 2019 the weighted average lifetime default rate was 12.9%. If the weighted
average default rate were to change by 25%, the provision would change by £1.5 million for the year ended 31 December 2019. It is
considered that the range of reasonably possible outcomes in annual default rates used might be +/-25% and as a result it is
possible that the provision in future could materially diverge from management’s estimate.
Fair value of financial instruments (note 17)
At 31 December 2019, the carrying value of the Group’s financial instrument assets held at fair value was £754.8 million
(31 December 2018: £154.7 million) and the carrying value of financial liabilities carried at fair value was £16.0 million (2018: £nil).
In accordance with IFRS 13 Fair Value Measurement, the Group categorises financial instruments carried on the consolidated
balance sheet at fair value using a three-level hierarchy. Financial instruments categorised as level 1 are valued using quoted
market prices and therefore there is minimal estimation applied in determining fair value. However, the fair value of financial
instruments categorised as level 2 and, in particular, level 3 is determined using valuation estimation techniques including
discounted cash flow analysis and valuation models. The most significant estimation is with respect to discount rates.
A sensitivity to the discount rate is illustrated below.
Description
Fair value (£m)
Unobservable input
Investment in SME
loans (warehouse)
Investment in SME
loans (securitised)
342.0
Discount rate
366.6
Discount rate
Inputs
US 7.8%
UK 6.3%
US 6.8%
UK 5.9%
Bonds (unrated)
(16.0)
Discount rate
UK 11.6%
Relationship of unobservable inputs to
fair value
A change in the discount rate by
50 bps would increase/decrease
fair value by £2.8 million.
A change in the discount rate by
50 bps would increase/decrease
fair value by £2.7 million.
A change in the discount rate by
50 bps would increase decrease
fair value by £0.3 million.
It is considered that the range of reasonably possible outcomes in relation to the discount rate used could be +/-50 bps and as a
result the fair value of the assets could materially diverge from management’s estimate.
114
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 3. 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 function is made up of
the Executive Directors and other senior 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 (see glossary), 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 (see note 5). 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.
31 December 2019
31 December 2018 (restated)
United
Kingdom
£m
93.6
24.6
United
States
£m
37.1
Developing
Markets
£m
11.2
(5.7)
(6.8)
Net income¹
Segment adjusted
EBITDA
Product development
Corporate costs
Adjusted EBITDA
Depreciation and
amortisation
Share-based payments
and social security costs
Foreign exchange loss
Exceptional items (note 5)
Operating loss
United
Kingdom
£m
108.5
United
States
£m
45.6
Developing
Markets
£m
Total
£m
13.3
167.4
34.0
(10.3)
(12.5)
11.2
(26.4)
(12.3)
(27.5)
(14.9)
(8.0)
—
(34.3)
(84.7)
Total
£m
141.9
12.1
(24.5)
(11.0)
(23.4)
(12.5)
(8.6)
(0.4)
(5.9)
(50.8)
1. Net income is also referred to as “Revenue”.
Net income by type
In addition to the segmental reporting of performance under IFRS 8, the table below sets out net income by its type:
Transaction fees
Servicing fees
Net investment income:
– Investment income
– Investment expense
– Fair value (losses)/gains
Other fees
Net income
31 December
2019
£m
31 December
2018
£m
121.2
30.4
10.5
28.3
(7.9)
(9.9)
5.3
167.4
112.9
24.9
—
—
—
—
4.1
141.9
Annual Report and Accounts 2019
115
4. Operating expenses
Depreciation
Amortisation
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
Loan repurchase charge
Foreign exchange loss
Impairment of goodwill (exceptional)
Impairment of intangible and tangible assets (exceptional)
IPO adviser costs (exceptional)
Other expenses
Total operating expenses
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 financial
statements of subsidiaries of the Company
Total audit fees
Assurance-related fees
– Audit-related assurance services
– Total other assurance services
Total assurance-related fees
Non-audit fees
– Tax compliance services
– Reporting accountant fees in connection with the IPO
Total non-audit fees
5. Exceptional items
Impairment of non-financial assets
IPO adviser costs
Total
31 December
2019
£m
7.8
7.1
—
0.1
0.1
90.3
66.5
9.4
6.5
—
29.0
5.3
—
30.0
252.1
31 December
2018
(restated)
£m
6.4
6.1
(0.8)
0.1
0.1
79.2
57.8
9.2
2.6
0.4
—
—
5.9
25.7
192.7
31 December
2019
£m
31 December
2018
£m
0.3
0.2
0.5
0.1
0.2
0.3
—
—
—
0.2
0.2
0.4
0.1
—
0.1
0.1
2.0
2.1
31 December
2019
£m
31 December
2018
£m
34.3
—
34.3
—
5.9
5.9
Impairment of non-financial assets in Germany and the Netherlands: In the year as part of the annual goodwill impairment assessment
it was identified that goodwill in relation to the Continental European business was carried at a value higher than its value in use
driven by a reduction in the future discounted cash flows of the Business Unit. As a result an impairment was recognised of
£29.0 million. Additionally the Group assessed the tangible and intangible fixed assets of the German and Dutch businesses as
part of the cash-generating unit and an impairment of £0.7 million and £4.6 million respectively was recognised. There was no cash
movement in relation to the impairment.
116
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 5. Exceptional items continued
IPO adviser costs: In 2018 sponsor and adviser costs associated with the IPO were recorded as exceptional items. The total
costs associated with the IPO were £15.0 million, of which £5.9 million were expensed to the income statement with the remaining
£9.1 million offset against share premium as is required for costs directly associated with the primary offering.
Cash flows in relation to the exceptional IPO costs amounted to £15.0 million in 2018 and there were no additional profit and loss
charges or cash outflows in 2019.
6. Employees
The average monthly number of employees (including Directors) during the year was:
Product and technology
Operations, support and administrative
2019
Number
252
803
1,055
2018
Number
232
722
954
In addition to the employees above, the average monthly number of contractors during the year was 110 (2018: 50).
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
7. Net finance costs
Interest receivable
Total finance income
Interest on lease liabilities
Total finance costs
Net finance income
31 December
2019
£m
31 December
2018
£m
80.1
7.8
1.0
8.0
96.9
7.7
(14.3)
90.3
68.7
7.0
0.5
8.6
84.8
5.2
(10.8)
79.2
31 December
2019
£m
1.8
1.8
(1.2)
(1.2)
0.6
31 December
2018
(restated)
£m
0.9
0.9
(1.0)
(1.0)
(0.1)
8. 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% (2018: 19.00%).
Current tax
UK corporation taxation
Research and development tax credit
Total current tax
Total tax charge/(credit)
31 December
2019
£m
31 December
2018
£m
0.5
—
0.5
0.5
—
(1.4)
(1.4)
(1.4)
Annual Report and Accounts 2019
117
8. Income tax continued
The Group continues to be in a loss-making position; however, credits receivable in respect of UK research and development
expenditure credits (“RDEC”) are subject to UK corporation tax. The above tax charge represents the amount of tax deducted
from the RDEC receivable for the years 2017 to 2019. In the prior year, the research and development tax credit of £1.4 million
was claimed under the Small and Medium Enterprise R&D tax relief.
The Group charge/(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 charge/(credit) for the year
Loss before taxation
Taxation on loss at 19.00% (2018: 19.00%)
Effects of:
Research and development
Effect of foreign tax rates
Non-deductible expenses
Temporary differences not recognised
Impairment charge (exceptional)
Tax charge/(credit)
31 December
2019
£m
(84.2)
(16.0)
0.5
(2.4)
0.8
10.7
6.9
0.5
31 December
2018
(restated)
£m
(50.9)
(9.6)
(1.4)
(2.7)
1.5
10.8
—
(1.4)
The Group is 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 (30.5%) and the Netherlands (25%). The effective tax rate for the year was (0.6%) (2018: 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 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.
Deferred tax assets and liabilities
Property, plant and equipment
Carry forward losses
Deferred stock options
US R&D credit
Unrecognised deferred tax asset
31 December
2019
£m
(1.9)
61.5
1.0
0.4
61.0
31 December
2018
(restated)
£m
(2.5)
45.9
0.1
—
43.5
Following the application of IFRS 16, deferred tax assets/liabilities in relation to capital allowances have been restated.
The Group has unrelieved tax losses of £248.0 million (2018: £182.3 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 certainty of
suitable taxable 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.
118
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 9. Loss per share
Basic loss per share amounts are calculated by dividing the loss 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
Loss for the year before exceptional items
Weighted average number of ordinary shares in issue (million)
Adjusted basic and diluted loss per share
10. Goodwill
Cost and carrying amount
At 1 January 2018
Exchange differences
At 31 December 2018
At 1 January 2019
Impairment charge (note 5)
Exchange differences
At 31 December 2019
31 December
2019
£m
(84.7)
347.6
(24.4)p
31 December
2018
(restated)
£m
(49.5)
271.3
(18.2)p
(50.4)
(43.6)
347.6
(14.5)p
271.3
(16.1)p
Total
£m
41.3
1.0
42.3
42.3
(29.0)
(2.0)
11.3
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 the German and Dutch businesses (Funding Circle Continental Europe or “FCCE”) and its
subsidiaries to which goodwill is attached. The goodwill associated with each CGU is shown below.
FCUSA
FCCE
Total
31 December
2019
£m
31 December
2018
£m
11.3
—
11.3
11.7
30.6
42.3
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 value-in-use calculations. The fair value review also took into account the current market
value of the Group segmented against each CGU.
Annual Report and Accounts 2019
119
10. Goodwill continued
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:
‐
income growth at a compound annual growth rate of 26.5% and 10.9% for FCUSA and FCCE respectively (2018: 45% and 73%);
‐ cost growth at a compound rate of 13.3% and (3.1%) for FCUSA and FCCE respectively (2018: 27% and 54%);
‐ pre-tax discount rate of 12.0% and 11.9% for FCUSA and FCCE respectively (2018: 11.8% and 13.3%); and
‐
revenues beyond the five-year period are extrapolated using an estimated growth rate of 2.0% for both CGUs (2018: 2.0%).
The above assumptions are based on historical trends and future market expectations.
The review identified impairment of £29.0 million to the goodwill of FCCE as the value in use calculated was below the carrying
amount. There are no further CGUs for which management considers a reasonably possible change in a key assumption would
give rise to an impairment.
The cumulative amount of impairment losses in relation to goodwill is £29.0 million (2018: £nil).
11. Intangible assets
Cost
At 1 January 2018
Exchange differences
Additions
Reclassification
Disposals
At 31 December 2018
At 1 January 2019
Exchange differences
Additions
Reclassification
Disposals
At 31 December 2019
Accumulated amortisation
At 1 January 2018
Exchange differences
Reclassification
Charge for the year
Disposals
At 31 December 2018
At 1 January 2019
Exchange differences
Reclassification
Charge for the year
Impairment
Disposals
At 31 December 2019
Carrying amount
At 31 December 2019
At 31 December 2018
120
Funding Circle Holdings plc
Capitalised
development
costs
£m
Computer
software
£m
Other
intangibles
£m
23.0
0.8
10.8
0.5
(0.9)
34.2
34.2
(0.5)
14.3
—
(0.7)
47.3
7.3
0.4
0.5
6.1
(0.9)
13.4
13.4
(0.1)
(0.3)
6.9
4.6
(0.5)
24.0
23.3
20.8
0.6
—
0.2
—
—
0.8
0.8
—
0.2
—
—
1.0
0.3
—
—
—
—
0.3
0.3
—
0.3
0.2
—
—
0.8
0.2
0.5
1.3
—
—
—
—
1.3
1.3
(0.2)
—
—
—
1.1
1.1
—
—
—
—
1.1
1.1
(0.1)
—
—
—
—
1.0
0.1
0.2
Total
£m
24.9
0.8
11.0
0.5
(0.9)
36.3
36.3
(0.7)
14.5
—
(0.7)
49.4
8.7
0.4
0.5
6.1
(0.9)
14.8
14.8
(0.2)
—
7.1
4.6
(0.5)
25.8
23.6
21.5
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 12. Property, plant and equipment, right-of-use assets and lease liabilities
As disclosed in note 1, the Group has adopted IFRS 16, effective from 1 January 2019, using the fully retrospective approach and
comparative information has therefore been restated. The Group has right-of-use assets which comprise property leases held by
the Group. Information about leases for which the Group is a lessee is presented below.
Analysis of property, plant and equipment between owned and leased assets
Property, plant and equipment (owned)
Right-of-use assets
Reconciliation of amount recognised in the balance sheet
Leasehold
improvements
£m
Computer
equipment
£m
Furniture
and fixtures
£m
4.3
1.0
—
5.3
5.3
(0.2)
(0.5)
1.4
(0.2)
5.8
1.0
0.7
—
1.7
1.7
(0.3)
1.0
0.6
—
3.0
2.8
3.6
2.9
1.1
—
4.0
4.0
—
—
0.9
(0.1)
4.8
2.0
1.0
—
3.0
3.0
—
0.9
0.1
—
4.0
0.8
1.0
1.6
0.6
—
2.2
2.2
—
(0.4)
1.2
—
3.0
1.1
0.4
—
1.5
1.5
(0.4)
0.4
—
—
1.5
1.5
0.7
Cost
At 1 January 2018 (restated)
Additions
Exchange differences
At 31 December 2018 (restated)
At 1 January 2019
Reclassification
Disposals
Additions
Exchange differences
At 31 December 2019
Accumulated depreciation
At 1 January 2018 (restated)
Charge for the year
Exchange differences
At 31 December 2018 (restated)
At 1 January 2019
Disposals
Charge for the year
Impairment
Exchange differences
At 31 December 2019
Carrying amount
At 31 December 2019
At 31 December 2018 (restated)
Lease liabilities
Amounts recognised on the balance sheet were as follows:
Current
Non-current
Total
31 December
2019
£m
5.1
33.9
39.0
Right-of-use
assets
(property)
£m
32.1
1.3
0.4
33.8
33.8
0.2
(5.3)
21.1
(0.4)
49.4
9.4
4.3
0.2
13.9
13.9
(3.7)
5.5
—
(0.2)
15.5
33.9
19.9
31 December
2018
(restated)
£m
5.3
19.9
25.2
Total
£m
40.9
4.0
0.4
45.3
45.3
—
(6.2)
24.6
(0.7)
63.0
13.5
6.4
0.2
20.1
20.1
(4.4)
7.8
0.7
(0.2)
24.0
39.0
25.2
31 December
2019
£m
8.5
29.8
38.3
31 December
2018
(restated)
£m
5.0
20.1
25.1
Annual Report and Accounts 2019
121
12. Property, plant and equipment, right-of-use assets and lease liabilities continued
Lease liabilities continued
Amounts recognised in the statement of comprehensive income were as follows:
Depreciation charge of right-of-use assets (property)
Interest expense (included in finance costs)
Expense relating to short-term leases and leases of low-value assets
31 December
2019
£m
5.5
1.2
0.2
31 December
2018
(restated)
£m
4.3
1.0
0.2
The total cash outflow for leases (excluding short-term and low-value leases) in 2019 was £7.1 million (2018: £3.8 million).
A maturity analysis illustrating the undiscounted contractual cash flows of lease liabilities is included within the liquidity risk
disclosure within note 17.
As at 31 December 2019 the potential future undiscounted cash outflows that have not been included in the lease liability due
to lack of reasonable certainty the lease extension options might be exercised amounted to £nil (2018: £nil).
13. Investment in SME loans
Non-current
Investment in SME loans (other) – amortised cost
Total non-current
Current
Investment in SME loans (curing) – FVTPL
Investment in SME loans (warehouse) – FVTPL
Investment in SME loans (securitised) – FVTPL
Total current
Total
14. Trade and other receivables
Trade receivables
Other receivables¹
Prepayments
Accrued income
Rent and other deposits
31 December
2019
£m
31 December
2018
£m
1.7
1.7
—
342.0
366.6
708.6
710.3
0.3
0.3
4.7
—
—
4.7
5.0
31 December
2019
£m
31 December
2018
£m
0.9
17.3
4.2
7.3
3.9
33.6
1.2
6.5
6.0
3.6
5.7
23.0
1. Includes £7.5 million in relation to cash and liquidity reserves held in the UK securitisation vehicle which will unwind to make payments to bond holders in future.
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 £3.3 million of rental deposits (2018: £2.9 million) in respect of the Group’s property
leases which expire over the next five years.
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
122
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 15. Trade and other payables
Trade payables
Other taxes and social security costs
Other creditors
Accruals
31 December
2019
£m
3.2
3.1
1.7
11.7
19.7
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
31 December
2018
(restated)
£m
2.8
5.5
0.9
10.1
19.3
Total
£m
3.7
4.0
(3.1)
4.6
—
7.3
(7.9)
4.0
Dilapidation
£m
Loan repurchase
£m
0.4
0.4
—
0.8
—
0.1
—
0.9
2.5
2.6
(2.0)
3.1
0.5
6.5
(7.2)
2.9
Other
£m
0.8
1.0
(1.1)
0.7
(0.5)
0.7
(0.7)
0.2
31 December
2019
£m
31 December
2018
£m
3.1
0.9
4.0
3.8
0.8
4.6
16. Provisions
At 1 January 2018
Additional provision
Amount utilised
At 31 December 2018
Reclassification
Additional provision
Amount utilised
At 31 December 2019
Current
Non-current
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.
Loan repurchase 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 commitments, the Group is entitled to the
excess returns or additional income which is recorded as other fees.
Under IFRS 9, the Group is required to provide for these loan repurchases under the expected credit loss (“ECL”) model.
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 loan repurchase 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.
Annual Report and Accounts 2019
123
16. Provisions continued
Loan repurchase provision continued
The Group bands each loan investment using an internal risk rating and assesses credit losses on a collective basis.
At 1 January 2018
Provision against new loans originated
Provision against loans transferred from performing
Amounts utilised
Loans repaid
Change in probability of default
At 31 December 2018
Provision against new loans originated
Provision against loans transferred from performing
Amounts utilised
Loans repaid
Change in probability of default
At 31 December 2019
At 31 December 2018
Performing (due in 30 days or less)
Underperforming (31–90 days overdue)
Non-performing (90+ days overdue)
At 31 December 2019
Performing (due in 30 days or less)
Underperforming (31–90 days overdue)
Non-performing (90+ days overdue)
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
2.8
(3.6)
—
(0.5)
1.3
2.1
0.3
0.3
0.1
—
—
0.1
0.8
—
(0.1)
—
—
0.1
0.8
0.6
—
1.6
(2.0)
—
—
0.2
—
7.4
(7.2)
—
(0.4)
—
Total
£m
2.5
2.1
1.6
(2.0)
(0.4)
(0.7)
3.1
2.8
3.7
(7.2)
(0.5)
1.0
2.9
Expected credit
loss coverage
%
Basis for
recognition of
loan repurchase
provision
Gross assets
of external
parties subject
to loan repurchase
provision
£m
1 12-month ECL
67
Lifetime ECL
100
Lifetime ECL
Total
220.6
1.2
0.2
222.0
Expected credit
loss coverage
%
Basis for
recognition of
loan repurchase
provision
Gross assets
of external
parties subject
to loan repurchase
provision
£m
5 12-month ECL
81.3
Lifetime ECL
100
Lifetime ECL
Total
40.6
0.9
—
41.5
Loan
repurchase
provision
£m
2.1
0.8
0.2
3.1
Loan
repurchase
provision
£m
2.1
0.8
—
2.9
The percentages applied above are based on the Group’s past experience of delinquencies and loss trends, as well as forward-looking
information in the form of macroeconomic scenarios governed by an impairment committee, which considers macroeconomic
forecasts such as changes in interest rates, GDP and inflation. Macroeconomic scenarios are probability weighted within the
model and include scenarios of: i) low losses, a high GDP, market confidence and political stability; ii) normal losses based on
baseline economic conditions; iii) high losses with manufacturing and political instability; iv) very high losses with a stress
scenario reflecting a one-in-twenty-year event.
The expected credit loss model includes actual defaults determined by monthly cohort, adjusted for forecasted lifetime cumulative
default rates. It applies the latest default curve and lifetime default rates tailored to each cohort based on the expected lifetime
default rate. When actual defaults trend higher than the curve, the forecast default curve is shifted upwards to align with actual
performance. The items that the model is most sensitive to are delinquencies and default rates. Management has applied an
estimated weighted average lifetime default rate across cohorts of 12.9%. See note 2 for a sensitivity analysis on the impact
of a change in default rates. At 31 December 2019, there is only one portfolio of loans.
The maximum exposure the Group might have to pay at the balance sheet date if 100% of eligible loans were required to be
bought back would be £41.5 million (2018: £222.0 million). This would be dependent on the timing of any eligible loans defaulting.
Repayments of eligible loans are no longer reinvested and therefore the final loan is due to expire in December 2024, along with
the associated financial guarantees.
124
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 17. 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; and
‐ market risk (including foreign exchange risk, interest rate risk and other price 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;
‐
trade and other payables;
‐ bank borrowings;
‐ bonds; and
‐
lease liabilities.
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 2019:
Assets
Investment in SME loans (other)
Investment in SME loans (curing)
Investment in SME loans (warehouse)
Investment in SME loans (securitised)
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Bank borrowings
Bonds
Lease liabilities
Fair
value through
profit and loss
£m
Amortised cost
£m
—
—
342.0
366.6
0.2
46.0
754.8
1.7
—
—
—
21.9
118.5
142.1
Fair
value through
profit and loss
£m
Amortised cost
£m
(4.9)
(265.8)
(332.7)
(38.3)
—
—
(16.0)
—
(16.0)
Total
£m
1.7
—
342.0
366.6
22.1
164.5
896.9
Total
£m
(4.9)
(265.8)
(348.7)
(38.3)
(641.7)
(657.7)
Annual Report and Accounts 2019
125
17. Financial risk management continued
Principal financial instruments continued
Categorisation of financial assets and financial liabilities continued
The tables show the carrying amounts and fair values of financial assets and financial liabilities by category of financial instrument
as at 31 December 2018:
Assets
Investment in SME loans (other)
Investment in SME loans (curing)
Trade and other receivables
Cash and cash equivalents
Liabilities
Trade and other payables
Lease liabilities
Fair
value through
profit and loss
£m
Amortised
cost
£m
—
4.7
—
150.0
154.7
Fair
value through
profit and loss
£m
—
—
—
0.3
—
13.4
183.0
196.7
Amortised
cost
£m
(3.7)
(25.1)
(28.8)
Total
£m
0.3
4.7
13.4
333.0
351.4
Total
£m
(3.7)
(25.1)
(28.8)
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, investment in SME loans (other) 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.
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 assets 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 SME loans) 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 investment in SME loans (curing). These
are typically held for two to three days before being transferred to independent investors at the principal amount.
126
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 17. Financial risk management continued
Financial instruments measured at fair value continued
If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.
31 December 2019
Financial assets
Trade and other receivables
Investment in SME loans (warehouse)
Investment in SME loans (securitised)
Cash and cash equivalents
Financial liabilities
Bonds
31 December 2018
Financial assets
Investment in SME loans (curing)
Cash and cash equivalents
Fair value measurement using
Quoted prices
in active
markets
(level 1)
£m
Significant
observable
inputs
(level 2)
£m
Significant
unobservable
inputs
(level 3)
£m
—
—
—
46.0
46.0
—
—
0.2
—
—
—
0.2
—
—
—
342.0
366.6
—
708.6
(16.0)
(16.0)
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
—
—
—
Total
£m
0.2
342.0
366.6
46.0
754.8
(16.0)
(16.0)
Total
£m
4.7
150.0
154.7
Loan investments held under cure period were originated during the last week of the respective reporting periods. As a result fair
value is assumed to be equal to the outstanding principal amount.
The fair value of investment in SME loans (warehouse) has been estimated by discounting future cash flows of the loans using
discount rates that reflect the changes in market interest rates and observed market conditions at the reporting date. The estimated
fair value and carrying amount of the investment in SME loans (warehouse) was £342.0 million at 31 December 2019 (2018: £nil).
The fair value of investment in SME loans (securitised) represents loan assets in the securitisation vehicles and has been estimated
by discounting future cash flows of the loans using discount rates that reflect the changes in market interest rates and observed
market conditions at the reporting date. The estimated fair value and carrying amount of the investment in SME loans (securitised)
was £366.6 million at 31 December 2019 (2018: £nil).
Bonds represent the unrated tranches of bond liabilities measured at fair value through profit and loss (the rated tranches of
bonds are measured at amortised cost). The fair value has been estimated by discounting future cash flows in relation to the
bonds using discount rates that reflect the changes in market interest rates and observed market conditions at the reporting
date. The estimated fair value and carrying amount of the bonds was £16.0 million at 31 December 2019 (2018: £nil).
Annual Report and Accounts 2019
127
17. Financial risk management continued
Financial instruments measured at fair value continued
The most relevant significant unobservable input relates to the discount rates applied to the fair value calculation, details of
which are set out below.
Description
Fair value (£m)
Unobservable input
Investment in SME
loans (warehouse)
Investment in SME
loans (securitised)
342.0
Discount rate
366.6
Discount rate
Inputs
US 7.8%
UK 6.3%
US 6.8%
UK 5.9%
Bonds (unrated)
(16.0)
Discount rate
11.6%
Relationship of unobservable inputs to
fair value
A change in the discount rate by
50 bps would increase/decrease
fair value by £2.8 million.
A change in the discount rate by
50 bps would increase/decrease
fair value by £2.7 million.
A change in the discount rate by
50 bps would increase/decrease
fair value by £0.3 million.
Fair value movements on investment in SME loans (warehouse), investment in SME loans (securitised) and bonds (unrated) are
recognised through the profit and loss account in net investment income as part of net income.
A reconciliation of the movement in level 3 financial instruments is shown as follows:
At 1 January 2019
Additions
Securitisations
Repayments
Net loss on the change in fair value of financial instruments at fair value through profit
and loss during the year
Foreign exchange loss
At 31 December 2019
Investment in
SME loans
(warehouse)
£m
Investment in
SME loans
(securitised)
£m
Bonds
(unrated)
£m
—
673.4
(292.2)
(32.5)
(0.5)
(6.2)
—
—
414.5
(37.4)
(5.8)
(4.7)
—
(13.1)
—
0.7
(3.6)
—
342.0
366.6
(16.0)
128
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 17. 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
Investment in SME loans (other)
Current
Investment in SME loans (curing)
Investment in SME loans (warehouse)
Investment in SME loans (securitised)
Trade and other receivables:
– Trade receivables
– Other receivables
– Rent and other deposits
Cash and cash equivalents
Total gross credit risk exposure
Less bank borrowings and bond liabilities
Total net credit risk exposure
31 December
2019
£m
31 December
2018
£m
1.7
—
342.0
366.6
0.9
17.3
3.9
164.5
896.9
(614.5)
282.4
0.3
4.7
—
—
1.2
6.5
5.7
333.0
351.4
—
351.4
In addition the Group is subject to financial guarantees it has issued to buy back loans detailed in the loan repayment provision in
note 16. The Group’s maximum exposure to credit risk on this financial guarantee were every eligible loan required to be bought
back would be £41.5 million (2018: £222.0 million).
Investment in SME loans (curing) 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.
Investment in SME loans (warehouse) and investment in SME loans (securitised) relate to the underlying pool of SME loans in
both the warehouse and securitisation vehicles. Whilst there is credit risk from the loans defaulting, these SME loans and the
associated bank debt or third party bonds are held within bankruptcy remote vehicles. If the SME loans were to all default, then
the bank debt or third party bonds do not receive their money back. Therefore the overall exposure to the Group for these investments
is the Group’s net investment in the SME loans which is after taking account of the bank debt and third party bonds.
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/A- rated: £112.6 million (2018: £30.1 million) A+ or better:
£51.1 million (2018: £299.9 million) and below A- rated: £0.8 million (2018: £nil).
Annual Report and Accounts 2019
129
17. Financial risk management continued
Financial risk factors continued
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 financial resources 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.
The maturity analysis of financial instruments at 31 December 2019 and 31 December 2018 is as follows:
At 31 December 2019
Financial liabilities
Trade and other payables
Bank borrowings
Bonds
Loan repurchase provision1
Lease liabilities
At 31 December 2018 (restated)
Financial liabilities
Trade and other payables
Loan repurchase provision1
Lease liabilities
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
Total
undiscounted
cash flows
£m
Impact of
discounting 2
£m
Carrying
amount
£m
(4.9)
(265.8)
(43.4)
(2.9)
(2.1)
—
—
—
—
(108.8)
(219.8)
—
(6.4)
—
(28.8)
(319.1)
(115.2)
(248.6)
—
—
(0.5)
—
(5.7)
(6.2)
(4.9)
(265.8)
(372.5)
(2.9)
(43.0)
(689.1)
—
—
23.8
—
4.7
28.5
(4.9)
(265.8)
(348.7)
(2.9)
(38.3)
(660.6)
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
Total
undiscounted
cash flows
£m
Impact of
discounting 2
£m
Carrying
amount
£m
(3.7)
(3.1)
(1.5)
(8.3)
—
—
(4.6)
(4.6)
—
—
(18.3)
(18.3)
—
—
(3.5)
(3.5)
(3.7)
(3.1)
(27.9)
(34.7)
—
—
2.8
2.8
(3.7)
(3.1)
(25.1)
(31.9)
1. Financial guarantees provided for in the loan repurchase provision are allocated to the earliest period in which the guarantee could possibly be called.
2. Included within the impact of discounting on bonds is £2.7 million of deferred bond issuance costs.
The year to 31 December 2018 has been restated for the impact of IFRS 16 Leases – refer to note 1.
During the year, the Group entered into revolving credit facility agreements of up to £220 million and $180 million for the Group’s
UK and US ABS programmes respectively. As at 31 December 2019 the amounts drawn in the UK and US totalled £144.8 million
and $159.8 million, interest is payable on the borrowings in the UK and the US at 1.50% plus one-month Libor and 2.5% plus the
three-month commercial paper rate respectively. The Group may draw down on its borrowing facilities on the balance sheet in
order to fund the purchase of SME loans for the warehouse.
The Group has undrawn committed borrowing facilities available at 31 December 2019 of £90.5 million (2018: £nil) which are due
to expire in March 2021 in the US and in the UK no further drawdowns can be made under this facility from May 2020 and must be
repaid by June 2028. The use of the facilities is restricted to the purchase of loans for the purpose of securitisation.
Market risk
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 positions 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.
130
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 17. Financial risk management continued
Financial risk factors continued
Market risk continued
b) Cash flow and fair value interest rate risk
The Group is exposed to interest rate risk in relation to financial liabilities through drawn committed borrowing facilities and
on bonds and on financial assets through investment in SME loans.
Non-trading interest rate risk
The Group’s interest risk on financial instruments is limited to interest receivable on loan note investments, cash and cash equivalent
balances and interest on bank borrowings. The maturities of financial instruments subject to interest rate risk are as follows:
Less than 3 months
Between 3 months and 1 year
Between 1 and 5 years
At 31 December
Fixed rate
Investment in SME loans (other)
Investment in SME loans (curing)
Investment in SME loans
(warehouse)¹
Investment in SME loans
(securitised)¹
Bonds¹
Floating rate
Cash and cash equivalents
Bank borrowings
Bonds
2019
£m
—
—
0.3
0.6
—
164.5
(265.8)
—
2018
£m
—
4.7
—
—
—
333.0
—
—
2019
£m
—
—
11.5
4.9
—
—
—
—
(100.4)
337.7
16.4
2018
£m
—
—
—
—
—
—
—
—
—
2019
£m
1.7
—
330.2
361.1
(128.9)
—
—
(219.8)
344.3
2018
£m
0.3
—
—
—
—
—
—
—
0.3
1. The bonds, investment in SME loans (warehouse) and investment in SME loans (securitised) are classified as current on the balance sheet, representing that the holding in
residual junior notes and investment in SME loans in the warehouse by the Group are held to sell, and upon sale the Group would expect to deconsolidate the related assets
of the securitisation vehicles. The above table represents the contractual maturities.
There are no financial assets which are held for a period of over five years.
Interest rate risk sensitivity analysis – non-trading interest (fixed rate)
Interest on loan note investments including investment in SME loans (other), investments in SME loans (curing), investments in
SME loans (warehouse), investment in SME loans (securitised) and bond liabilities (in the US) is fixed until the maturity of the investment,
and is not impacted by market rate changes. 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. The Directors believe that any reasonable increase in the Libor rate would not
significantly impact the Group.
Interest on bank borrowings is subject to movements in Libor and the three-month commercial paper rate. However, the Group
has mitigated the risk of increases in interest rates through the use of interest rate caps. A 0.5% increase in Libor would result in
an increase of annual interest paid on facilities drawn to their current levels of £7.2 million.
Interest on bonds (in the UK) is subject to movements in SONIA. However, the Group has mitigated the risk of increases in
interest rates through the use of interest rate caps. A 0.5% increase in SONIA would result in an increase of projected annual
interest expense for the year ended 31 December 2020 of £0.8 million.
Annual Report and Accounts 2019
131
17. Financial risk management continued
Financial risk factors continued
Market risk continued
(b) Cash flow and fair value interest rate risk continued
Instruments used by the Group
Interest rate caps mitigate risk of increases in floating rate interest on borrowing facilities used to fund the origination of loans for
the securitisation warehouses.
All derivatives are held at fair value through profit and loss with movements in the fair value being recognised in fair value gains/
(losses) within net investment income. Derivatives are not designated into formal hedging relationships within the Group.
At 31 December 2019
Notional amount
Underlying
Strike rate
Maturity
Fair value
Interest rate cap
USA warehouse
Interest rate cap
UK warehouse
Interest rate cap
UK securitisation
$180m
USD Libor
4.0%
June 2021
—
£200m
GBP Libor
2.5%
June 2020
—
£177m ¹
GBP SONIA
2.0%
July 2024
£0.2m
1. The UK securitisation interest rate cap notional is set on a declining basis in line with the expected repayment of bonds subject to floating rate SONIA benchmark.
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 Group assessed the 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 senior 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 year end for a 5% change in foreign
currency rates. The sensitivity analysis excludes quasi-equity loans to foreign operations within the Group.
The Group’s sensitivity to fluctuations in foreign currencies is related to the US dollar and euro amounts held in the Parent Company.
The sensitivity analysis resulted in £nil impact on income statement or equity from an appreciation or depreciation in pound
sterling in 2019 (2018: £nil).
132
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 17. Financial risk management continued
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.
Sources of estimation uncertainty and critical judgements that may result in a material adjustment in future periods are outlined
in note 2.
18. Share capital
Called up, allotted and fully paid
Ordinary shares of £0.001
31 December
2019
Number
31 December
2019
£
31 December
2018
Number
31 December
2018
£
348,399,274
348,399
346,033,078
346,034
During 2019, the Company issued 2,366,196 ordinary shares of £0.001 ranking pari passu with ordinary shares in issue (2018: 7,494,589)
in connection with employee share schemes, giving rise to total share premium of £0.5 million (2018: £1.0 million).
Included in the total number of ordinary shares outstanding above are 2,282,239 (2018: 5,043,359) shares held by the Group’s
Employee Benefit Trust.
19. Share premium account
At 1 January
Capital reduction
Premium arising on IPO
Transaction costs associated with the issue of new shares
Exercise of options – proceeds received
2019
£m
291.8
—
—
—
0.5
2018
£m
278.0
(278.1)
300.0
(9.1)
1.0
At 31 December
292.3
291.8
20. Foreign exchange reserve
At 1 January 2018
Exchange difference on translating the net assets of foreign operations
At 31 December 2018
Exchange difference on translating the net assets of foreign operations
At 31 December 2019
£m
13.3
2.4
15.7
(7.7)
8.0
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.
Annual Report and Accounts 2019
133
21. Retained earnings/(accumulated losses)
At 1 January 2018 (restated)
Capital reduction
Transfer of share option costs
Loss for the year
At 31 December 2018 (restated)
Capital reduction
Transfer of share option costs
Loss for the year
At 31 December 2019
£m
(154.4)
278.1
13.0
(49.5)
87.2
—
4.0
(84.7)
6.5
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.
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.
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 with the exception of LTIP Awards granted to Executive Directors
which are 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 granted to employees, excluding Executive Directors, currently vest subject to continued service only (“Time Based
Vesting”) in accordance with a vesting schedule set at grant.
LTIP Awards granted to Executive Directors vest at the end of three years subject to achievement of performance conditions.
Further details are shown in the Remuneration Report.
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).
134
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 22. Share-based payment continued
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.
ESS Shares with “shadow” Unapproved Options
To subscribe for the ESS Shares, employees had to give up certain employment rights. ESS Shares were 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 was 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 differed depending on the underlying share.
If the performance target was met, the participants would 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 had a right of redemption – the employee had 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 depended on the number of ESS Shares granted.
The ESS Shares were each issued in conjunction with a “shadow” Unapproved Option. The Unapproved Option could be exercised
if the relevant enterprise value hurdle was not met upon an exit event. Both the ESS Shares and the “shadow” Unapproved Options
vested 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 and were converted into ordinary shares on IPO, with the
shadow options lapsing.
Growth Shares with “shadow” Unapproved Options
Growth Shares were 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 was 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
differed depending on the underlying share.
If this performance target was met, the participants would 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 were each issued in conjunction with a “shadow” Unapproved Option. The Unapproved Option could be exercised
if the applicable enterprise value hurdle is not met upon an exit event. Both the Growth Shares and the “shadow” Unapproved
Options vested 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. All Growth Shares were converted into
ordinary shares on IPO, and the related “shadow” options lapsed.
Charge for the year
Included in operating expenses of the Group is a charge for share-based payments and associated social security costs of
£8.0 million (2018: £8.6 million) that arises from transactions accounted for as equity-settled share-based payment transactions.
Annual Report and Accounts 2019
135
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
LTIP Awards
US Options Scheme
Total
Number and WAEP¹
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 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
Granted during
the year
Exercised during
the year
Forfeited during
the year
Converted
on IPO
Outstanding at
31 December
2018
Outstanding at
1 January 2019
Granted during
the year
Exercised during
the year
Forfeited during
the year
Outstanding at
31 December
2019
—
— 4,716,312
0.362
(2,605,831)
0.027
(3,490,423)
0.180
—
—
—
—
(3,007)
0.027
(945,320)
0.443
(28,125)
0.390
—
—
—
— (15,051,790)
0.360
1,418,196
—
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
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
£
630,912
0.027
9,093,840
0.327
—
—
—
—
(149,600)
0.027
(1,059,368)
0.386
—
—
(719,138)
0.535
481,312
0.027
7,315,334
0.298
—
—
—
—
—
—
1,418,196
— 6,380,111
0.406
17,523,059
0.319
— 8,840,545
—
(450,492)
— (1,295,157)
—
—
—
—
—
8,840,545
—
(867,752)
0.338
(2,527,212)
0.279
(906,152)
0.373
(2,920,447)
0.247
— 8,513,092
— 4,606,207
0.426
20,915,945
0.199
1. Weighted average exercise price.
The following table summarises information about the share awards outstanding at 31 December 2019:
EMI Options
Unapproved Options
LTIP Awards
US Options
Total
Number and WARCL2
Number and WARCL
Number and WARCL
Number and WARCL
Number and WARCL
Range of exercise prices
Number
Years
Number
Years
Number
Years
Number
Years
Number
Years
£0–£0.008
£0.009–£0.176
£0.177–£0.471
£0.472–£1.75
—
481,312
—
—
—
3.6
—
—
2,728,326
797,981
3,358,705
430,322
8.4
2.1
8.1
8.5
8,513,092
—
—
—
8.2
—
273,095
35,893
— 3,368,358
—
928,861
8.6
0.9
6.0
7.2
11,514,513
1,315,186
6,727,063
1,359,183
481,312
3.6
7,315,334
7.6
8,513,092
8.2
4,606,207
6.3
20,915,945
8.2
2.6
7.0
7.6
7.5
The following table summarises information about the share awards outstanding at 31 December 2018:
EMI Options
Unapproved Options
LTIP Awards
US Options
Total
Number and WARCL2
Number and WARCL
Number and WARCL
Number and WARCL
Number and WARCL
Range of exercise prices
Number
Years
Number
Years
Number
Years
Number
Years
Number
Years
£0–£0.008
£0.009–£0.176
£0.177–£0.471
£0.472–£1.75
—
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
2. Weighted average remaining contractual life.
136
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 22. Share-based payment continued
Unapproved Options Scheme
There have been no Unapproved Options granted since IPO in 2018. The weighted average fair values of options granted under the
Unapproved Options Scheme and the US Options Scheme ranged between £0.73 and £1.80 per option respectively in the previous
year. 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
£1.89
£nil–£0.44
4 years
48%
0.93%–1.02%
Nil
0.769
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 to employees excluding Executive Directors. The fair value of Executive Director share options is estimated at the grant date
using the Black-Scholes option pricing model. The following table gives the assumptions applied to the options granted.
Strike price
Share price on grant date
Expected life
Expected volatility
Risk-free interest rate
Dividend yield
31 December
2019
£4.40
£1.80
2.5 years
69%
1%
Nil
Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in
the Group’s option pricing models is the annualised standard deviation of the continuously compounded rates of return on the
share over a period of time. In estimating the future volatility of the Company’s share price, the Group considers the historical volatility
of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into
account the remaining contractual life of the option.
Annual Report and Accounts 2019
137
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 goodwill
Impairment of intangible and tangible assets
Interest receivable
Interest payable
Non-cash employee benefits expense – share-based payments and associated social security costs
Fair value and other non-cash adjustments
Tax credit cash received
Movement in provisions
Other non-cash movements
Changes in working capital
Movement in trade and other receivables
Movement in trade and other payables
Net cash outflow from operating activities
31 December
2019
£m
(84.2)
31 December
2018
(restated)
£m
(50.9)
7.8
7.1
29.0
5.3
(1.8)
1.2
7.7
9.9
—
(0.4)
(0.2)
(9.1)
0.7
6.4
6.1
—
—
(0.9)
1.0
8.1
—
1.4
0.2
—
(8.1)
6.1
(27.0)
(30.6)
In 2018, total IPO adviser costs were £15.0 million, of which £5.9 million related to the secondary shares traded on admission and
other costs attributable to the listing and £9.1 million related to the issuance of new shares. Both cash outflows were presented
in net cash flow from financing activities but in recent discussions, the Financial Reporting Council has highlighted that the cash
flow presentation of the £5.9 million in respect of the secondary shares and other costs did not satisfy the requirements of IAS 7
Statement of Cash Flows. Accordingly, these have been re-presented within net cash flow from operating activities. In addition to
the above, the cash flow statement was restated for the impact of IFRS 16 Leases - refer to note 1.
138
Funding Circle Holdings plc
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements
23. Notes to the consolidated statement of cash flows continued
Cash and cash equivalents
Cash and cash equivalents
31 December
2019
£m
31 December
2018
£m
164.5
333.0
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 cash of £1.2 million
(2018: £0.4 million) which is restricted in use in the event of rental payment defaults and cash held in the securitisation SPVs of
£14.2 million (2018: £nil) which has been collected for on payment to bond holders and is therefore restricted in its use.
At 31 December 2019, money market funds totalled £46.0 million (2018: £150.0 million).
Analysis of changes in liabilities from financing activities
Lease liabilities
Liabilities from financing activities
1 January
2018
(restated)
£m
(23.9)
(23.9)
Cash flow
£m
3.8
3.8
Exchange
movements
£m
Other non-cash
movements
£m
(2.7)
(2.7)
(2.3)
(2.3)
31 December
2018
(restated)
£m
(25.1)
(25.1)
The year to 31 December 2018 has been restated for the impact of IFRS 16 Leases – refer to note 1.
Bank borrowings
Bonds
Lease liabilities
Liabilities from financing activities
1 January
2019
(restated)
£m
—
—
(25.1)
(25.1)
Cash flow
£m
(269.4)
(349.4)
7.1
(611.7)
Exchange
movements
£m
Other non-cash
movements
£m
31 December
2019
£m
3.6
4.3
(0.3)
7.6
—
(3.6)
(20.0)
(265.8)
(348.7)
(38.3)
(23.6)
(652.8)
24. Operating lease arrangements
As disclosed in notes 1 and 12, leases of low-value items or short-term leases continue to be treated as operating leases.
Lease payments under operating leases recognised as an expense in the year
31 December
2019
£m
0.2
31 December
2018
(restated)
£m
0.2
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 years inclusive
After five years
31 December
2019
£m
0.1
—
—
0.1
31 December
2018
(restated)
£m
0.2
0.1
—
0.3
Operating lease payments represent payments for lease assets that are individually considered low value.
Annual Report and Accounts 2019
139
Notes forming part of the consolidated financial statements continued
for the year ended 31 December 2019
25. Dividends per share
No ordinary dividends were declared or paid in the current or previous financial years.
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 previous year, the Group entered into, and successfully won, a competition run by Nesta, a charitable organisation,
with a prize of £100,000 paid to develop a finance modelling template that can be used by small businesses. An additional
£200,000 of cash in relation to this prize was received in 2019. Ed Wray was a trustee of Nesta until December 2019.
Compensation of key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the
activities of the Group. The Group’s key management personnel comprises the Global Leadership Team (“GLT”), which is made
up of the Executive Directors and other senior management as defined in note 3 as the chief operating decision maker (“CODM”)
and the Non-Executive Directors of the Group.
Salaries and short-term benefits
Equity-based compensation
Post-employment benefits
31 December
2019
£m
31 December
2018
£m
4.2
2.7
0.1
7.0
3.5
1.8
–
5.3
Further details on Directors’ remuneration are disclosed in the Remuneration Report in the Corporate Governance section of the
Annual Report and Accounts on pages 80 to 83.
Transactions with other related parties
During the year the Group invested £13.9 million into entities accounted for as associates and subsequently received dividends
of £0.1 million.
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. Subsequent events
In March 2020, the Group announced that it is reorganising the Continental European businesses of Germany and the
Netherlands (the Developing Markets segment) and centralising the operations in London. The anticipated restructuring costs of
this reorganisation are estimated at c.£5.0 million.
140
Funding Circle Holdings plc
Financial statements 30. Interests in other entities
Investments 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
Directly/
indirectly
held
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 Midco Limited
Funding Circle USA, Inc.
Funding Circle Notes Program, LLC
FC Marketplace, LLC
FC Partners, LLC
Funding Circle Securities, LLC
Funding Circle Investor Funds, LLC
FC Capital US, LLC
FC Depositor US LLC
FC Partners, LP
Funding Circle Diversified Income Fund, LP
UK
UK
UK
UK
UK
UK
UK
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
Funding Circle CE GmbH
Funding Circle Deutschland GmbH
Funding Circle Connect GmbH
FC Forderungsmanagement GmbH
Juwel 182 VV UG
Funding Circle Espana S.L.
Germany
Germany
Germany
Germany
Germany
Spain
Funding Circle Nederland B.V.
Netherlands
100%
100%
100%
100%
100%
100%
100%
100%
Directly
Indirectly
Indirectly
Indirectly
Directly
Indirectly
Directly
Directly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
Indirectly
100%
100%
100%
100%
100%
100%
100%
Directly
Indirectly
Indirectly
Indirectly
Directly
Indirectly
Indirectly
Funding Circle Canada Inc.
Canada
100%
Indirectly
Funding Circle Capital Canada Inc.
Canada
100%
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
71 Queen Victoria Street, London EC4V 4AY
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
85 Second Street, 4th Floor,
San Francisco, California 94105
Bergmannstraße 71/72, 10961 Berlin
Bergmannstraße 71/72, 10961 Berlin
Bergmannstraße 71/72, 10961 Berlin
Bergmannstraße 71/72, 10961 Berlin
Bergmannstraße 71/72, 10961 Berlin
c/o Jorge Juan 30, 6A Madrid, 28 Madrid
Atrium, Strawinskylaan 3075, 4th Floor,
1077 ZX Amsterdam
c/o TMF Canada Inc., 330 Bay Street, Suite 820,
Toronto ON M5H 2S8
c/o TMF Canada Inc., 330 Bay Street, Suite 820,
Toronto ON M5H 2S8
Annual Report and Accounts 2019
141
30. Interests in other entities continued
Investments in associates
Set out below are the associates of the Group as at 31 December 2019 which, in the opinion of the Directors, are material to the
Group. The entities listed below have share capital consisting solely of ordinary shares, which are held directly by the Group.
The country of incorporation or registration is also their principal place of business, and the proportion of ownership interest
is the same as the proportion of voting rights held.
Associate entity name
Funding Circle European SME Direct
Lending Fund I¹
Funding Circle UK SME Direct Lending
Fund I¹
Place of
incorporation
Proportion of
ownership
interest
Directly/
indirectly
held
Registered office address
Ireland
24%
Indirectly
70, Sir John Rogerson’s Quay, Dublin 2, Ireland
Ireland
14%
Indirectly
70, Sir John Rogerson’s Quay, Dublin 2, Ireland
1. Private sub-fund held via the Funding Circle ICAV, an Irish collective asset-management vehicle constituted as an umbrella fund with registered office address of 70, Sir John
Rogerson’s Quay, Dublin 2, Ireland.
The tables below provide summarised financial information for those associates that are material to the Group. The information
disclosed reflects the amounts presented in the financial statements of the relevant associates and not Funding Circle Holdings
plc’s share of those amounts. They have been amended to reflect adjustments made by the entity when using the equity method,
including modifications for differences in accounting policy. As these associates were incorporated during the year ended
31 December 2019, comparative information is not presented. While the Group holds less than 20% ownership in Funding Circle
UK SME Direct Lending Fund I the Group considers that it has significant influence over the entity through representation on its
board and so continues to account for it as an associate instead of a trade investment.
The associates are sub-funds which invest in SME loans, and the Group is exposed to default and prepayment risk with respect
to the performance of the underlying loans in the associates, to the extent that the share of profit from associate may diminish.
The table below illustrates the Group’s maximum exposure to the investment in associate which represents the value on the
Group balance sheet. The value of the investment is derived from net asset value statements from the sub-funds; however, being
private these are not from observable market data, and therefore the fair value is considered to be aligned to the carrying value.
Summarised balance sheet
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Funding Circle European
SME Direct Lending Fund I
31 December 2019
£m
Funding Circle UK
SME Direct Lending Fund I
31 December 2019
£m
8.3
0.3
—
—
8.6
4.9
0.2
—
—
5.1
Reconciliation of associates’ total shareholders’ equity to carrying amount in Funding Circle Holdings plc’s consolidated
financial statements:
Opening net assets as at 1 January 2019
Shares issued in the year
Profit for the year
Other comprehensive income
Dividends paid in the year
Closing net assets as at 31 December 2019
Group’s share in %
Group’s share of net assets as at 31 December 2019
Accounting policy alignment
Group’s carrying amount
142
Funding Circle Holdings plc
—
34.9
0.4
—
(0.2)
35.1
24.4%
8.6
(0.3)
8.3
—
35.0
0.8
—
(0.2)
35.6
14.3%
5.1
(0.2)
4.9
Notes forming part of the consolidated financial statements continuedfor the year ended 31 December 2019Financial statements 30. Interests in other entities continued
Reconciliation of associates’ total shareholders’ equity to carrying amount in Funding Circle Holdings plc’s consolidated
financial statements: continued
Summarised statement of comprehensive income
Gross income
Profit for the year
Other comprehensive income
Total comprehensive income
Dividends received from associates
Interest in other entities
Funding Circle European
SME Direct Lending Fund I
2019
£m
Funding Circle UK
SME Direct Lending Fund I
2019
£m
0.4
0.1
—
0.1
0.1
0.2
0.1
—
0.1
—
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.
Consolidated structured entities: Small Business Origination Loan Trust 2019-3 DAC, Great Trinity Lending 1 DAC, Small
Business Lending Trust 2019-A and Small Business Lending Grantor Trust 2019-A are consolidated structured warehouse and
securitisation entities set up in the year which either hold SME loan assets in a warehouse awaiting sale to a securitisation entity
or hold the portfolio of SME loans and issue bonds after securitisation has occurred.
The entities are bankruptcy remote special purpose vehicles and as such there is no requirement for the Group to provide financial
support to the entities. The entities’ activities are not governed by voting rights and the Group has assessed that it has power
over the entities based on the purpose and design of the entity and ability to direct the relevant activities of the entity, the nature
of the relationship with the entity and the size of its exposure to the variability of the returns from each entity.
As explained in note 17, the Group experiences net credit risk and prepayment risk in relation to the SME loan assets net of bond
liabilities, and interest rate risk in relation to the warehouse loan facilities and floating rate bond liabilities which is partially mitigated
through the use of derivative financial instruments.
The principal activities of the Group’s most significant subsidiary undertakings are set out below. These are considered significant
in the context of the Group’s business, results and financial position.
Subsidiary undertakings
Principal activity
Funding Circle Ltd
Funding Circle USA, Inc.
FC 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.
FC 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, LLC) on an arm’s length
basis. FC Marketplace LLC initially holds loans for a two to three days’ cure period before selling
the loan on to 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 FC 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 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 Nederland B.V.
Operates the Funding Circle platform in the Netherlands and services loans.
Annual Report and Accounts 2019
143
Company balance sheet
as at 31 December 2019
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 earnings
Total equity
Total equity and liabilities
31 December
2019
£m
31 December
2018
£m
Note
5
7
7
6
11
8
9
9
10
416.2
—
416.2
0.9
0.6
80.8
82.3
498.5
1.3
1.3
0.3
292.3
11.9
192.7
497.2
498.5
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
The Company’s loss for the year was £81.6 million (2018: loss of £7.8 million).
The financial statements on pages 144 to 154 were approved by the Board and authorised for issue on 12 March 2020. They were
signed on behalf of the Board by:
Sean Glithero
Director
Company registration number 07123934
The notes on pages 147 to 154 form part of these financial statements.
144
Funding Circle Holdings plc
Financial statements Company statement of changes in equity
for the year ended 31 December 2019
Balance at 1 January 2018
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
Loss for the year
Transactions with owners
Transfer of share option costs
Issue of share capital
Employee share schemes –
value of employee services
Balance at 31 December 2019
Note
10
10
9
Share capital
£m
0.2
—
—
—
0.1
—
—
0.3
—
—
—
—
Share
premium
account
£m
278.0
—
—
(278.1)
301.0
(9.1)
—
291.8
—
—
0.5
—
0.3
292.3
Share options
reserve
£m
(Accumulated
losses)/retained
earnings
£m
Total equity
£m
13.9
—
(13.0)
—
—
—
5.1
6.0
—
(4.0)
—
9.9
11.9
(13.0)
(7.8)
13.0
278.1
—
—
—
270.3
(81.6)
4.0
—
—
279.1
(7.8)
—
—
301.1
(9.1)
5.1
568.4
(81.6)
—
0.5
9.9
192.7
497.2
The notes on pages 147 to 154 form part of these financial statements.
Annual Report and Accounts 2019
145
Company statement of cash flows
for the year ended 31 December 2019
Net cash outflow from operating activities
Investing activities
Loans advanced to subsidiary undertakings
Loan repayment from subsidiary undertakings
Capital contribution to subsidiary undertakings
Interest received
Net cash outflow from investing activities
Financing activities
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 (decrease)/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
Note
11
7
5
31 December
2019
£m
(4.1)
—
0.2
(220.9)
1.2
(219.5)
—
—
—
0.7
0.7
(222.9)
303.7
80.8
31 December
2018
(restated)
£m
(6.0)
(1.7)
14.6
(58.3)
0.5
(44.9)
(0.5)
300.0
(9.1)
1.1
291.5
240.6
63.1
303.7
The year to 31 December 2018 has been restated to re-present certain IPO adviser costs within operating cash flows – refer to
note 23 of the consolidated financial statements.
The notes on pages 147 to 154 form part of these financial statements.
146
Funding Circle Holdings plc
Financial statements Notes forming part of the Company financial statements
for the year ended 31 December 2019
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 Company is a public company limited by shares and registered in
England and Wales.
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 5 for further details).
Key sources of estimation uncertainty
The preparation of financial statements requires the Company to make estimates and judgements that affect the application of
policies and reported amounts. Where a significant risk of materially different outcomes exists due to management assumptions
or sources of estimation uncertainty, this will represent a key source 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. Although these estimates are based on management’s best knowledge of the amount,
event or actions, actual results ultimately may differ from those estimates.
Impairment of investments in subsidiary undertakings (note 5)
The carrying value of investment in subsidiary undertakings is reviewed for impairment on an annual basis. The recoverable
amount is determined based on the value in use. The use of this method requires the estimate of future cash flows expected to
arise from the continuing operation of the subsidiaries and the choice of a suitable discount rate in order to calculate the present
value. Actual outcomes could vary significantly from these estimates. During the year impairment was identified in relation to the
investment in Funding Circle Continental Europe GmbH. Based on the performance of the entity and changes to the medium-term
outlook for the investment it was determined that the carrying value exceeded the value in use. The investment was fully
impaired by £77.5 million.
The investment in Funding Circle USA, Inc. has a carrying value of £243.9 million. An annual impairment review was undertaken
in relation to the carrying amount of the investment and while it was not found to be impaired, it is considered that there are
reasonably possible outcomes that may differ from management’s estimation assumptions that could lead to material
impairment of the investment.
The Group prepares a five-year management plan for its operations, which is used in the value-in-use calculation. For compound
annual growth rates the majority of the sensitivity is in the growth rate applied to the fifth year which is forecast out into perpetuity.
The cash flow projections are based on the following key assumptions presented along with the sensitivity to impairment for
each key assumption:
‐
revenue growth at a compound annual growth rate of 26.5% and cost growth at a compound rate of 13.3%. A 5.2% decline in
the projected fifth year revenue growth rate with no cost reduction or a 6.4% increase in the projected fifth year cost growth
rate without revenue growth would reduce the estimated value in use to be equal to the carrying value of the investment;
‐ pre-tax discount rate of 12%. A 1.5% increase in the discount rate would reduce the estimated value in use to be equal to the
carrying value of the investment; and
‐
revenues beyond the five-year period are extrapolated using an estimated growth rate of 2.0%. A reduction in the growth rate
to (0.3%) would reduce the estimated value in use to be equal to the carrying value of the investment.
The above assumptions are based on historical trends and future market expectations.
Annual Report and Accounts 2019
147
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 assets and liabilities of 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 as at 31 December 2019:
Assets
Loans due from related undertakings
Trade and other receivables
Cash and cash equivalents
Liabilities
Loans due to related undertakings
Carried at amortised cost
Carried at fair value
Carrying
amount
£m
Fair value
£m
Based on
market
derived data
£m
Based on
individual
valuation
parameters
£m
0.9
0.3
34.8
36.0
(0.2)
(0.2)
0.9
0.3
34.8
36.0
(0.2)
(0.2)
—
—
46.0
46.0
—
—
—
—
—
—
—
—
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 Company’s financial assets measured at fair value are all carried at level 1.
148
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2019Financial 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 as at 31 December 2018:
Assets
Loans due from related undertakings
Trade and other receivables
Cash and cash equivalents
Liabilities
Loans due to related undertakings
Trade and other payables
Carried at amortised cost
Carried at fair value
Carrying
amount
£m
1.8
0.3
153.7
155.8
(0.2)
(0.7)
(0.9)
Fair value
£m
1.8
0.3
153.7
155.8
(0.2)
(0.7)
(0.9)
Based on
market
derived data
£m
Based on
individual
valuation
parameters
£m
—
—
150.0
150.0
—
—
—
—
—
—
—
—
—
—
Financial instruments measured at amortised cost
Financial assets and liabilities 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.
The fair value of cash and cash equivalents at 31 December 2019 and 31 December 2018 approximates the carrying value.
Credit risk is mitigated as cash and cash equivalents are held with reputable institutions.
Financial risk factors
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial asset 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:
– Amounts due from related undertakings
Cash and cash equivalents
Liquidity risk
31 December
2019
£m
31 December
2018
£m
—
0.9
0.3
80.8
1.7
0.1
—
303.7
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.
Annual Report and Accounts 2019
149
2. Financial risk management continued
Financial risk factors continued
Liquidity risk continued
The maturity analysis of financial assets and liabilities at 31 December 2019 and 31 December 2018 is as follows:
At 31 December 2019
Financial assets
Trade and other receivables
Cash and cash equivalents
Loans due from related undertakings
Financial liabilities
Trade and other payables
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
Market risk
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
0.3
80.8
0.9
82.0
(0.2)
(0.2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Less than
3 months
£m
Between
3 months
and 1 year
£m
Between 1
and 5 years
£m
Over
5 years
£m
—
303.7
—
303.7
—
—
—
—
0.1
0.1
(0.9)
(0.9)
—
—
1.7
1.7
—
—
—
—
—
—
—
—
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 positions 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. A 0.5% increase in Libor could increase the annual interest earned by c.£0.4 million
(2018: 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.
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 17 to the consolidated financial statements.
Capital management
The Company considers its capital to comprise 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.
150
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2019Financial statements 2. Financial risk management continued
Capital management continued
The Directors monitor a number of KPIs at both the Company 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 Company.
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 Company has adequate resources to meet its
working capital requirements.
3. Company 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 £81.6 million (2018: comprehensive
loss of £7.8 million).
4. Employees
The Company had no employees during the current or prior year other than Directors. The Company did not operate any pension
schemes during the current or preceding year. Directors received emoluments in respect of their services to the Company during
the year of £1.2 million (2018: £0.9 million). For further information see the Remuneration Report.
5. Investments in subsidiary undertakings
Balance at 1 January
Capital contribution regarding employee services in subsidiaries
Additions
Impairment
Capitalisation of intercompany loans
31 December
2019
£m
31 December
2018
£m
264.6
8.2
220.9
(77.5)
—
416.2
201.8
4.5
58.3
—
—
264.6
Investments in subsidiary undertakings, which are listed in note 30 of the Group financial statements, are all stated at cost less
any provision for impairment.
During the year the Company made capital contributions in the form of cash investments of £127.1 million (2018: £31.5 million),
£9.1 million (2018: £12.2 million) and £84.7 million (2018: £14.6 million) 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.
In addition to the above, the Company recognised a capital contribution of £8.2 million (2018: £4.5 million) representing the
service cost for the employees of its subsidiaries, under the Company’s share option schemes.
During the year the Company identified impairment of £77.5 million to the Company’s investment in Funding Circle Continental
Europe GmbH as the value in use calculated was below the carrying amount.
The cumulative amount of impairment losses in relation to investment in subsidiaries is £77.5 million (2018: £nil).
6. Trade and other receivables
Amounts due from related undertakings
Prepayments
Accrued income
31 December
2019
£m
31 December
2018
£m
0.3
0.2
0.1
0.6
—
0.2
0.1
0.3
The Directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value.
Annual Report and Accounts 2019
151
7. Loans due from subsidiary undertakings
Funding Circle Ltd
Funding Circle Continental Europe GmbH
Stichting Derdengelden Funding Circle
Funding Circle Global Partners Limited
Less: non-current portion
Current portion
Amount due from Group undertakings
31 December
2019
£m
31 December
2018
£m
—
0.8
0.1
—
0.9
—
0.9
1.5
—
0.1
0.2
1.8
(1.7)
0.1
During 2019, the Company continued to operate a loan facility agreement with Funding Circle Ltd (subsidiary company). Under
the terms of the agreement, the Company provided an unsecured sterling term loan facility of a total principal amount not
exceeding £30 million (2018: £30 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 was repayable with the principal amount at the end of the facility term of five
years which expired on 31 December 2019. A term loan facility of £16 million was amended in the year to operate as a revolving
credit facility (2018: £16 million term loan facility) under the same terms above expiring on 23 November 2020.
During the year the Company has provided £5.1 million (2018: £1.5 million) of additional funding under the facility agreement.
Total interest income of £0.1 million (2018: £0.3 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 year, Funding Circle Ltd settled certain amounts due under the intercompany loan obligations cumulative of interest
of £6.6 million (2018: £14.6 million) with Funding Circle Holdings plc.
During the year the Company provided a revolving credit facility to Funding Circle Continental Europe GmbH of up to €2.0m. Any
drawn amount under the facility bears an interest of 3.5% above the base rate of the Bank of England and is repayable at the end
of the facility term of five years on 18 July 2024. The facility was drawn by £0.8 million (2018: £nil) at the balance sheet date.
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 term loan facility was amended to operate as a revolving credit
facility under the same terms.
During the year the Company has provided £nil (2018: £0.2 million) of funding under the facility agreement. The carrying amount
of this receivable approximates to its fair value.
During the year the Company provided a revolving credit facility to Funding Circle Canada of up to £2.1 million. Any drawn amount
under the facility bears an interest of 3.5% above the base rate of the Bank of England and is repayable at the end of the facility
term of two years on 22 April 2021. The facility was drawn by £0.9 million (2018: £nil) at the balance sheet date. The Company
has impaired this loan balance in full under the expected credit loss model.
During the year the Company provided a term loan facility to Funding Circle USA, Inc. of up to £6.3 million. Any drawn amount
under the facility bears an interest of 3.5% above the base rate of the Bank of England and is repayable at the end of the facility
term of five years on 30 October 2024. The facility is undrawn at the balance sheet date.
8. Trade and other payables
Accruals
Taxes and social security costs
Other creditors
Amounts due to related undertakings
31 December
2019
£m
31 December
2018
£m
0.7
0.4
—
0.2
1.3
0.5
0.6
0.2
0.7
2.0
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
152
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2019Financial statements 9. Share capital and share premium
The movement on these items is disclosed in notes 18 and 19 to the consolidated financial statements.
10. Retained earnings/(accumulated losses)
At 1 January 2018
Capital reduction
Transfer of share option costs
Loss for the year
At 31 December 2018
Transfer of share option costs
Loss for the year
At 31 December 2019
11. Notes to the Company statement of cash flows
Cash outflow from operating activities
Loss before taxation
Adjustments for
Interest receivable
Non-cash employee benefits expense – share-based payments
Impairments (note 5 and note 7)
Changes in working capital
Movement in trade and other receivables
Movement in trade and other payables
Net cash outflow from operating activities
£m
(13.0)
278.1
13.0
(7.8)
270.3
4.0
(81.6)
192.7
31 December
2019
£m
(81.6)
(1.4)
1.5
78.4
(0.4)
(0.6)
(4.1)
31 December
2018
(restated)
£m
(7.8)
(0.8)
1.1
—
0.2
1.3
(6.0)
The year to 31 December 2018 has been restated to re-present certain IPO adviser costs within operating cash flows – refer to
note 23 of the consolidated financial statements.
Cash and cash equivalents
Cash and bank balances
1 January
2019
£m
Cash flow
£m
31 December
2019
£m
303.7
(222.9)
80.8
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 2019, money
market funds totalled £46.0 million (2018: £150.0 million).
Annual Report and Accounts 2019
153
12. Related parties
Short-term payables/receivables
Funding Circle Ltd
Funding Circle USA, Inc.
Funding Circle Continental Europe GmbH
Intercompany loans
Funding Circle Ltd
Funding Circle Continental Europe GmbH
Stichting Derdengelden Funding Circle
Funding Circle Global Partners Limited
Amounts owed by related parties
Amounts owed to related parties
31 December
2019
£m
31 December
2018
£m
31 December
2019
£m
31 December
2018
£m
0.2
0.1
—
—
0.8
0.1
—
1.2
—
—
—
1.5
—
0.1
0.2
1.8
—
—
0.2
—
—
—
—
0.7
—
—
—
—
—
—
0.2
0.7
During the year, the Company received payment of expenses for amounts of £1.5 million (2018: received payment of expenses
for amounts of £1.1 million) from Funding Circle Ltd.
As at the year end, the Company was owed a cumulative amount of £nil (2018: £1.5 million), £0.1 million (2018: £0.1 million) and
£0.8 million (2018: £nil) from loans with Funding Circle Ltd, Stichting Derdengelden Funding Circle and Funding Circle Continental
Europe GmbH. In addition it was owed £0.9 million by Funding Circle Canada which has been fully impaired by the Company.
13. 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 section 479A of the
Companies Act 2006 relating to subsidiary companies:
Company
Funding Circle Asset Finance Limited
Funding Circle Midco Limited
Funding Circle Trustee Limited
Funding Circle Property Finance Limited
Funding Circle Global Partners Limited
Registration number
07832868
11793162
07239092
08896582
10554628
The Company will guarantee the debts and liabilities of the above UK subsidiary undertakings at the balance sheet date in accordance
with section 479C of the Companies Act 2006. The Company has assessed the probability of loss under the guarantee as remote.
The Company will guarantee the debt and liabilities of the European subsidiary Funding Circle Continental Europe GmbH and
therefore meets the requirements of Section 264(3) HGB and the entity is not subject to audit by virtue of this guarantee.
The Company has assessed the probability of loss under the guarantee as remote.
The following UK entity, which is 100% owned by the Group, is exempt from the requirement to prepare accounts by virtue of
section 394A and section 448A of the Companies Act 2006 relating to the individual accounts of dormant subsidiaries:
Company
Made To Do More Limited
Registration number
10575978
14. Remuneration of key management personnel
The remuneration of key personnel is disclosed in note 26 to the consolidated financial statements.
15. Ultimate controlling party
In the opinion of the Directors, the Group does not have a single ultimate controlling party.
154
Funding Circle Holdings plc
Notes forming part of the Company financial statements continuedfor the year ended 31 December 2019Financial statements Glossary
Alternative performance measures
The Group uses a number of alternative performance measures (“APMs”) within its financial reporting. These measures are not
defined under the requirements of IFRS and may not be comparable with the APMs of other companies. The Group believes
these APMs provide stakeholders with additional useful information in providing alternative interpretations of the underlying
performance of the business and how it is managed and are used by the Directors and management for performance analysis
and reporting. These APMs should be viewed as supplemental to, but not as a substitute for, measures presented in the financial
statements which are prepared in accordance with IFRS.
APM
Income statement
Adjusted EBITDA
Closest equivalent
IFRS measure
Adjustments to reconcile
to IFRS measure
Definition
EBITDA, while not defined
under IFRS, is a widely
accepted profit measure.
Refer to note 3.
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.
Segment adjusted
EBITDA
EBITDA, while not defined
under IFRS, is a widely
accepted profit measure.
Refer to note 3.
Adjusted EBITDA before product development and
central costs.
Exceptional items
None.
Refer to note 5.
Adjusted earnings/
loss per share
Earnings per share.
Refer to note 9.
Adjusted diluted
earnings/loss
per share
Cash flow
Free cash flow
Diluted earnings per share.
Refer to note 9.
Cash generated from
operating activities.
Refer to note 23.
Items which the Group excludes from adjusted EBITDA
in order to present a measure of the Group’s performance.
Each item is considered to be significant in nature or
size and is treated consistently between periods.
Excluding these items from profit metrics provides the
reader with additional performance information on the
business across the business as it is consistent with
how information is reported to the Board and GLT.
Profit/loss after tax attributable to owners of the Parent
and before the impact of exceptional items, divided by
the weighted average number of ordinary shares in
issue during the year.
Profit/loss after tax attributable to owners of the Parent
and before the impact of exceptional items, divided by
the weighted average number of ordinary shares in
issue during the year adjusted for the effects of any
potentially dilutive options.
Net cash flows from operating activities including the
cash cost of purchasing intangible assets, property, plant
and equipment, interest received, IPO costs in operating
activities and the payment of lease liabilities, i.e. the cash
flows excluding the investment and funding of SME loan
purchases and capital raising.
Annual Report and Accounts 2019
155
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 registrars 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
12 March 2020
3 April 2020
20 May 2020
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.
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
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
Cautionary statement
Certain statements included in our 2019 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. 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.
156
Funding Circle Holdings plc
Financial statements 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.
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Funding Circle Holdings plc
71 Queen Victoria Street
London
EC4V 4AY
corporate.fundingcircle.com